Income Tax Appellate Tribunal - Mumbai
Godrej Consumer Prodjects Ltd, Mumbai vs Assessee on 20 April, 2016
IN THE INCOME TAX APPELLATE TRIBUNAL
"K" BENCH, MUMBAI
BEFORE SHRI SAKTIJIT DEY, JUDICIAL MEMBER AND
SHRI ASHWANI TANEJA, ACCOUNTANT MEMBER
ITA no.1299/Mum./2013
(Assessment Year : 2009-10)
Godrej Consumer Products Ltd.
Kalyaniwalla & Mistry
Army & Nevy Building
................ Appellant
148, Mahatma Gandhi Road
Fort, Mumbai 400 001
PAN - AABCG3365J
v/s
Asstt. Commissioner of Income Tax
Range-10(2), Mumbai ................ Respondent
Assessee by : Shri F.V. Irani
Revenue by : Shri Narendra K. Chand
Date of Hearing - 22.01.2016 Date of Order - 20.04.2016
ORDER
PER SAKTIJIT DEY, J.M.
Instant appeal of the assessee is directed against the order dated 21st December 2012, passed by the learned Commissioner (Appeals)- 15, Mumbai, for the assessment year 2009-10.
The assessee in this appeal has raised 12 grounds.
2. In ground no.1, the assessee has challenged the decision of the Departmental Authorities in computing deduction under section 80IC 2 Godrej Consumer Products Ltd.
of the Income Tax Act, 1961 (for short "the Act") excluding the subsidy received and expenses recoveries from business income.
3. Brief facts are, the assessee a company is engaged in manufacture and sale of Fast Moving Consumer Goods (FMCG). For the purpose of its manufacturing activities, the assessee has set-up units at various places such as Malanpur, Baddi, Guwahati, Sikkim and Katha. For the assessment year under consideration, assessee filed its return of income on 26th September 2009, declaring total income of ` 41,86,81,920, under the normal provisions and book profit of ` 186,80,48,734 under section 115JB. In the course of assessment proceedings, the Assessing Officer while verifying the return of income filed by the assessee, noticed that assessee had claimed deduction of ` 137.08 lakh under section 80IC of the Act. Though, the Assessing Officer called upon the assessee to justify its claim under section 80IC raising various issues, however, for the purpose of present appeal, we will only discuss the facts which are relevant to the issue raised by the assessee in the ground.
4. As stated earlier, the Assessing Officer while examining assessee's claim of deduction under section 80IC found that the profit of eligible unit as shown in the Profit & Loss account also includes other income. He, therefore, called upon the assessee to furnish 3 Godrej Consumer Products Ltd.
details of such income. On verifying the details furnished by the assessee, he found that other income consist of scrap sales, subsidies received and other expenses recoveries. Though, the Assessing Officer accepted scrap sales as profit earned from eligible unit, hence, is eligible for deduction under section 80IC, however, as far as income by way of subsidy received and expenses recoveries are concerned, the Assessing Officer observed, they are not part of manufacturing process, hence, not eligible for deduction under section 80IC. Accordingly, he reduced these amounts from the profit of the eligible unit while computing deduction under section 80IC. Being aggrieved of such decision of the Assessing Officer, assessee preferred appeal before the learned Commissioner (Appeals).
5. Before the learned Commissioner (Appeals), it was contended by the assessee, eligible units have received transport subsidy and power subsidy from the respective Government authorities in terms of industrial policies of the concerned States i.e., Himachal Pradesh and Assam. Referring to the relevant industrial policies of the concerned State Governments, it was submitted that such subsidy was received as reimbursement of transport and power costs incurred by the eligible unit. It was submitted, the expenditure incurred towards transport and power costs have been debited to the eligible units and the recovery of such costs have been credited as part of other income of eligible unit. 4
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It was submitted, the expenditure has been considered for determining the profit of the eligible units and consequent thereto any recovery of such expenditure will go to reduce the cost of such units. Therefore, the recoveries have been reflected as part of other income and have been considered for determining the profit of the eligible unit. Furnishing the details of subsidy, in terms of the industrial policy framed by Himachal Pradesh and Assam, it was submitted by the assessee that it has raised claims for subsidies with the Governments Department in accordance with the provisions of the policy / scheme. However, unless the claim is approved and accepted by the Government agencies no subsidy is payable to the assessee, hence, only when claims have been accepted by the Government Department and paid to the assessee, it has accounted for such subsidies. It was submitted by the assessee, as the subsidies have been received reimbursement of the transport and power cost incurred by the units, they will form part of profit of eligible unit and deduction under section 80IC is available on such income.
6. The learned Commissioner (Appeals), after considering the submission of the assessee, however, did not find merit in the same. He was of the view that transport and power subsidy received by the assessee cannot be treated as profit derived from the eligible business as they do not come under the first degree of source of profit derived 5 Godrej Consumer Products Ltd.
from the industrial undertaking. For such conclusion, he relied upon the decision of the Hon'ble Supreme Court in Liberty India Ltd. v/s CIT, [2009] 317 ITR 218 (SC). Further, learned Commissioner (Appeals) observed, the subsidies received by the assessee during the impugned year actually pertain to the financial year 2004-05 and 2005-06. He observed, as the assessee follows mercantile system of accounting, such receipts of subsidies cannot be considered to be the income of the undertaking for the impugned assessment year. Accordingly, he dismissed the grounds raised by the assessee.
7. Learned Authorised Representative reiterating the stand taken before the Departmental Authorities submitted, the subsidies received by the assessee is actually reimbursement of expenditure incurred on transport and power. The learned Authorised Representative referring to the relevant extracts from the industrial policy of Government of Assam and Government of Himachal Pradesh submitted, the assessee has to incur certain costs towards transport and power. After incurring such costs, the assessee has to raise claim for transport and power subsidy in terms of the industrial policy before the concerned Government Departments. He submitted, as the subsidy is an operational subsidy and not for reducing the cost of any asset, it is in the revenue field, hence, has to be treated as part of the profit of the undertaking. For such proposition, Learned Authorised Representative 6 Godrej Consumer Products Ltd.
relied upon the decision of Hon'ble Guwahati High Court in CIT v/s Meghalaya Steel Ltd. [2013] 356 ITR 235 (Guwa.). Learned Authorised Representative also referred to the decision of the Hon'ble Guwahati High Court in Patkai Coal Products v/s CIT, [2013] 356 ITR 528 (Guwa.) and the decision of the Tribunal, Guwahati Bench, in ACIT v/s Manas Salt Iodized Pvt. Ltd., 38 ITR (Trib.) 502.
8. As far as the allegation of the learned Commissioner (Appeals) that subsidy pertains to financial year 2004-05 and 2005-06, learned Authorised Representative submitted, until a claim is accepted, the assessee cannot account for it. Therefore, when the Government authorities accepted assessee's claim, assessee accounted for subsidies in its books of account and claimed it as deduction. He submitted, assessee could not have re-opened the account for earlier years for claiming the deduction. For such proposition, he relied upon the decisions of the Hon'ble Supreme Court in CIT v/s Excel Industries Ltd. [2013] 358 ITR 295 (SC) and Taparia Tools Ltd. v/s CIT, [2015] 372 ITR 605 (SC). Thus, it was submitted by the learned Authorised Representative, assessee is eligible for deduction under section 80IC on the subsidy received.
9. Learned Departmental Representative, however, contesting the claim of the assessee submitted, in the profit and loss account assessee has treated the income as other income and not part of the 7 Godrej Consumer Products Ltd.
business profit, therefore, according to assessee itself the income from subsidy is not derived from business. Learned Departmental Representative submitted, the subsidy received by the assessee does not go to reduce the cost but it is merely reimbursement of cost. Learned Departmental Representative submitted, subsidy means aid or assistance and purposive test has to be applied for ascertaining the purpose of grant of subsidy. The learned Departmental Representative submitted, though, the power and transport SUBSIDY is in the revenue field but there is nothing in the scheme to show that it reduced the cost. Learned Departmental Representative submitted, the accounting treatment given by assessee also indicates subsidies have not reduced the cost. The assessee has credited the subsidy as other income without reducing the cost of power or transport. Learned Departmental Representative submitted, referring to decision of the Hon'ble Supreme Court in Liberty India Ltd. (supra) submitted, the ratio laid down therein squarely applies to the facts of the present case. He submitted, in case of Meghalaya Steels Ltd. (supra), Hon'ble Gauwahati High Court has not properly appreciated the reasoning of Liberty India Ltd. (supra), hence, the said decision cannot be applied to the facts of the present case. Learned Departmental Representative also relied upon the decision of the Hon'ble Delhi High Court in Pine Packaging (P) Ltd. v/s CIT, [2012] 23 Taxmann.com 369 (Del.), to 8 Godrej Consumer Products Ltd.
argue that the receipt towards subsidy cannot be considered to be income derived from business of industrial undertaking, hence, deduction under section 80IC is not available. Learned Departmental Representative also referred to the following decision of the Hon'ble Himachal Pradesh High Court and submitted, the Hon'ble High Court after considering similar subsidy granted by the Government of Himachal Pradesh has held that deduction under section 80IB / 80IC is not available.
i) CIT v/s Gheria Oil Gramudhyog Workers Welfare Association,, [2010] 228 CTR 94 (HP);
ii) Ms. Supriya Gill v/s CIT, [2010] 193 Taxman 23 (HP);
iii) Alpine Industries v/s ITO, [2014] 45 Taxmann.com 93 (HP);
iv) CIT v/s Kiran Enterprises, [2010] 228 CTR 10 (HP);
v) Janak Raj Bansal v/s CIT, [2010] 2010] 228 CTR 167 (HP); and
vi) CIT v/s Maharani Packaging Pvt. Ltd., [2012] 24 Taxmann.com 204 (HP).
10. In the rejoinder, learned Authorised Representative submitted, in the decisions referred to by the learned Departmental Representative, the Hon'ble High Court has followed the decision of the Hon'ble Calcutta High Court in CIT v/s Andaman Timber Ltd., 242 ITR 204 (Cal.), which subsequently, the Hon'ble Calcutta High Court in CIT v/s Cement Manufacturing Co. Ltd., ITA no.130 of 2014, did not approve 9 Godrej Consumer Products Ltd.
on the reasoning that the Court in Andaman Timber Ltd. (supra) did not make distinction between operational subsidy and capital subsidy and the High Court following the decision of the Hon'ble Guwahati High Court in Meghalaya Steels Ltd. (supra) allowed assessee's claim of deduction under section 80IC. Learned Authorised Representative also referred to the decision of the Tribunal, Kolkata Bench, in Mythan Smelters Ltd., ITA no.1327/Kol./2011, dated 26th August 2015 and Meghalaya Sobha Ispat Alloys Ltd., ITA no.980/Kol./2012, dated 17 th September 2015, wherein the Tribunal followed the decision of the Hon'ble Calcutta High Court in Cement Manufacturing Co. Ltd. (supra) and Meghalaya Steels Ltd. (supra). He also submitted, each and every decision cited by the learned Departmental Representative was considered by the Hon'ble Guwahati High Court in case of Meghalaya Steels Ltd. (supra).
11. We have considered the submissions of the parties in the context of facts and materials on record as well as relevant case laws. The issue arising for consideration is whether the power and transport subsidy received by the assessee for its Assam and Himachal Pradesh units should be reduced from the profit of the business for computing deduction under section 80IC. It is the claim of the assessee that as the power and transport subsidy under the subsidy scheme framed under the respective industrial policy of the concerned State 10 Godrej Consumer Products Ltd.
Governments is for reimbursing the actual cost of power and transportation the same is operational subsidy, in other words, it enhanced the business profit of the assessee, therefore, assessee would be eligible to claim deduction under section 80IC on such subsidy. On a perusal of the industrial policy of Assam 2008, notified by the Government of Assam, it is observed that as per the fiscal incentives declared under the said policy, power subsidy will be provided to eligible unit on power tariff paid by the units on the actual units consumed for a period of five years from the date of commercial production subject to the following ceiling:-
Connected Loan Rate of Subsidy Ceiling & Subsidy per annum Up to 1.0 MW 30% ` 10 lakh Above 1.0 MW 25% ` 25 lakh
12. Similarly, clause 3 of the Industrial Policy provides for incentive on transpiration of raw material as well as finished products. It is also claimed by the assessee that similar incentives are also provided under the industrial policy of Himachal Pradesh. It is the claim of the assessee that the transportation and power subsidy provided under the Industrial Policy of Assam and Himachal Pradesh are actually the reimbursement of actual cost incurred by the assessee, therefore, it is an operational subsidy which goes to reduce the cost of manufacture 11 Godrej Consumer Products Ltd.
resulting in enhancement of the profit of the assessee. It is the contention of the assessee that as the power and transport subsidy granted to the assessee has a direct nexus to the earning of profit it is a part of the business income, hence, eligible for deduction under section 80IC. It is noticed, in case of CIT v/s Meghalaya Steels Ltd. (supra), the Hon'ble Guwahati High Court while examining assessee's claim of deduction under section 80IB / 80IC, analysed the industrial policy of the year 1971 of the Assam Government and found that the transportation and power subsidy given by the Government under the scheme is towards actual reimbursement of cost incurred by the industry in respect of power and transportation.
13. The Hon'ble Guwahat High Court after taking into consideration the principle laid down by the Hon'ble Supreme Court in Liberty India Ltd. (supra) and a host OF other decisions, opined that if the subsidy is non-operational in nature, there will be no entitlement of deduction. But, if the subsidy is operational, the assessee would be entitled to claim deduction under section 80IC / 80IB of the Act. The Hon'ble Guwahati High Court after considering the industrial policy of the Government of India dated 23rd July 1971 and the transport subsidy scheme framed for the States in the North Eastern Region, found that as per the scheme, transportation of raw material as well as finished goods was promised to be made available to the industrial units 12 Godrej Consumer Products Ltd.
concerned in a manner which would directly Affect the cost of production inasmuch as transportation subsidy on the raw materials was not meant to cover all the raw materials but only that part or portion of raw material which were actually required and used by an industrial unit in its manufacturing program approved by the Government concerned and similar transportation subsidy on the finished goods to help in reduction of costs of manufacturing of industrial unit concerned inasmuch as subsidy on transportation of finished goods was to be given on finished goods actually produced by the industrial unit in accordance with the manufacturing program approved by the Government concerned. The Court observed, when the transport subsidy so received both on the transportation of raw material as well as finished goods goes to reduce the cost of production of industrial undertaking, resultant effect of such a reduction on the cost of production will obviously help in generating profit. Therefore, it was observed by the Court, there is a direct nexus between the transport subsidy and the profit earned by the industrial undertaking unit and such a direct nexus cannot but to be termed as first degree nexus between the two namely transport subsidy on the one hand and resultant profit and gains on the other. The Court observed, unless the Revenue succeeds in showing that the transport subsidy has no bearing on the cost of production of industrial 13 Godrej Consumer Products Ltd.
undertaking, the claim for deduction under section 80IC cannot be denied. The Hon'ble High Court referring to the decision of the Hon'ble Supreme Court in Jai Bhagwan Oil and Flower Mills v/s Union of India, [2009] 14 SCC 63, observed, the transport subsidy as per industrial policy was aimed to reduce the cost of production of industrial undertaking, therefore, there was a first degree nexus between the transport subsidy and cost of production. When cost is reduced, it naturally helps in earning of profit. Therefore, such profits have to be treated as profit and gains derived from the industrial undertaking.
14. As far as power subsidy is concerned, the High Court referring to the industrial policy of the year 1997, as extended by the Industrial Policy of Assam 2003, noticed that it provides for power subsidy to be given to eligible industrial units for a period of five years from the date of commercial production. It was further noticed, the power subsidy is available in the form of reimbursement of fully paid power bills with certain ceilings. The Court observed, reimbursement of fully paid power bills will obviously reduce the cost of production of an industrial undertaking contributing thereby to the profit and gains derived by the industrial undertaking and augmenting the income of the industrial undertaking. Therefore, there is a direct and first degree nexus between the industrial activities of the undertaking on the one hand and the subsidy in the form of power subsidy on the other. The Court 14 Godrej Consumer Products Ltd.
while coming to such conclusion referred to the decision of the Hon'ble Supreme Court in CIT v/s Rajaram Maize Products, [2001] 251 ITR 457 (SC) and observed, power subsidy is meant to enable a person meet a certain percentage of expenditure on power and is, therefore, revenue in nature. Further, it was observed, though, the subsidy is revenue in nature fact remains it not only helps in growth on industrial undertaking but also helps an industrial undertaking to earn profit and make gains. Such a subsidy though revenue in nature and taxable accordingly, is nonetheless covered by the provisions embodied in section 80IB/80IC. The High Court referring to Explanation-10 to section 43(1) held, if any portion of costs of asset is made by any subsidy grant or reimbursement, then such a subsidy grant or reimbursement would go on to reduce the costs of such asset and depreciation to the assessee will be allowed on the reduced costs. Similarly, the subsidy such as transport subsidy or power subsidy when goes on to reduce the cost of transportation of goods whether raw material or finished goods, then it will result in profit, hence, the assessee would be entitled to deduction under section 80IB/80IC. The Court, while examining the ratio laid down by the Hon'ble Supreme Court in Liberty India Ltd. (supra) observed, the issue raised before the Hon'ble Supreme Court was not relating to subsidy but the issue was whether profit from duty entitlement pass book scheme would be 15 Godrej Consumer Products Ltd.
said to be profit derived from the industrial undertaking. The Court observed, while answering the question framed, the Hon'ble Supreme Court pointed out that DEPB is an incentive given under the duty exemption remission scheme and essentially is an export incentive, hence, not related to business operation of industrial undertaking per se for its manufacturing or production. According to the Hon'ble Supreme Court DEPB's entitlement arise when the undertaking goes on to export after manufacturing or production and is restricted to its export product. Therefore, according to the Hon'ble Supreme Court, the position is if there is no export there is no DEPB entitlement, hence, its relation to the manufacturing / production is neither proximate nor direct. The High Court after analyzing the ratio laid down in the case of Liberty India (supra), ultimately concluded that the DEPB and duty drawback are not provided by the Government as a means to reduce the cost of production of the industrial undertaking. Therefore, the ratio laid down would not apply to the power and transport subsidy which directly reduces the cost of production. The Court observed, the DEPB considered by the Hon'ble Supreme Court in Liberty India Ltd. (supra) is a case of non-operational subsidy as much as it does not relate to production, whereas the transport and power subsidy provided under the industrial policy are operational in nature, inasmuch as, they are related to production of industrial undertaking. 16
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Thus, it was held by the Court that the income received on account of power and transport subsidy would form part of the profit derived from the industrial undertaking, hence, eligible for deduction under section 80IC.
15. Though, it may be a fact that the Hon'ble Himachal Pradesh High Court in the decisions referred to by the learned Departmental Representative has taken a contrary view in respect of transport and power subsidy but on a careful analysis of these decisions, it is found that the Hon'ble High Court while coming to its conclusion has relied upon the decision of the Hon'ble Calcutta High Court in Andaman Timber Ltd. (supra) and the decision of Hon'ble Supreme Court in Liberty India Ltd. (supra). It is observed, in the case of Meghalaya Steels Ltd. (supra), the Hon'ble Guwahati High Court analysing the ratio laid down by the Hon'ble Supreme Court in Liberty India Ltd. (supra) has held that it will not apply to subsidy which is operational in nature. As far as the decision of the Hon'ble Calcutta High Court in Andaman Timber Ltd. (supra), it must be noted that the very same High Court, subsequently, in the case of Cement Manufacturing Co. Ltd. (supra) preferred to follow the decision of Hon'ble Guwahati High Court in Meghalaya Steels Ltd. (supra) rather than its own decision in Andaman Timber Ltd. (supra). On the reasoning that in case of 17 Godrej Consumer Products Ltd.
Andaman Timber, the Court did not differentiate between operational and capital subsidy.
16. Thus, on a conspectus of the decisions referred to above, in principle we hold that if a particular subsidy goes to reduce the cost of manufacture actually incurred by the assessee, it is in the nature of operational subsidy as it enhances the profit derived by the assessee from manufacturing of goods. In other words, subsidy is directly related to profit derived from manufacturing activities. Hence, subsidy being part of profit derived from industrial undertaking would be eligible for deduction under section 80IC. Having held so, it is necessary to examine the facts of the present case. As could be seen, the Assessing Officer while disallowing assessee's claim of deduction under section 80IC has not made any discussion about the nature of subsidy granted to the assessee, whether operational or non- operational. As it appears, the Assessing Officer has not at all examined the relevant industrial policy and subsidy schemes under which the assessee was granted transport and power subsidy. Similarly, though, before the first appellate authority, as per the learned Commissioner (Appeals)'s own version, the assessee did produce the industrial policy of the concerned State Governments but, he has not at all examined such industrial policies to find out the true nature of subsidy granted under the respective subsidy schemes. 18
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Therefore, in our view, for coming to a definite conclusion as far as nature of subsidy is concerned, the relevant subsidy schemes have to be examined to find out whether such subsidy are for reimbursement of actual costs incurred by the assessee towards transport and power. As the Departmental Authorities have not examined the nature of subsidy with reference to the relevant industrial policy resolution and subsidy schemes, we are inclined to restore the matter back to the file of the Assessing Officer for deciding afresh keeping in view the ratio laid down in the decisions referred to above as well as the observations made by us. As far as the issue of particular assessment year in which the subsidy deemed to have accrued, we may observe, the Assessing Officer did not raise this issue in course of assessment proceedings. It is only the learned Commissioner (Appeals) who has raised this issue. However, there is nothing in the order of the learned Commissioner (Appeals) to suggest that assessee was given opportunity to explain its stand on the issue. Be that as it may, whether the subsidy has accrued as income in the impugned assessment year has to be decided on the basis of the fact when it was approved / accepted by the concerned authorities. Only when the concerned Government authorities verify the quantum and approve, the subsidy crystallizes as income. The decisions relied upon by the learned Authorised Representative support this view. The Assessing 19 Godrej Consumer Products Ltd.
Officer is directed to verify this aspect also. It must be mentioned the Assessing Officer not only should give adequate opportunity of being heard to the assessee but must pass a well reasoned order after considering the submissions of the assessee as well as judicial pronouncements relied upon. Accordingly, ground no.1, raised by the assessee is allowed for statistical purposes.
17. In ground no.2, assessee has challenged the decision of the Departmental Authorities in treating the remission of deferred sales tax loan liability as income of the assessee.
18. Brief facts are, in the course of assessment proceedings, the assessee vide letter dated 25th November 2011 submitted, it had availed sales tax loan under the Madhya Pradesh conversion of Amount of Deferred Tax Into Loan Liability Scheme 1989, under which the aggregate loan liability was payable after a period of ten years from the date of deferment. During the year under consideration, company pre-paid the sales tax loans and availed remission of loan liability amounting to ` 1,49,074. It was submitted, the said amount was reflected as other income under Schedule-10, though, it should have been reduced while computing the total income. Therefore, the assessee claimed that the remission of liability of ` 1,49,074, should be reduced from the total income. The Assessing Officer, however, did 20 Godrej Consumer Products Ltd.
not accept the claim of the assessee. The Assessing Officer observed, as per section 41(1) of the Act, any remission and cessation of the liability shall be deemed to be the profit of business, hence, chargeable to tax. He further observed, as the assessee has not made the claim by way of revised return of income even otherwise also assessee's claim is not acceptable. Being aggrieved with such decision of the Assessing Officer, assessee challenged the same in appeal before the learned Commissioner (Appeals).
19. The learned Commissioner (Appeals), though, accepted assessee's contention that there is no cessation or remission of liability under section 41(1), however, he held that the gain derived by the assessee on premature repayment would be taxable under section 28(iv) of the Act.
20. Learned Authorised Representative submitted, the issue is covered by the decision of the Tribunal in assessee's own case for the assessment years 2006-07 to 2008-09.
21. Learned Departmental Representative on the other hand, though, agreed that the issue is decided by the Tribunal in assessee's own case for the preceding assessment year, but he nevertheless relied upon the reasoning of the learned Commissioner (Appeals). 21
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22. We have considered the submissions of the parties and perused the material available on record. As could be seen, identical issue arose before the Tribunal in assessee's own case in ITA no.4103/Mum. /2010 and others, for assessment years 2006-07 to 2008-09 in order dated 20th November 2013, the Tribunal held as under:-
"5. Before us, at the outset, the ld. A.R. has brought our attention to the fact that this issue raised by the assessee in ground No.1 of its appeal and the Revenue in its cross objections is squarely covered in favour of the assessee vide judgment of the co-ordinate bench of the Tribunal passed in Godrej & Boyce Mfg. Co. Ltd. in ITA No.6867/M/11 decided on 26.06.13. He has further contended that similar issues which have been raised by both the parties in the case in hand, relating tax liability of remission of loan amount, were also considered in the above noted case by the co-ordinate bench of the Tribunal. The co-ordinate bench of the Tribunal, when faced with almost similar set of facts and circumstances, while relying upon the decision of the Special Bench of the Tribunal in the case of „Sulzer India Ltd.‟ (47 DTR 329 dated 10.11.10, has observed as under:
"4. We have considered the rival submissions and carefully perused the order of the lower authorities and the material evidences brought on record. It is not in dispute that the assessee has taken benefit of the scheme offered by the Government of Maharashtra. As provided in Circular No.496 dated 25.09.1987 and Circular No.674 dated 29.12.1993 issued by the CBDT, although the sales tax collected from the customers is a trading receipt, on account of deferral scheme, the same is deemed to have been paid. As a result, it amounts to discharge of the liability to pay sales tax. Once the liability is discharged the unpaid deferrals assumes a character of loan. In the light of the above circulars of the CBDT, sales tax collected by the assessee, which is not paid into the Government Treasury yet deemed to have been paid is nothing but the loan granted by the Government to the assessee. Therefore, such a loan cannot be treated as a trading liability. Facts on record show that during the year under consideration 22 Godrej Consumer Products Ltd.
the Government of Maharashtra introduced the Net Present Value (NPV) under Maharashtra Act No.XX of 2002 & Rule 31D of BST Rules 1959 notified vide Govt. Notification No.STR-12.02/CR-002/Taxation-1, dated 16.11.2002, where under the eligible undertaking was permitted to prepay the loan amount. Under the said scheme, the prepayment was allowed at the NPV of the loan repayable at the end of the loan period. The assessee availed the benefits of this scheme and got a remission in the aggregate loan liability amounting to Rs.9,92,92,718/-. It is further seen that on 12.12.2002 the Government of Maharashtra announced a scheme of "Premature Repayment of the amount of deferred tax by the eligible units at NPV". The industries who had availed the incentives of the sales tax scheme were permitted to prematurely repay the deferred sales tax liability by arriving at NPV by applying a specific discount. The assessee availed the benefit of the scheme announced on 12.12.2002 as under:
Sales tax liability Rs.18,79,58,925/- Less: Premature repayment Rs.8,86,66,207/- Surplus accrued on the above Rs.9,92,92,718/-
This surplus has been treated as capital receipt, which has been taxed by the Assessing Officer u/s 41(1) of the Act. Considering these facts, we find force in the contention of the counsel that the issues are squarely covered by the decision of the Special Bench of the Tribunal in the case of Sulzer India Ltd. (supra). The Tribunal has held as under:
"The assessee was liable to pay sales tax amounts collected from 1-11-1989 to 31.10.1996, payments of which were deferred under the scheme, and the amounts were payable after twelve years in six equal annual installments commencing from 1-5-2003, which meant that the liability was payable in future. Later on, the State Government came out with a scheme by which it was provided that if some dealers opted, then they could pay the future liability at a discounted value or what one may call net present value immediately. Thus, in this situation, it could not be construed as remission of liability, because the State Government had not waived of any of the liability as given in the illustrations. Had the State Government accepted lessor amount after twelve years or reduced such installments, then it could 23 Godrej Consumer Products Ltd.
have been a case of remission cessation. However, in the instant case the State Government had chosen to receive the money immediately which was receivable from 1-5-2003 to 1-5-2008. The amount of Rs.337.13 lakhs was actually paid to SICOM on 30- 10-2002. Thus, it did not satisfy the condition of actual remission in present. It was a simple case of collecting the amount at net present value which was due later on and even the formula for collecting the net present value was also given by the SICOM and the amounts had been paid as per that formula. Therefore, such payment of net present value of a future liability could not be classified as remission or cessation of the liability so as to attract the provisions of section 41(1)(a) [Para 108]".
Considering facts in totality, in the light of the aforesaid decision of the Tribunal Special Bench, which has been rightly followed by the CIT(A), we do not find any reason to interfere with the findings of the CIT(A). For the reasons stated above, it was to be held that the deferred sales tax liability being the difference between the payment of net present value against the future liability credited by the assessee under the capital reserve account in its books of account was a capital receipt and could not be termed as remission/cessation of liability and, consequently, no benefit would arise to the assessee in terms of section 41(1)(a) [Para 109] The appeal filed by the Revenue is accordingly dismissed."
6. The ld. A.R. has further brought our attention to the fact that even in the own case of the assessee for the earlier assessment year i.e. A.Y. 2005-06, this issue was again under consideration before the co-ordinate bench of the Tribunal and the Tribunal again relying upon the Special Bench decision in the case of „Sulzer India Ltd.‟ (supra) has decided the issue in favour of the assessee observing as under:
"14. In our opinion, the issue before us squarely stands covered in favour of the assessee by the decision of the Sulzer India Ltd. (supra). The only objection of the ld. D.R. is that in the case of Sulzer India Ltd. (supra), the said assessee has treated the difference as a capital receipt but in the present case the assessee has treated the difference as its profit. In our opinion, the treatment given by the assessee does not make any difference so far as application of 24 Godrej Consumer Products Ltd.
the legal principles. Admittedly, the assessee excluded the said amount while computing the total income. We, therefore, reject the object of the ld. D.R. and respectfully following the principles laid down in the case of Sulzer India Ltd. (supra) allow ground no.2 taken by the assessee and direct the AO to delete the addition."
A perusal of the above reproduced findings of the co-ordinate benches of the Tribunal reveals that the different benches of the Tribunal have been unanimous in holding that the concession received by the assessee from the state government for repaying the loan amount on an early date, which was liable to be paid on a future date as per the scheme of the government, cannot said to be a case of remission or cessation of liability so as to attract the relevant provisions of the Income Tax Act for taxing the said amount and the same has been held to be a capital receipt. In view of the consistent findings of the Tribunal on this issue as discussed above, this issue is decided accordingly in favour of the assessee and against the Revenue."
23. There being no difference in facts brought to our notice by the learned Departmental Representative, respectfully following the decision of the Tribunal in assessee's own case, we hold that the amount of ` 1,49,074, being capital in receipt cannot be treated as income of the assessee. Ground no.2, is allowed.
24. In grounds no.3 to 7, assessee has challenged disallowance of interest expenditure of ` 13,15,000 and administrative and other expenses of ` 7,87,000 under section 14A of the Act r/w rule 8D of the I.T. Rules, 1962.
25
Godrej Consumer Products Ltd.
25. Brief facts are, in the course of assessment proceedings, the Assessing Officer noticing that the assessee has made investment in shares and securities which could yield exempt income, called upon the assessee to explain disallowance under section 14A. In response to the query raised by the Assessing Officer, it was submitted by the assessee that as the assessee has not earned any exempt income by way of dividend during the year, no disallowance under section 14A could be made. Further, it was submitted, the investments made by the assessee were out of surplus funds available and no borrowed funds were utilised. It was submitted, surplus funds were invested in mutual fund for short periods to ensure optimum possible return. It was submitted, as far as borrowed funds are concerned, the assessee has availed secured loan in the form of sales tax deferment loan which has no interest cost. It was submitted, company has also availed temporary cash credit facility which was exclusively utilised for the purpose of carrying out the manufacturing activities and not for investment. Thus, it was submitted, no disallowance under section 14A can be made of interest expenditure. As far as administrative and other indirect expenses are concerned, it was submitted by the assessee, no such disallowance can be made notionally as the assessee has not incurred any expenditure for earning dividend income. Without prejudice to the aforesaid claim, it was submitted by 26 Godrej Consumer Products Ltd.
the assessee if, at all, any indirect expenditure is required to be disallowed, then such expenditure relating to a part of cost of one employee can be disallowed under rule 8D and the assessee worked out such disallowance at ` 1,36,785. The Assessing Officer, however, did not find merit in the submissions of the assessee and ultimately disallowed an amount of ` 21.02 lakh under section 14A r/w rule 8D. Though, the assessee challenged disallowance before the learned Commissioner (Appeals), he also sustained the disallowance.
26. Learned Authorised Representative contesting the findings of the Departmental Authorities submitted, as during the relevant previous year the assessee has not earned any exempt income, no disallowance under section 14A r/w rule 8D can be made. Further, learned Authorised Representative submitted, it was factually proved before the Assessing Officer that the assessee had own surplus funds available to make the investment, hence, no disallowance of direct expenditure could be made. The third proposition of the learned Authorised Representative was the investment consists solely of one strategic investment which has been made for business purpose, hence, to be excluded for computing average value of investment under rule 8D. Further explaining, the learned Authorised Representative submitted, the assessee has made investment in fully paid equity shares of Godrej SCA Hygiene Ltd., which subsequently 27 Godrej Consumer Products Ltd.
merged with the assessee in the year 2013. Hence, it is a strategic investment. Learned Authorised Representative submitted, in assessee's own case for assessment year 2007-08 and 2008-09, the Tribunal has directed the Assessing Officer to verify and delete disallowance of interest expenditure. He submitted, as far as disallowance on administrative expenditure is concerned, the Tribunal has restricted such disallowance to ` 1 lakh.
27. Learned Departmental Representative, however, submitted that after rule 8D was inserted to the statute book, disallowance under section 14A r/w rule 8D, has to be made. For such proposition, he relied upon the decision of the Hon'ble Supreme Court in Rajendra Prasad Moody, [1978] 115 ITR 519 (SC) and the decision of Hon'ble Delhi High Court in Maxopp Investment Ltd. v/s CIT, [2011] 15 Taxmann.com 390 (Del.).
28. We have considered the submissions of the parties in the context of facts and material on record and relevant case laws cited before us. The first contention of the learned Authorised Representative is, during the relevant assessment year, since the assessee has not earned any exempt income, no disallowance under section 14A can be made. We fully agree with the aforesaid contention of the learned Authorised Representative. In case of Cheminvest Ltd. v/s CIT, [2015] 61 28 Godrej Consumer Products Ltd.
Taxmann.com 118 (Del.), the Hon'ble Delhi High Court, after taking into consideration the ratio laid down by the Hon'ble Supreme Court in Rajendra Prasad Moody (supra) and Maxopp Investment Ltd. (supra), held that if in a particular assessment year, the assessee has not earned any exempt income, no disallowance under section 14A can be made. The ratio laid down as aforesaid squarely applies to the facts of the present case. Though, the learned Departmental Representative has tried to distinguish the aforesaid decision of the Hon'ble Delhi High Court with the submission that it relates to an assessment year prior to introduction of rule 8D. However, in our view, the ratio laid down equally applies to an assessment year even after the introduction of rule 8D. Therefore, we direct the Assessing Officer to verify whether assessee has earned any exempt income during the relevant previous year. If on such verification, it is found that assessee has not earned any exempt income during the relevant previous year, no disallowance under section 14A should be made. As far as interest expenditure is concerned, it can also be looked into from another angle. It is the contention of the assessee that it had enough interest free surplus funds available to make the investment, hence, no disallowance of interest expenditure under section 14A r/w rule 8D can be made. On a perusal of the material on record, it is noticed that before the Assessing Officer itself the assessee has submitted necessary facts 29 Godrej Consumer Products Ltd.
which revealed that at the beginning of the year, the assessee had reserves and surplus amounting to ` 51122.41 lakh and share capital amounting to ` 2569.54 lakh. Thus, own surplus funds available with the company were to the extent of ` 53691.95 lakh. As against the aforesaid surplus fund, the investments held by the assessee at the year end aggregated to ` 9788.59 lakh which consists mainly of shares in foreign subsidiary amounting to ` 7438.59 lakh the dividend income from which is not exempt. Therefore, when enough interest free surplus fund is available with the assessee to take care of the investment, no disallowance under section 14A r/w rule 8D, as far as interest expenditure is concerned, can be made. The Assessing Officer should verify this aspect also before making any disallowance. It is necessary to observe, in assessment year 2007-08 and 2008-09, when identical issue came up for consideration before the Tribunal, the Tribunal, in its order dated 20th November 2013, in ITA no.4103/ Mum./2010 and others, directed the Assessing Officer to verify whether sufficient funds were available with the assessee to make the investment and only thereafter make the disallowance if it is found that no surplus fund was available. The facts are also similar in the present case. In view of the aforesaid, we direct the Assessing Officer to decide the issue in accordance with the observation made by us as 30 Godrej Consumer Products Ltd.
above after providing due opportunity of being heard to the assessee. Grounds no.3 to 7 are allowed for statistical purposes.
29. In grounds no.8 and 9, assessee has challenged the disallowance of lease rentals.
30. Brief facts are, while verifying the computation of income of the assessee, it was noticed by the Assessing Officer that the assessee has reduced an amount of ` 10,53,374, from the total income on account of lease rentals paid for lease of cars. In response to the query raised by the Assessing Officer, it was submitted by the assessee, during the year under consideration assessee has capitalised leased assets acquired during the year in the books of account in accordance with the accounting standard issued by the ICAI and written-off the cost of such assets in the books of account by way of depreciation over the period of the lease. It was submitted, in the computation of total income, the depreciation of such leased asset has been disallowed and added back to the total income. Such leased assets have not been considered as an addition to the block of assets and no depreciation has been claimed thereon. Consequently, the entire lease rental paid during the year was claimed as deduction under section 37(1). The Assessing Officer, however, did not accept the claim of the assessee. Referring to the decision of the Hon'ble Supreme Court in Asea 31 Godrej Consumer Products Ltd.
Brown Boveri Ltd. v/s Industrial Finance Corp. of India, [2006] 154 Taxman 512 (SC), the Assessing Officer held, the lease rental of ` 10,53,374, is a capital expenditure, hence, not allowable. However, he allowed depreciation @ 15% on such amount. Though, assessee challenged the disallowance before the learned Commissioner (Appeals), he confirmed the same.
31. Learned Authorised Representative submitted, the issue has been decided in favour of the assessee by the Tribunal in assessment years 2006-07, 2007-08 and 2008-09.
32. Learned Departmental Representative, though, agreed that the Tribunal has decided the issue in favour of the assessee, however, he relied upon the reasoning of the Assessing Officer and the learned Commissioner (Appeals).
33. We have considered the submissions of the parties and perused the material available on record. It is observed, similar issue arose in assessee's own case for assessment year 2006-07, 2007-08 and 2008-09, in appeal before the Tribunal in ITA no.4103/Mum./2010 and others dated 20th November 2013. The Tribunal, after considering the submissions of both the parties and relying upon the decision of the Hon'ble Supreme Court in ICDS Ltd. v/s CIT, Civil Appeal no.3282 of 2008, decided on 14th January 2013, allowed assessee's claim of 32 Godrej Consumer Products Ltd.
expenditure on account of lease rental. There being no material difference in facts pointed out by the learned Departmental Representative, respectfully following the decision of the Co-ordinate Bench of the Tribunal in assessee's own case for preceding assessment years, we allow assessee's claim by deleting the addition made. Grounds no.8 and 9 are allowed.
34. In ground no.10, assessee has challenged disallowance of expenditure incurred on buy-back of shares.
35. Brief facts are, in the course of assessment proceedings, the assessee in letter dated 15th December 2011 submitted, the company had disallowed ` 14,66,534, being the expenditure incurred on buy- back of shares while computing the total income. However, the said expenditure being in the nature of revenue expenditure is allowable. In support of such claim, assessee relied upon the decision of the Tribunal, Kolkata Bench, in ACIT v/s Britannia Industries Ltd., ITA no.1789/Kol./2008. The Assessing Officer, however, rejected assessee's claim relying upon the decision of the Hon'ble Supreme Court in Goetz India Ltd. v/s CIT, [2006] 284 ITR 323 (SC), wherein it was held, the assessee can make such claim only through a revised return of income.
33
Godrej Consumer Products Ltd.
36. The learned Commissioner (Appeals) also confirmed the view expressed by the Assessing Officer.
37. Learned Authorised Representative submitted, the issue is squarely covered in favour of the assessee by virtue of a number of decisions rendered by different Benches of the Tribunal as under:-
i) ACIT v/s Britannia Industries Ltd., ITA no.1789/Kol./2008, order dated 31st August 2010;
ii) CIT v/s Selan Exploration Technology Ltd., [2010] 188 Taxmann.com 001 (Del.);
iii) Deccan Chronicle Holdings Ltd. v/s DCIT, ITA no.219/Hyd./ 2014 dated 16th September 2014; and
iv) John Flower (I) Pvt. Ltd. v/s ITO, ITA no.4691/Mum./2005 dated 8th December 2010.
38. Learned Departmental Representative, however submitted, the expenditure incurred being capital in nature is not allowable.
39. We have considered the submissions of the parties in the light of the case laws relied upon and perused the material available on record. As could be seen from the assessment order as well as the order of the first appellate authority, assessee's claim was not considered only for the reason that it was not made through a revised return of income. However, as held by the Hon'ble Supreme Court in Goetz India Ltd. (supra), restriction imposed therein for not entertaining a claim otherwise by way of revised return of income is 34 Godrej Consumer Products Ltd.
only applicable to the Assessing Officer. That being the case, we restore the matter back to the file of the Assessing Officer for considering afresh in the light of the decision relied upon by the assessee. Ground no.10, is allowed for statistical purposes.
40. Grounds no.11 and 12, relate to transfer pricing adjustment made on the corporate guarantee provided by the assessee to its A.E.
41. Brief facts are, the Assessing Officer in the course of assessment proceedings while verifying the audit report in Form no.3CEB, noticed that the assessee has extended corporate guarantee on behalf of its overseas A.E. as under:-
Name of Associated Enterprises Amount of Guarantee Godrej Netherlands B.V. GBP 30,00,000 Godrej Consumer Products Mauritius Ltd. USD 4,00,00,000 Godrej Blobal Middle East FZE AED 14,00,000
42. He also noticed that the assessee on its own has made transfer pricing adjustment on account of corporate guarantee provided to A.E. at ` 48,75,813, in the return of income filed by it. Noticing this, the Assessing Officer called for necessary details and also called upon the assessee to justify the basis for transfer pricing adjustment made suo- motu by the assessee. In response to the query raised by the Assessing Officer, it was submitted by the assessee that rate of 35 Godrej Consumer Products Ltd.
guarantee commission adopted to bench mark the guarantee given to A.Es was 0.25% which was arrived at on the basis of a quotation given by ICICI Bank to the assessee wherein the said bank had expressed its willingness to give guarantee on behalf of the assessee by charging guarantee commission of 0.15% per annum. The Assessing Officer being of the opinion that the rate adopted by the assessee @ 0.25% is on the lower side called upon the assessee to explain why the guarantee given should not be bench marked at 3% per annum. According to the Assessing Officer, such rate was proposed keeping in view the bench mark rate adopted by the Department in all other similar cases pertaining to assessment year 2008-09. Though, the assessee made elaborate submissions objecting to proposed transfer pricing adjustment suggested by the Assessing Officer but the Assessing Officer did not find merit in the same and ultimately determining the arm's length price of the corporate guarantee provided by the assessee @ 3% per annum and as a result, addition of ` 5,36,33,943 was made to the income of the assessee. Being aggrieved of such addition, the assessee challenged the same before the learned Commissioner (Appeals).
43. In the course of hearing of appeal, the assessee making elaborate submissions, contested the adoption of 3% rate by the Assessing Officer. It was submitted by the assessee that rate of 36 Godrej Consumer Products Ltd.
interest charged by bank to the assessee for loan is only 3.50%, therefore, the guarantee charged by the Assessing Officer @ 3% is not justifiable. It was further submitted by the assessee that rate charged by the Assessing Officer is based on rates applied in the year ending 31st March 2008 and the Assessing Officer has not listed out the arm's length cases which she has relied upon for bench marking. The learned Commissioner (Appeals), after considering the submissions of the assessee observed, where no cash margin is provided interest rate is charged at 2.75% per annum of bank guarantee amount. Ultimately, the learned Commissioner (Appeals) held that the arm's length rate of interest on corporate guarantee has been appropriately fixed at 3% by the Assessing Officer.
44. Learned Authorised Representative, while initiating his argument submitted, transaction relating to corporate guarantee will not fall within the definition of international transaction as provided under section 92B. However, when the bench pointed out that the assessee itself has treated the transaction as international transaction and has bench marked it, the learned Authorised Representative fairly accepting such factual position proceeded to confine his argument only to the rate applied by the Department. Learned Authorised Representative submitted, this is not the first year where the assessee has given such corporate guarantee to its overseas A.E. He submitted, 37 Godrej Consumer Products Ltd.
in the preceding assessment year also i.e., assessment year 2006-07, 2007-08 and 2008-09, the assessee has given such facility of corporate guarantee to the A.E. and is bench marked it at 0.5% in assessment years 2006-07 and 2007-08 and 0.25% in assessment year 2008-09, which the Department has accepted. The learned Authorised Representative submitted, corporate guarantee would not stand in the same footing as bank guarantee, therefore, the rate applied for bank guarantee by the bank cannot be applied to corporate guarantee. Learned Authorised Representative submitted, as far as corporate guarantee is concerned, generally, for bench marking the arm's length price, rate of 0.15% to 1.0% is applied. He submitted, the Hon'ble Jurisdictional High Court in CIT v/s Everest Kento Cylinders Ltd., ITA no.1165/2013, dated 8th May 2015, has accepted rate of 0.5% for corporate guarantee. He also relied upon the decision of the Tribunal, Mumbai Bench, in case of assessee's sister concern in Godrej Household Products Ltd., ITA no.7369/Mum./2010, dated 22 nd November 2013, wherein the Tribunal accepted the arm's length price of corporate guarantee at 0.5%. Learned Authorised Representative submitted, in the impugned assessment year, the HSBC has charged commission on financial guarantee at 0.5% per annum. He, therefore submitted, when internal CUP is available, the Departmental 38 Godrej Consumer Products Ltd.
Authorities should have followed that instead of applying the rate applicable to bank guarantee.
45. The learned Departmental Representative on the other hand submitted, there is no reason to interfere with the order of the learned Commissioner (Appeals) as the arm's length price determined at 3% is reasonable in the facts and circumstances of the case. Learned Departmental Representative submitted, by providing corporate guarantee not only the assessee bears the cost but also it involves considerable risk as the credit rating of the A.E. is not high. The learned Authorised Representative referring to the letter received by the assessee from HSBC, a copy of which is at Page-59 to 64 of the paper book submitted, the commission charged in respect of some of the guarantee is @ 1%. The learned Departmental Representative submitted, assessee's claim that the bench marking at 0.25% should be accepted is not tenable.
46. We have considered the submissions of the parties in the light of the relevant case laws cited before us and perused the material available on record. Undisputedly, the assessee has provided corporate guarantee to its overseas A.E. It is also not disputed that the assessee suo-motu bench marked the commission chargeable on such bank guarantee @ 0.25%. The issue before us is restricted to whether the 39 Godrej Consumer Products Ltd.
arm's length price of corporate guarantee is to be fixed at 0.25% as claimed by the assessee or at 3% as held by the Department. In the aforesaid context, it is relevant to refer to the letter dated 3 rd February 2008 of HSBC, a copy of which is placed at Page-59 to 64 of the paper book. On a perusal of the aforesaid letter of HSBC, it is evident that for financial guarantee, the commission charged by the bank is @ 0.50% per annum. It is further relevant to note, in case of Everest Kento Cylinders Ltd. (supra), the Hon'ble Jurisdictional High Court while accepting the commission rate of 0.5% on corporate guarantee provided by the assessee to its A.E. observed that corporate guarantee cannot be equated to bank guarantee. Following the aforesaid decision the Tribunal, Mumbai Bench, in Godrej Household Products Ltd., ITA no.7369/Mum./2010, dated 22nd November 2013, held the rate of guarantee commission of 0.5% as the arm's length price of the corporate guarantee provided by the assessee to its A.E. In the present case also, there is no dispute that the internal CUP by way of letter received from HSBC indicates that the commission charged for financial guarantee is 0.5%. Further, it is relevant to note that the Department in assessee's own case has accepted the arm's length price of corporate guarantee @ 0.5% in the assessment year 2006-07 and 2007-08. Thus, on consideration of overall facts and circumstances in the light of judicial pronouncements referred to 40 Godrej Consumer Products Ltd.
above, we are of the considered opinion that the arm's length price of the corporate guarantee should be fixed at 0.5%. The Assessing Officer / Transfer Pricing Officer is directed to make adjustment accordingly. Ground no.12, raised by the assessee is partly allowed.
47. In the result, assessee's appeal stands partly allowed.
Order pronounced in the open Court on 20.04.2016 Sd/- Sd/-
ASHWANI TANEJA SAKTIJIT DEY
ACCOUNTANT MEMBER JUDICIAL MEMBER
MUMBAI, DATED: 20.04.2016
Copy of the order forwarded to:
(1) The Assessee;
(2) The Revenue;
(3) The CIT(A);
(4) The CIT, Mumbai City concerned;
(5) The DR, ITAT, Mumbai;
(6) Guard file.
True Copy
By Order
Pradeep J. Chowdhury
Sr. Private Secretary
(Dy./Asstt. Registrar)
ITAT, Mumbai