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Income Tax Appellate Tribunal, “C” BENCH: KOLKATA
Before: Shri P. M. Jagtap(KZ) & Shri A. T. Varkey]
1 ITA No. 1493/Kol/2019, M/s Ankit Metal & Power Ltd.., AY 2013-14
आयकर अपील�य अधीकरण, �यायपीठ –“C” कोलकाता, IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH: KOLKATA [Before Shri P. M. Jagtap, Vice President (KZ) & Shri A. T. Varkey, Judicial Member] I.T.A. No. 1493/Kol/2019 Assessment Year: 2013-14
DCIT, CC-3(3), Kolkata Vs M/s Ankit Metal & Power Ltd. . (PAN: AAECA 5230 B) Appellant Respondent
Date of Hearing (Virtual) 23.09.2021 Date of Pronouncement 28.10.2021 For the Appellant Shri Anand Kumar Kedia, CIT Shri Gourav Kanojia,CITTP For the Respondent Shri S. K. Tulsiyan, Advocate
ORDER Per Shri A. T. Varkey, JM:
This is an appeal preferred by the Revenue against the order of the Ld. CIT(A)-22, Kolkata dated 29.03.2019 for AY 2013-14.
The Grounds of appeal raised by the revenue reads as under:
That, on the facts and in the circumstances of the case and In law, the Ld CIT(A) has erred in deciding that the TPO has adopted a wrong method for valuation andadded adjustment of Rs 2,65,75,525/- when the adjustment was made on factualfigures as elaborately In the order of the TPO. 2. That, on the facts and in the circumstances of the case and in law, the CIT(A) has erred in deleting the adjustment made by TPO when on service of the draft assessment order with TP modification, the assessee accepted it and didn't raise any objection before the appropriate authority which is the DRP. 3. That, on the facts and in the circumstances of the case and in law, the Ld CIT(A)has erred in deleting the additions made by the AO on receipt of incentives by the assessee from the Govt when such incentives are not subsidy and not paid for setup the business or complete any project and as such violating the decision of the Hon'ble Apex Court in the case of M/S Sahney Steel & Press Works Ltd Vs CIT. 228ITR 253(SC),
That, on the facts and in the circumstances of the case and in law, the Ld CIT(A)has erred in deleting the additions made by the AO on receipt of incentives by the assessee from the Govt when such incentives are fixed percentages of the expenditures incurred by the assessee and take deductions as Revenue Expenditure in the accounts.
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The revenue reserves its rights to substantiate, modify, delete, supplement and /or alter the grounds at any time of the appeal proceeding.
Ground no. 5 is general in nature so it is dismissed.
Ground Nos. 1 and 2 raised by the revenue are against the action of Ld. CIT(A) deleting the adjustment of Rs. 2,65,75,525/- added/adjusted by TPO.
Brief facts pertaining to the appeal is that, the assessee company is engaged in the business of manufacturing Ferro-alloys, Ingots, trading in TMT Bar and selling of beneficiation coal. For AY 2013-14, being the year under appeal, the assessee company has filed its Return of Income on 30.11.2013 declaring total loss of Rs. 13,70,70,443/-. The assessee paid tax on book profit u/s 115JB at Rs. 13,70,02,768/-. The assessee’s case was selected for scrutiny through CASS and statutory notices were served upon the assessee and the assessee responded to the requisition/explanation/documents sought by him. Thereafter, the AO referred the domestic specific transaction with the related parties to Transfer Pricing Officer (TPO).
The TPO noted that, the assessee had purchased several raw materials from its related parties. The assessee had benchmarked these purchases applying the Comparable Uncontrolled Price Method (‘CUP’ Method). The assessee had demonstrated in the Transfer Pricing Study Report (TPSR) that the rates at which the related parties sold these raw materials to the assessee was comparatively lower than the average rate at which the same related parties sold these raw materials to unrelated/independent customers. According to the TPO however, the rates at which the assessee had purchased the raw materials ought to have been compared with the minimum/lowest rate at which the related parties sold the same raw material to unrelated/independent parties. The TPO accordingly re-tabulated the data set out in the Transfer Pricing Study Report (TPSR) in the following manner:
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Having regard to the above table, the TPO observed that the Having regard to the above table, the TPO observed that the Having regard to the above table, the TPO observed that the assessee had purchased the aforesaid products from its related parties at a price higher than the purchased the aforesaid products from its related parties at a price higher than the purchased the aforesaid products from its related parties at a price higher than the prices at which the same product was sold by them prices at which the same product was sold by them to the unrelated parties, and to the unrelated parties, and such difference was outside +/ such difference was outside +/-3% range as per the proviso to Section 92C(2) of 3% range as per the proviso to Section 92C(2) of the Act. The TPO therefore made downward adjustment to the therefore made downward adjustment to the value of raw materials purchased from the related parties to the extent of Rs. 2, materials purchased from the related parties to the extent of Rs. 2, materials purchased from the related parties to the extent of Rs. 2,65,66,525/-. Pursuant to the order of the TPO, the AO passed the assessment order dated Pursuant to the order of the TPO, the AO passed the assessment order dated Pursuant to the order of the TPO, the AO passed the assessment order dated 13.01.2017 u/s 143(3) r.w.s 144C of the Income Tax Act, 1961 (hereinafter 13.01.2017 u/s 143(3) r.w.s 144C of the Income Tax Act, 1961 (hereinafter 13.01.2017 u/s 143(3) r.w.s 144C of the Income Tax Act, 1961 (hereinafter referred to as the Act) which referred to as the Act) which inter alia included disallowance of Rs. 2,65,75,525/ included disallowance of Rs. 2,65,75,525/- on account of downward adjustment made to the value of raw materials purchased ownward adjustment made to the value of raw materials purchased ownward adjustment made to the value of raw materials purchased from related parties u/s 92CA of the Act. Being aggrieved by the assessment order from related parties u/s 92CA of the Act. Being aggrieved by the assessment order from related parties u/s 92CA of the Act. Being aggrieved by the assessment order passed by the AO, the assessee had filed an appeal before the Ld. CIT(A). The passed by the AO, the assessee had filed an appeal before the Ld. CIT(A). The passed by the AO, the assessee had filed an appeal before the Ld. CIT(A). The Ld. CIT(A) allowed the appeal o Ld. CIT(A) allowed the appeal of the assessee and deleted the downward transfer f the assessee and deleted the downward transfer pricing adjustment. Aggrieved by this action of Ld. CIT(A), the Revenue is now in pricing adjustment. Aggrieved by this action of Ld. CIT(A), the Revenue is now in pricing adjustment. Aggrieved by this action of Ld. CIT(A), the Revenue is now in appeal before us.
Assailing the action of the Ld. CIT(A), the Ld. CIT,DR (TP) Shri Gaurav Assailing the action of the Ld. CIT(A), the Ld. CIT,DR (TP) Shri Gaurav Assailing the action of the Ld. CIT(A), the Ld. CIT,DR (TP) Shri Gaurav Kanojia submitted that the Ld. Kanojia submitted that the Ld. CIT(A) erroneously accepted the assessee’s plea CIT(A) erroneously accepted the assessee’s plea that the transaction with related parties were at ALP by accepting the that the transaction with related parties were at ALP by accepting the that the transaction with related parties were at ALP by accepting the simple arithmetic mean of the comparable rates of sales made to unrelated parties. of the comparable rates of sales made to unrelated parties. of the comparable rates of sales made to unrelated parties. According to him, in such cases According to him, in such cases weighted average mean has to be taken to has to be taken to
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correctly determine the Arm’s Length Price (ALP). He contended that, if the correctly determine the Arm’s Length Price (ALP). He contended that, if the correctly determine the Arm’s Length Price (ALP). He contended that, if the weighted average mean is taken, then the comparable rate would fall outside the weighted average mean is taken, then the comparable rate would fall outside the weighted average mean is taken, then the comparable rate would fall outside the tolerance limit of +/-3% and as a consequence 3% and as a consequence, the TPO’s adjustment would stand the TPO’s adjustment would stand justified. He further stated that in case the assessee had any objections to the ustified. He further stated that in case the assessee had any objections to the ustified. He further stated that in case the assessee had any objections to the benchmarking methodology adopted by the TPO, then he ought to have preferred benchmarking methodology adopted by the TPO, then he ought to have preferred benchmarking methodology adopted by the TPO, then he ought to have preferred objections before the Dispute Resolution Panel (DRP). He submitted that, the fact objections before the Dispute Resolution Panel (DRP). He submitted that, the fact objections before the Dispute Resolution Panel (DRP). He submitted that, the fact that the assessee did not object to the draft assessment order before the DRP, did not object to the draft assessment order before the DRP, did not object to the draft assessment order before the DRP, showed that the assessee had no objection in respect of the adjustment made by showed that the assessee had no objection in respect of the adjustment made by showed that the assessee had no objection in respect of the adjustment made by the TPO. The Ld. CIT,DR(TP) thus pleaded that the action of the Ld. CIT(A) may the TPO. The Ld. CIT,DR(TP) thus pleaded that the action of the Ld. CIT(A) may the TPO. The Ld. CIT,DR(TP) thus pleaded that the action of the Ld. CIT(A) may be reversed and action of TPO/AO to be reversed and action of TPO/AO to be upheld.
Per contra, the Ld. A.R. Shri S. K. Tulsiyan Per contra, the Ld. A.R. Shri S. K. Tulsiyan first invited our attention to first invited our attention to page no. 125 to 131 of PB and the TPSR to demonstrate the manner in which the page no. 125 to 131 of PB and the TPSR to demonstrate the manner in which the page no. 125 to 131 of PB and the TPSR to demonstrate the manner in which the TPO had made the impugned transfer pricing TPO had made the impugned transfer pricing adjustment. To illustrate the same, adjustment. To illustrate the same, he first drew our attention to the chart setting out the computation of arithmetic drew our attention to the chart setting out the computation of arithmetic drew our attention to the chart setting out the computation of arithmetic mean of anthrasite coal purchased by unrelated parties (‘non purchased by unrelated parties (‘non-SPs) from the related SPs) from the related parties (‘SPs). He submitted that this average rate was comparable submitted that this average rate was comparable with the rate at with the rate at which anthrasite coal was purchased by the assessee from the SPs. The same is te coal was purchased by the assessee from the SPs. The same is te coal was purchased by the assessee from the SPs. The same is extracted below:
As per the above table, the minimum price charged As per the above table, the minimum price charged from unrelated party from unrelated party was Rs. 13,500/- and the maximum price charged was Rs.16,275/ and the maximum price charged was Rs.16,275/ and the maximum price charged was Rs.16,275/-. Hence, the price ranged between Rs.13,500/ price ranged between Rs.13,500/- to Rs.16,275/-. The arithmetic mean for the . The arithmetic mean for the same comes to Rs.15,309/- - and the price at which AMPL has purchased it from has purchased it from
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related parties is within the range and also below the arithmetic mean. The TPO however ignored all other comparable prices charged from other non related parties but took only the minimum price i.e. Rs. 13,500/- to benchmark the assessee’s transaction. He pointed out that the TPO had followed the same basis for all other products such as Ferro Chrome HC, Scrap, MS Round, TMT bars wherein he had similarly ignored all other comparable rates and took the lowest price as the comparable rate for benchmarking purposes. The Ld. AR submitted that the TPO’s basis of benchmarking was with a preconceived objective of some- how making an adjustment in any arbitrary manner without support of law and therefore clearly perverse. He thus contended that the Ld. CIT(A)’s order deleting the transfer pricing adjustment did not call for any interference.
Thereafter the Ld. A.R. drew our attention to Section 92C of the Act, regarding computation of arm’s length price, which is reproduced as under:
“Section 92C computation of arm’s length price (1) The arm’s length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe, namely :— (a) comparable uncontrolled price method; (b) resale price method; (c) cost plus method; (d) profit split method; (e) transactional net margin method; (f) such other method as may be prescribed by the Board. (2) The most appropriate method referred to in sub-section (1) shall be applied, for determination of arm’s length price, in the manner as may be prescribed: Provided that where more than one price is determined by the most appropriate method, the arm’s length price shall be taken to be the arithmetical mean of such prices.
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Provided further that if the variation between the arm’s length price so determined and price at which the international transaction has actually been undertaken does not exceed five per cent of the latter, the price at which the international transaction has actually been undertaken shall be deemed to be the arm’s length price.”(Emphasis given by us) 12. According to him, it is clear from the above section that where more than one price is determined or more than one comparable is available, then the arm’s length price shall be the arithmetic mean of all the prices or comparables available. Further, where the actual price did not exceed +/- 3% of the arm’s length price so determined or the arithmetic mean, then the actual price taken shall be the arm’s length price. For the aforesaid proposition the Ld. AR relied on the Judgment of Hon’ble Delhi High Court in the case of CIT vs. Mentor Graphics (Noida) Pvt. Ltd. [2013] 354 ITR 586 (Delhi), wherein it was held that:
“From the foregoing discussion, it is clear that the Tribunal was wrong in holding that if one profit level indicator of a comparable, out of a set of comparables, is lower than the profit level indicator of the taxpayer, then the transaction reported by the taxpayer is at an arm's length price. The proviso to section 92C(2) is explicit that where more than one price is determined by most appropriate method, the arm’s length price shall be taken to be the arithmetical mean of such prices. To this extent the appeal is allowed. ”(Emphasis given by us)
Therefore, according to Ld. AR, by applying the proviso to Section 92C(2) and the decision of the Hon’ble High Court (supra), it is clear that where there are more than one comparable price available for determination of Arm’s Length Price, the arithmetic mean of such comparable prices shall be the arm’s length price. However, the TPO had ignored the proviso to Section 92C(2) of the Act and had taken the lowest price from amongst the price of various comparables available as arm’s length price which is contrary to the explicit law. According to the Ld. AR, the TPO had neither provided any reason for considering such lowest rate nor stated any reason for ignoring the other comparables provided by the assessee. Further, according to the Ld. AR, the second proviso to Section 92C(2) set out the tolerance band of +/-3% between the actual price taken by the assessee and the arithmetic mean of the comparables. He submitted that the rates at which the assessee transacted with the related parties was well within the tolerance limit
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contained in the proviso of Section 92C of the Act, for which he drew our attention to the price comparison of actual price and arithmetic mean from TPSR, which is as under:
Product Purchase price from Arithmetic mean of Purchase price Related parties from third party/sale price by the RP to the third party. Anthracite Coal 15,115 15,309 Ferro Chrome HC 64,000 65,859 Scrap 28,508 28,101 MS Round 48,500 48287 TMT Bars 45,000 45,081 Pellets 11,670 9,026 Ferro Silicon 36,800 59,589 Silicon Manganese 44,861 51,441 Calcium Silicide 1,32,500 1,33,514 Coal 6,150 6300 C. I. Scrap 20,872 NA
According to Ld. AR, from perusal of the above table, it is clear that the price charged to the assessee by the related parties is lower than the arithmetic mean determined for all the product, except Scrap, MS Round and Pellets. With regard to MS Round and Scrap, the Ld. AR pointed out that, the actual price paid by the assessee to the related parties did not exceed the tolerance limit of 3% set out in the proviso to Section 92C(2) of the Act and hence, no adjustment was warranted in relation thereto. In case of Pellets, it was explained that the rate at which pellets were purchased by the assessee was inclusive of freight and excise duty, whereas the price at which it was purchased by Non SPs was exclusive of freight and excise duty. Accordingly, in order to undertake meaningful comparison, the excise duty and freight component was required to be added to the comparable arithmetic mean rate. Hence, if the comparable rate of purchase of pellets (after including excise duty and freight) is worked out, the Ld. AR claimed that it would be comparable with the assessee’s rate of purchase. The Ld. AR additionally submitted that, the material which was purchased by the related parties was transferred to the assessee/AMPL on actual cost basis without any profit mark-up on the same product/pellet. Hence, according to the Ld. AR, the
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actual price paid by the assessee should have been treated to be at Arm’s Length. In light of the aforesaid submission, according to the Ld. AR, the TPO has erroneously determined the arm’s length price without complying with the provision of Section 92C and, therefore, on appeal the same was rightly deleted by the Ld. CIT(A). In the light of the aforesaid submissions, the Ld. AR does not want us to interfere with the order of the Ld. CIT(A).
We have heard both the parties and perused the material available on record. Having regard to the facts set out above, it is noted that the dispute before us pertains to the determination of arm’s length price of specified domestic transaction (‘SDT’)involving purchase of raw materials by the assessee from its sister concern/AE aggregating to Rs.58,90,85,891/-. The CUP Method taken as the Most Appropriate Method (‘MAM’) by the assessee has not been disputed by the AO/TPO. The only question before us, is the manner of application of CUP Method. The assessee has benchmarked the SDT with the ‘arithmetical mean rate’ at which the related parties sold the same product to independent buyers. On the other hand, the TPO has benchmarked it by taking the ‘lowest/minimum rate’ at which the related parties sold the same product to independent buyers, ignoring all other comparable uncontrolled transactions. We find that the bench marking methodology followed by the TPO is prima facie perverse and against the extant provisions contained in proviso to Section 92C(2) of the Act, which clearly states that where more than one comparable prices are available, then the arithmetical mean shall be taken as the arm’s length price. The Ld. CIT(A) had therefore rightly deleted the impugned transfer pricing adjustment by holding as follows:
“The appellant had furnished comparative statements which showed that the weighted average price at which AE sold raw materials to unrelated parties was comparable with the price at which the raw material was sold to the appellant. The Ld. TPO did not dispute the application of internal CUP in the given facts of the case but cherry picked the lowest price at which the AE sold the same item to various unrelated parties instead of weighted average price at which AE sold the item to all unrelated parties and compared it with the average purchase price of the appellant.
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AE had sold 4358 Kgs of anthracite coal to seven parties at an average price of Rs.15,309/-. Correspondingly, the AE had sold the same anthracite coal to the appellant at an average price of Rs.15,115/-. Prima facie it is evident that the transaction with AE was at arm’s length and therefore no adjustment is called for. The Ld.TPO however picked one party, M/s Shriram Vinyl & Chemical Industries out of seven(7) parties to whom the said item was sold at 135,500/- and took the same to be the comparable rate. No reason-or logic whatsoever was assigned by the Ld.TPO to reject the remaining six(6) parties or for that matter at why weighted average price was not the most appropriate method. In my considered view such action of the TPO was unjustified.” 16. We note that even the Ld. CIT, DR (TP) has not supported this arbitrary/whmsical benchmarking analysis of the TPO, but at the same time, it is his case that, instead of arithmetical mean rate, the weighted average mean of the product sold by the related parties to independent buyers should be taken as the comparable rate. However, as rightly pointed out by the Ld. AR of the assessee, the proviso to Section 92C(2) only speaks about ‘arithmetical mean’ and therefore the concept of ‘weighted average mean’ cannot be applied in the facts of the present case.
We find considerable force in the contention of the Ld. AR that 'Casus Omissus' cannot be applied by judicial interpretations. 'Casus Omissus', a Latin word, means "the case omitted". Casus Omissus can in no case be applied by a Court of Law, for that it would amount to making of the law by Court, as held by the Hon'ble Supreme Court in MoulabiHussain Haj Vs. State of Gujarat (2004) 6 SCC 672. The Hon'ble Supreme Court in D.R. Venkatchalam v Dy. Transport Commissioner (1977 (2) SCC 273) observed that courts must avoid the danger of a priori determination of the meaning of a provision based on their own preconceived notions of ideological structure or scheme into which the provision to be interpreted is somewhat fitted. The Hon'ble Apex Court has held that the Courts are not entitled to usurp legislative duty. The Hon'ble Supreme Court has held while interpreting a provision that, the court only interprets law and cannot legislate. If the provision of law is misused and subjected to the abuse of process of law, it is for the legislature to amend, modify or repel it, if deemed necessary. In Popular Trading Co. (2000) 5SCC 515 it was held that legislative 'Casus
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Omissus' cannot be applied by judicial interpretation. The rule is that, the particular case, thus left un-provided for must be disposed of according to law as it existed in the statute. Useful reference may also be made to the decision of this Tribunal in the case of Coal India Ltd VsJt.CIT (88 ITD 514) where this Tribunal following the principles of 'casus omissus' as set out in the foregoing, held as follows:
"10. We may mention that it is not for this Tribunal to supply the casus omissus, even if any, in the statute. A casus omissus, which broadly refers to a matter which has not been provided in the statute but should have been there to make the statute workable, cannot be supplied by us, as, to do so will be clearly beyond the call and scope of our duty which is only to interpret the law as it exists. Hon'ble Supreme Court, in the case of Smt. TarulataShyam v. CIT [1977] 108 ITR 345 at page 356 has observed :
"We have given anxious thought to the persuasive arguments.... (which) if accepted, will certainly soften the rigour of this extremely drastic provision and bring it more in conformity with logic and equity. But the language of sections....is clear and unambiguous. There is no scope for importing into the statute the words which are not there. Such interpretation would be, not to construe, but to amend the statute. Even if there be a casus omissus, the defect can be remedied only by legislation and not by judicial interpretation....To us, there appears no justification to depart from normal rule of construction according to which the intention of legislature is primarily to be gathered from the words used in the statute. It will be well to recall the words of Rowlatt J. in Cape Brandy Syndicate v. Inland Revenue Commissioners [1921] 1 KB 64 (KB) at page 71, that : '.........in a taxing Act one has to look at merely what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be, implied. One can only look fairly at the language used.' Once it is shown that the case of the assessee comes within the letter of law, he must be taxed, however great the hardship may appear to the judicial mind to be."
It is by now well settled that provisions of taxing statute must be strictly construed and, therefore, save and except the words and phrase expressly used or employed by the legislature, nothing more can be taken into account while interpreting any provision. Casus Omissus is not permitted. At the same time, it has to be kept in mind that the judicial/quasi judicial authorities are also not permitted to ignore or overlook the expression or words expressly used. There is no scope for intendment while interpreting a deeming provision of a taxing provision, particularly when the words employed are of precise meaning.
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The proviso to Section 92C(2), as it stood during the relevant year, clearly states that where more than one price is determined by the most appropriate method, the arm’s length price shall be taken to be the arithmetical mean of such prices. Hence, when the computation of arithmetical mean has been expressly set out in the said provision, this Tribunal is not permitted to ignore or overlook the said expression and read weighted average mean in its place. In this regard, we may gainfully refer to the following findings of the Mumbai Bench of this Tribunal in the case of RBS Equities (India) Ltd Vs Addl. CIT (28 taxmann.com 158), upholding the Revenue’s plea for use of arithmetical mean instead of weighted average mean.
“As regards the claim of the assessee for adopting weighted average arithmetic mean of brokerage rate of 10 FIIs as against simple average arithmetic mean of such rates taken by the TPO, the first proviso to section 92C speaks about taking arithmetic mean of more than one ALPs determined by the most appropriate method. There is, however, nothing to suggest that volume of the relevant transactions also has to be taken into consideration for the purpose of computing such arithmetic mean. Therefore, the stand of the assessee that weighted average arithmetic mean should be taken and not the simple average arithmetic mean cannot be accepted. The Commissioner (Appeals), therefore, has rightly rejected the stand of the assessee on this issue holding that there is no provision in the statute which allows taking weighted average arithmetic mean for determination of arm's length price.”(Emphasis given by us)
Hence, in view of the above, we do not find any force in the Ld. CIT, DR’s contention for use of weighted average mean as against arithmetical mean computed by the assessee.
We also do not find any merit in the Revenue’s contention that, when the assessee has accepted the draft assessment order, pursuant to the TPO’s order making the T. P. adjustment, by not filing objections before the DRP, resulted in automatic acceptance of the T.P. adjustment. It is well laid out in the statute that if the assessee is not agreeable to the T.P. Adjustment which has been incorporated in the draft assessment order pursuant to the TP order, then the assessee has two alternative appellate routes viz., (a) to object to the draft order inter alia including the T P Adjustment before the DRP or (b) post passing of the final assessment
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order, prefer an appeal against the action of the TPO before the Ld. CIT(A). In the facts of the present case, the assessee has availed the alternate remedy and chose to challenge the action of the TPO before the Ld. CIT(A). Such action of the assessee of choosing to file appeal before the CIT(A) rather than the DRP cannot be objected to by the AO/Revenue nor does it in any manner tantamount to acceptance of the draft assessment order by the assessee.
For the reasons as mentioned above, we do find any reason to interfere with the order of the Ld. CIT(A) and therefore the Ground Nos. 1 & 2 of the Revenue’s appeal stands dismissed.
Ground nos. 3 and 4 raised by the revenue relate to taxability of power subsidy and VAT subsidy received by the assessee under the State Industrial Policy by way of revenue receipt.
During the relevant assessment year, the assessee has claimed following subsidies as capital receipt and had accordingly excluded them from the computation of income:
i. Capital receipt of power subsidy : Rs. 73,81,832/-
ii. Capital receipt of VAT subsidy under VAT Incentive :Rs. 44,79,82,00/-
Total : Rs. 45,53,63,832
The AO assessed the above subsidies received from the State Government on the premise that the subsidies were not utilized for the purchase of new plant & machineries & expansion of factory. On appeal, the Ld. CIT(A), after examining the purpose and intent behind the grant of subsidy upheld the assessee’s claim that it was in the nature of capital receipt. Aggrieved by the action of the Ld. CIT(A) the Revenue is before us.
Assailing the action of the Ld. CIT(A), the Ld. CIT, DR contended that the Ld. CIT(A) erred in holding that the subsidies, which the assessee received from
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the State Government, were capital in nature. In support of his contention, he relied on the decisions of the Hon’ble Supreme Court in the case of Commissioner Of Income-Tax vs Rajaram Maize Products reported in 251 ITR 427 (SC) and in the case of M/s Sahney Steel & Press Works Ltd. vs. CIT reported in 228 ITR 253 (SC). According to him, particularly in relation to power subsidy, the Hon’ble Supreme Court had held it to be revenue in nature and therefore taxable. So, he pleaded that the order of Ld. CIT(A) on this issue may be reversed and AO’s view to be upheld.
Per contra, the Ld. A.R submitted that the issue of taxability of subsidy being treated as a capital receipt is squarely covered in their favour by the decision rendered by the Hon’ble Calcutta High Court in their own case for AY 2010-11 which is reported in 416 ITR 591(Cal). He also relied on the another decision of the Hon’ble Calcutta High Court in the case of CIT Vs Rasoi Ltd reported in 335 ITR 438. He thus urged that the order of the Ld. CIT(A) be upheld.
We have heard both the parties. It is noted that the State of West Bengal had formulated an Industrial Policy Scheme expressly for the purpose of attracting private investment in the State of West Bengal in the specified areas. To promote industrialization and generation of employment in the State, the Government offered various incentives/ subsidies including 'Industrial Promotion Assistance' (‘IPA’) in the form of concessional power tariffs by way of power subsidy and refund of 75% of sales tax paid on sale of goods within the State of West Bengal. The subsidy was thus directed towards industrial development in the State. The purpose/object of the West Bengal Incentive Scheme was for encouraging the setting up of new industrial units and expansion of existing industrial units pursuant to which IPA was to be paid in form of power subsidy, sales tax/VAT subsidy to the assessee.
The Hon’ble Apex Court in their judgment in the case of CIT vs. Ponni Sugar & Chemicals Ltd. (306 ITR 392) has held that whether the subsidy or grant given by the Government is in the nature of capital or revenue will have to be
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judged and decided with reference to the object and the purpose for which the subsidies are granted and not the form and manner of payment.
From the given facts of the present case, especially to the Gazette Notification of the West Bengal Government the Incentive for Promotion of Industries Scheme 2004, (herein after referred to as the Scheme ) wherein details of the Scheme is found placed from page 143 to 171 of PB and from a perusal of the same it is noted that the intent and object behind the industrial promotion assistance [herein after referred to as IPA] extended by the State under their Industrial Policy Scheme was to encourage the assessee to set up a new unit or expand the existing unit for overall economic development of the State and not to enable the assessee to run the business more profitably. In this case the assessee had invested in Sponge Iron Plant and Mega Project (Induction manufacturing units Sponge Iron, Power, Billet) as per the Scheme, which made the assessee eligible for subsidy [ sanction under the scheme given by West Bengal Industrial Development Corporation dated 5 january 2010 found placed at page 172 PB and Registration and Eligibilty Certificate as per the Scheme is found placed at pages 173 to 183 PB] under the Scheme taken out by the Government of West Bengal for making ‘capital investment’ in the State. We find that the intent and purpose of the Industrial Policy of State of West Bengal, 2004 was for establishing/substantial expansion of manufacturing units located in backward areas of State of West Bengal and generate employment for the local people, and therefore the nature of subsidy received under the State Industrial Scheme was in the capital field not exigible to tax. This subsidy was remitted through two modes viz., power subsidy and sales tax/VAT subsidy. Hence, applying the purpose test, both these subsidies received by the assessee was for undertaking industrialization in the State and is thus found to be in capital field and the details of the Scheme which has been re- produced by the Ld CIT(A) in respect of power subsidy from pages 24 to 29 of his impugned order and in respect of VAT subsidy from pages 29 to 31 of his impugned order, has been taken in to account for our decision, which is not repeated for the sake of brevity.
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Thus we find that the object of the West Bengal Incentive Scheme, 2004 was envisaged for encouraging the setting up of new industrial units and expansion of existing industrial units pursuant to which IPA in form of VAT subsidy and power subsidy was granted to the assessee.
In view of the above facts, we find that the incentive in the form of sales tax/VAT subsidy and power subsidy , have been granted for setting up new units in the States of West Bengal which lagged behind in industrial development for development of industries and generation of employment opportunities. The object of the assistance was not to enable the assessee to run the business more profitably but encourage them to set up a new unit or expand the existing unit for overall economic development of the State and so we concur/endorse this finding of Ld CIT(A) on this issue to the same effect.
We find that this particular issue is now no longer res integra in light of the decision of the Hon’ble Supreme Court in the case of CIT Vs Chaphalkar Brothers (400 ITR 279) wherein the Supreme Court after analysing the ratio laid down in their earlier judgments in the cases of CIT vs Rajaram Maize Products(supra), M/s Sahney Steel & Press Works Ltd. vs. CIT (supra) and CIT vs. Ponni Sugar & Chemicals Ltd. (supra) held that the subsidies granted under the State Industrial Scheme to accelerate industrial development and generate employment in the State, is capital in nature. The relevant extracts of the judgment are as follows:
“21. What is important from the ratio of this judgment is the fact that Sahney Steel was followed and the test laid down was the "purpose test". It was specifically held that the point of time at which the subsidy is paid is not relevant; the source of the subsidy is immaterial; the form of subsidy is equally immaterial. 22. Applying the aforesaid test contained in both Sahney Steel as well as Ponni Sugar, we are of the view that the object, as stated in the statement of objects and reasons, of the amendment ordinance was that since the average occupancy in cinema theatres has fallen considerably and hardly any new theatres have been started in the recent past, the concept of a Complete Family Entertainment Centre, more popularly known as Multiplex Theatre Complex, has emerged. These complexes offer various entertainment facilities for the entire family as a whole. It was noticed that these complexes are highly capital intensive and their gestation
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period is quite long and therefore, they need Government support in the form of incentives qua entertainment duty. It was also added that government with a view to commemorate the birth centenary of late Shri V. Shantaram decided to grant concession in entertainment duty to Multiplex Theatre Complexes to promote construction of new cinema houses in the State. The aforesaid object is clear and unequivocal. The object of the grant of the subsidy was in order that persons come forward to construct Multiplex Theatre Complexes, the idea being that exemption from entertainment duty for a period of three years and partial remission for a period of two years should go towards helping the industry to set up such highly capital intensive entertainment centers. This being the case, it is difficult to accept Mr. Narasimha's argument that it is only the immediate object and not the larger object which must be kept in mind in that the subsidy scheme kicks in only post construction, that is when cinema tickets are actually sold. We hasten to add that the object of the scheme is only one -there is no larger or immediate object. That the object is carried out in a particular manner is irrelevant, as has been held in both Ponni Sugar and Sahney Steel.
Mr. Ganesh, learned Senior Counsel, also sought to rely upon a judgment of the Jammu and Kashmir High Court in Shree Balaji Alloys v. CIT [2011] 9 taxmann.com 255/198 Taxman 122/ 333 ITR 335. While considering the scheme of refund of excise duty and interest subsidy in that case, it was held that the scheme was capital in nature, despite the fact that the incentives were not available unless and until commercial production has started, and that the incentives in the form of excise duty or interest subsidy were not given to the assessee expressly for the purpose of purchasing capital assets or for the purpose of purchasing machinery.
After setting out both the Supreme Court judgments referred to hereinabove, the High Court found that the concessions were issued in order to achieve the twin objects of acceleration of industrial development in the State of Jammu and Kashmir and generation of employment in the said State. Thus considered, it was obvious that the incentives would have to be held capital and not revenue. Mr. Ganesh, learned Senior Counsel, pointed out that by an order dated 19.04.2016, this Court stated that the issue raised in those appeals was covered, inter alia, by the judgment in Ponni Sugars & Chemicals Ltd. case (supra) and the appeals were, therefore, dismissed.
We have no hesitation in holding that the finding of the Jammu and Kashmir High Court on the facts of the incentive subsidy contained in that case is absolutely correct. In that once the object of the subsidy was to industrialize the State and to generate employment in the State, the fact that the subsidy took a particular form and the fact that it was granted only after commencement of production would make no difference.” (emphasis supplied)
It is further noted that this exact same issue regarding taxability of subsidy received under the West Bengal State Industrial Scheme has been adjudicated in assessee’s own case for the earlier A.Y. 2010-11. In the instant case, the Hon’ble jurisdictional Calcutta High Court (supra) upheld the order of this Tribunal
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holding the subsidies to be capital in nature and therefore not exigible to income- tax. The relevant extracts of the judgment are as follows:-
“..We have heard both sides at length on the issues involved in the instant appeal, considered their submission and perused the relevant record. The first issue which requires adjudication is whether incentives 'Interest subsidy' and 'Power subsidy' received by the assessee under the schemes in question are capital receipt not liable to the taxed or 'Revenue receipt' and is liable to be taxed and the key question which arises for determination of this issue is what is the character of the incentive subsidies under the said schemes in question and in judging the character of incentives, the "purpose test" is a great factor.
On this issue decision in the case of Sahney Steel and Press Works Ltd. (supra) relied upon by the revenue is a leading decision on the test or determining the nature and character of a subsidy under any scheme as to when it is to be treated as 'capital receipt' or 'revenue receipt' in the hands of the assessee and considering this decision of Sahney Steel & Press Works Ltd. (supra) another leading decision on this proposition of law is Ponni Sugars and Chemicals Ltd. (supra). Law laid down in these two decisions have been uniformly followed in series of decisions of the Hon'ble Supreme Court, our High Court and other High Courts which assessee has relied as referred above on this issue. The following paragraph of the judgment delivered by the Hon'ble Supreme Court in Ponni Sugars & Chemicals Ltd. (supra) case reads thus (page 400):
"The importance of the judgment of this court in Sahney Steel case lies in the fact that it has discussed and analysed the entire case law and it has laid down the basic test to be applied in judging the character of a subsidy. That test is that the character of the receipt in the hands of the assessee has to be determined with respect to the purpose for which the subsidy is given. In other words, in such cases, one has to apply the purpose test. The point of time at which the subsidy is paid is not relevant. The source is immaterial. The form of subsidy is immaterial. The main eligibility condition in the scheme with which we are concerned in this case is that the incentive must be utilized for repayment of loans taken by the assessee to set up new units or for substantial expansion of existing units. On this aspect there is no dispute. It the object of the subsidy scheme was to enable the assessee to run the business more profitable then the receipt is on revenue account. On the other hand, if the object of the assistance under the subsidy scheme was to enable the assessee to set up a new unit or to expand the existing unit then the receipt of the subsidy was on capital account. Therefore, it is the object for which the subsidy assistance is given which determines the nature of the incentive subsidy. The form or the mechanism through which the subsidy is given are irrelevant."
A perusal of the judgments in Sahney Steel & Press Works Ltd. (supra) and Ponni Sugars & Chemicals Ltd. (supra) therefore, reveals that the apex court had applied the above quoted dictum to determine the purpose, which the two
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schemes had intended to achieve by the incentive subsidies, permissible under the schemes in question in those cases.
It was, therefore, in the context of respective subsidy incentive schemes in the two cases, that the subsidy in Sahney Steel & Press Works Ltd. (supra) was held to be revenue receipt whereas the subsidy in Ponni Sugars & Chemicals Ltd. (supra) was held as capital receipt."
On a careful look into these decisions it appears that the law is settled that the nature of incentives/subsidies granted by the Government under any Scheme to any enterprise would totally depend upon the salient features of the said Scheme. The purpose for which the incentive/subsidy is given under the Scheme is the determining factor to lay down the nature of the incentive/subsidy. If an incentive/subsidy is given as a general assistance to the assessee to carry on his business or trade, it would be an operational incentive and thus a trading receipt in the hands of the assessee. However if the object of the subsidy, irrespective of its source, is to enable the assessee to acquire new plant and machinery or for further expansion of its manufacturing capacity or for setting up a new unit, the entire subsidy must be held to be a capital receipt. The incentives/subsidies, depending upon the purpose for which they are granted, fall under two categories namely :
(i) Operational incentives/subsidies which are given to the assessee to carry on his business or trade and;
(ii) Fixed capital incentives/subsidies which are given to the assessee to set up a new unit or to expand its existing unit.
On perusal of the contents of the relevant portion under the incentive subsidy schemes in question we found that in the case of the assessee, the State Government under the West Bengal Incentive Scheme, 2000, and 'West Bengal Incentive to Power Intensive Industries Scheme, 2005', had actually granted the subsidy with the sole intention of setting up new industry and attracting private investment in the state of West Bengal in the specified areas in the present case Bankura which is industrially backward hence the same was of the nature of non- taxable Capital receipt. Thus according to the 'purpose test' laid out by the Hon'ble Supreme Court, various and High Courts including our Court the aforesaid subsidy should be treated as capital receipt in spite of the fact that computation of 'Power subsidy' is based on the power consumed by the assessee. It is well established from submission of the assessee as enunciated above that once the purpose of a subsidy is established; the mode of computation is not relevant as held in the decisions of the Hon'ble Supreme Court in the case of Sahney Steel & Press Works Ltd. (supra), CIT v. Ponni sugars & Chemicals Ltd. (supra) and the decision of our High Court in case of Rasoi Ltd. (supra) against which SLP has been dismissed. The mode of computation/form of subsidy is irrelevant. The mode of giving incentive is re-imbursement of energy charges. The nature of subsidy depends on the purpose for which it is given. Hence the assessee draws
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support from the decisions already discussed earlier as the same principle will apply here. Thus, the entire reason behind receiving the subsidy is setting up of plant in the backward region of West Bengal, namely, Bankura.
Accordingly we hold the aforesaid incentive subsidies are 'capital receipts' and is not an 'income' liable to be taxed in relevant assessment year 2010-11 on the basis of discussion made above and further taking into consideration the definition of Income under Section 2(24) of the Income Tax Act, 1961, where sub-clause (xviii) has been inserted including 'subsidy' for the first time by Finance Act, 2015 w.e.f. April, 2016 i.e assessment year 2016-17. The amendment has prospective effect and had no effect on the law on the subject discussed above applicable to the subject assessment years.
Now the second issue which requires adjudication is as to whether the aforesaid incentive subsidies received by the assessee from the Government of West Bengal under the schemes in question are to be included for the purpose of computation of book profit under Section 115 JB of the Income Tax Act, 1961 as contended by the revenue by relying on the decision in the case of AppolloTyres Ltd. (supra).
In this case since we have already held that in relevant assessment year 2010- 11 the incentives 'Interest subsidy' and 'Power subsidy' is a 'capital receipt' and does not fall within the definition of 'Income' under Section 2(24) of Income Tax Act, 1961 and when a receipt is not on in the character of income it cannot form part of the book profit under Section 115JB of the Act, 1961. In the case of AppolloTyres Ltd. (supra) the income in question was taxable but was exempt under a specific provision of the Act as such it was to be included as a part of the book profit. But where a receipt is not in the nature of income at all it cannot be included in book profit for the purpose of computation under Section 115JB of the Income Tax Act, 1961. For the aforesaid reason, we hold that the interest and power subsidy under the schemes in question would have to be excluded while computing book profit under Section 115 JB of the Income Tax Act, 1961.
Gainful reference may also be made to the following observations made by the Hon’ble jurisdictional Calcutta High Court in the case of CIT Vs. Rasoi Ltd. (supra) holding that the subsidy in the form of VAT remission received under the West Bengal Industrial Scheme was capital in nature and hence not liable to tax.
14A. From the objects and the reasons of the aforesaid scheme as well as the entitlement as indicated in section 3 mentioned above, it is clear that the Government has decided to grant the subsidy by way of financial assistance to tide over the period of crisis for promotion of the industries mentioned in the scheme which have the manufacturing units in West Bengal and which are in need of financial assistance for expansion of their capacities, modernization, and improving their marketing capabilities and such subsidy for the financial year in question was only for that year and was equivalent to ninety per centum of the amount of sales tax paid by the
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Industry concerned, for any quarter under the Sales Tax Act in respect of sales of such goods.
We find that the principles laid down in the case of Sahney Steel & Press Works Ltd. (supra), relied upon by Mr. Nizamuddin has been explained by the Supreme Court in a subsequent decision in the case of Ponni Sugars & Chemicals Ltd. (supra), relied upon by Mr. Poddar in the following terms :
"In our view, the controversy in hand can be resolved if we apply the test laid down in the judgment of this Court in Sahney Steel and Press Works Ltd. In that case, on behalf of the assessee, it was contended that the subsidy given was up to 10 per cent of the capital investment calculated on the basis of the quantum of investment in capital and, therefore, receipt of such subsidy was on capital account and not on revenue account. It was also urged in that case that subsidy granted on the basis of refund of sales tax on raw materials, machinery and finished goods were also of capital nature as the object of granting refund of sales tax was that the assessee could set up new business or expand his existing business. The contention of the assessee in that case was dismissed by the Tribunal and, therefore, the assessee had come to this Court by way of a special leave petition. It was held by this Court on the facts of that case and on the basis of the analyses of the Scheme therein that the subsidy given was on revenue account because it was given by way of assistance in carrying on of trade or business. On the facts of that case, it was held that the subsidy given was to meet recurring expenses. It was not for acquiring the capital asset. It was not to meet part of the cost. It was not granted for production of or bringing into existence any new asset. The subsidies in that case were granted year after year only after setting up of the new industry and only after commencement of production and, therefore, such a subsidy could only be treated as assistance given for the purpose of carrying on the business of the assessee. Consequently, the contentions raised on behalf of the assessee on the facts of that case stood rejected and it was held that the subsidy received by Sahney Steel could not be regarded as anything but a revenue receipt. Accordingly, the matter was decided against the assessee." [Emphasis supplied]
In the aforesaid case, it was held that if the object of the Subsidy Scheme was to enable the assessee to run the business more profitably the receipt is on revenue account. On the other hand, if the object of the assistance under the Subsidy Scheme was to enable the assessee to set up a new unit or to expand the existing unit the receipt of the subsidy was on capital account. Therefore, the Court proceeded, it is the object for which the subsidy/assistance is given which determines the nature of the incentive subsidy. The form of the mechanism through which the subsidy is given is irrelevant.
In the case before us, the object of the subsidy is for expansion of their capacities, modernization, and improving their marketing capabilities and, thus, those are for the assistance on capital account. Similarly, merely because the amount of subsidy was equivalent to 90 per cent of the sales tax paid by the beneficiary does not imply that the same was in the form of refund of sale tax paid. As pointed out by
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the Supreme Court in the case of Senairam Doongarmall v. CIT AIR 1961 SC 1579, it is the quality of the payment that is decisive of the character of the payment and not the method of the payment or its measure, and makes it fall within capital or revenue. Thus, in the case before us, the amount paid as subsidy was really capital in nature. 36. For the reasons as discussed above and respectfully following the above cited judgments of the Hon’ble Supreme Court and jurisdictional Calcutta High Court (supra), we accordingly uphold the Ld. CIT(A)’s action of treating the aforesaid incentive subsidies as ‘capital receipts’ and therefore not in the nature of ‘income’ liable to be taxed in relevant AY 2013-14. Ground Nos. 3 & 4 of the Revenue therefore stands dismissed.
In the result, the appeal of Revenue is dismissed.
Order is pronounced in the open court on 28th October, 2021. Sd/- Sd/- (P. M. Jagtap) (A. T. Varkey) Vice President Judicial Member Dated: 28th October, 2021
SB, Sr. PS
Copy of the order forwarded to:
Appellant- DCIT, CC-3(3), Kolkata 2. Respondent – M/s Ankit Metal & Power Ltd, 35, C.R. Avenue, 4th Floor, Kolkata-700012.
CIT(A)-22, Kolkata (sent through e-mail) 4. CIT, Kolkata. 5. DR, Kolkata Benches, Kolkata (sent through e-mail) True Copy By Order
Senior Private Secretary/DDO ITAT, Kolkata Benches, Kolkata