2022 (7) TMI 1045 - AT - Income Tax

Tribunal ruling: Exclusion of excise duty, leasehold land expenses deduction, arm's length guarantee fee rate upheld

The Tribunal allowed the exclusion of excise duty exemption from book profit computation under section 115JB, citing it as a capital receipt. It also ... Capital receipt - book profit under section 115JB - excise duty exemption as subsidy/incentive - amortisation of leasehold land as revenue expenditure - allowability under section 37 - corporate guarantee - arm's length guarantee fee - transfer pricing adjustment for inter unit transactions - comparability and selection of TNMM/CUP - admission of documents under Rule 46ACapital receipt - book profit under section 115JB - excise duty exemption as subsidy/incentive - Excise duty exemption claimed by the assessee is a capital receipt and is to be excluded from computation of book profit under section 115JB. - HELD THAT: - The Tribunal found that the excise duty exemption granted to the Rudrapur units was an incentive given to encourage industrialisation in backward areas and to generate employment; it is capital in nature and not chargeable to tax under the normal provisions. Reliance on the Office Memorandum dated 07.01.2003 and precedents treating similar incentives as capital receipts supported exclusion from book profit. Inclusion of such capital receipts in book profit would defeat the object of MAT provisions to reflect real working results; where a receipt is not income it cannot form part of book profit under section 115JB. For these reasons the assessee's ground for exclusion of the excise duty exemption from book profit is allowed. [Paras 10, 11, 12, 22]Allowed - the excise duty exemption of Rs.87,98,09,432/- is a capital receipt and shall be excluded from book profit under section 115JB.Amortisation of leasehold land as revenue expenditure - allowability under section 37 - Amortisation of leasehold land expenses amounting to Rs.18,73,242/- is allowable as revenue expenditure under section 37. - HELD THAT: - The Tribunal held that lumpsum lease premiums paid for long term leases (up to 99 years) and spread over the lease term in accordance with Accounting Standard 19 are not preliminary expenses under section 35D and are not capital in the sense of being disallowable. The amortisation, computed as per accepted accounting practice and debited to P&L, was expended wholly and exclusively for business purposes and therefore allowable under section 37. The Tribunal followed coordinate decisions (including NIIT Technologies Ltd. and Adani Gas Ltd./Sun Pharmaceuticals precedents) which treated such amortisation as akin to depreciation and permitted spreading the cost over the lease term; accordingly the CIT(A)'s disallowance was reversed. [Paras 23, 28, 30]Allowed - amortisation of leasehold land of Rs.18,73,242/- to be allowed as deduction under section 37.Corporate guarantee - arm's length guarantee fee - comparability and selection of TNMM/CUP - The arm's length corporate guarantee fee is to be restricted to 0.5% of the guaranteed amount; Revenue's challenge to the CIT(A)'s reduction is dismissed. - HELD THAT: - The Tribunal noted the facts of downstream guarantees provided by the assessee and that the TPO had relied on comparables from the USA whereas comparable evidence for the relevant region was lacking. Having considered a series of tribunal precedents which have fixed arm's length guarantee commission in the vicinity of 0.3%-0.5% (and multiple decisions adopting 0.5%), the CIT(A)'s adoption of 0.5% was held to be supported by settled judicial precedent. The Revenue did not produce binding authority to justify higher rates; accordingly the Tribunal confirmed the CIT(A)'s restriction of the guarantee fee to 0.5%. [Paras 34, 39, 40]Revenue's grounds dismissed - guarantee commission to be benchmarked at 0.5% of the guaranteed amount.Transfer pricing adjustment for inter unit transactions - comparability and selection of TNMM/CUP - admission of documents under Rule 46A - The downward transfer pricing adjustment in respect of purchases by eligible units from non eligible units is not sustainable and is deleted; Revenue's Rule 46A objections are dismissed. - HELD THAT: - The Tribunal observed that the assessee had initially adopted CUP in its Form 3CEB but the TPO accepted TNMM as most appropriate and there was no dispute before the Tribunal that TNMM had been accepted. The purchases from related non eligible units formed a small proportion of eligible units' total purchases (5.82% and 9.33%), and eligible units would continue to earn high operating margins even after any adjustment. The TPO did not provide an analytical demonstration that the inter unit purchases caused the higher profit margins; other factors (excise exemption, VAT effects, better infrastructure and lower costs) explained the difference. Given these facts and the absence of convincing analysis by the TPO, the CIT(A)'s deletion of the TP adjustment was upheld. Revenue also failed to substantiate its contention that new evidence was admitted in breach of Rule 46A. [Paras 41, 48, 50, 51, 52]Revenue's appeal on this issue dismissed - the downward TP adjustment of Rs.2,48,39,215/- is deleted and Rule 46A objections are rejected.Procedural non pressing of ground - dismissal as not pressed - The assessee's ground seeking allowance of education cess was not pressed and is dismissed as not pressed. - HELD THAT: - Counsel for the assessee expressly requested that this ground not be pressed before the Tribunal. The Tribunal recorded that request and dismissed the ground accordingly. [Paras 4]Dismissed as not pressed.Final Conclusion: The assessee's appeal is partly allowed: the excise duty exemption is held to be a capital receipt and excluded from book profit under section 115JB; amortisation of leasehold land of Rs.18,73,242/- is allowed under section 37; the Revenue's appeals on corporate guarantee fee and the inter unit transfer pricing adjustment are dismissed. The education cess ground was dismissed as not pressed. Issues Involved:1. Education cess on Income Tax and Dividend Distribution Tax.2. Exclusion of Excise Duty Exemption as capital receipt in computing book profit under section 115JB.3. Deduction of Amortization of Leasehold Land expenses.4. Arm's length rate of Corporate Guarantee fees.5. Downward adjustment in respect of purchases made by eligible units from non-eligible units.Detailed Analysis:1. Education cess on Income Tax and Dividend Distribution Tax:- Summary: The assessee did not press this ground, and it was dismissed as not pressed.2. Exclusion of Excise Duty Exemption as capital receipt in computing book profit under section 115JB:- Facts: The assessee claimed excise duty exemption for its manufacturing units located in backward areas, amounting to Rs.87,98,09,432/-. The CIT(A) allowed the deduction under normal provisions but did not address the exclusion while computing book profit under section 115JB.- Arguments: The assessee argued that the excise duty exemption is a capital receipt and should be excluded from book profit computation. Various judgments, including CIT vs. Ponni Sugars & Chemicals Limited and CIT vs. Reliance Industries Limited, were cited to support this claim.- Decision: The Tribunal agreed with the assessee, stating that the excise duty exemption, being a capital receipt, should not be included in the book profit for computing MAT under section 115JB. The Tribunal referred to multiple precedents supporting this view.- Conclusion: The Tribunal allowed the exclusion of the excise duty exemption from the book profit computation under section 115JB.3. Deduction of Amortization of Leasehold Land expenses:- Facts: The assessee claimed deduction for amortization of leasehold land expenses amounting to Rs.18,73,242/-. The Assessing Officer disallowed this expenditure, and the CIT(A) upheld the disallowance but increased the deduction under section 80IC/80IE for lease rentals attributable to eligible units.- Arguments: The assessee argued that the amortization of leasehold land expenses should be allowed as a deduction under section 37, citing decisions like Empire Jute Co. Limited vs. CIT and DCIT vs. Sun Pharmaceuticals Industries Limited.- Decision: The Tribunal held that the amortization of leasehold land expenses is allowable under section 37, as it is expended wholly and exclusively for business purposes. The Tribunal found no error in the accounting treatment of amortization and allowed the deduction.- Conclusion: The Tribunal reversed the CIT(A)'s finding and allowed the deduction for amortization of leasehold land expenses.4. Arm's length rate of Corporate Guarantee fees:- Facts: The assessee provided corporate guarantees for loans taken by its Associated Enterprises (AEs) and charged no fees. The TPO suggested a guarantee fee rate ranging from 1.22% to 1.69%, leading to an addition of Rs.43,67,295/-. The CIT(A) reduced the rate to 0.5%.- Arguments: The Revenue argued that the CIT(A) erred in reducing the rate without scientific or logical reasons. The assessee cited various Tribunal rulings where the arm's length guarantee fee was set between 0.3% and 0.5%.- Decision: The Tribunal upheld the CIT(A)'s decision, noting that the 0.5% rate is supported by substantial judicial precedents, including the case of Everest Kento Cylinder Ltd.- Conclusion: The Tribunal confirmed the arm's length guarantee fee rate at 0.5%, dismissing the Revenue's appeal on this issue.5. Downward adjustment in respect of purchases made by eligible units from non-eligible units:- Facts: The TPO suggested a downward adjustment of Rs.2,48,39,215/- for purchases made by eligible units from non-eligible units, alleging that eligible units earned more than ordinary profits. The CIT(A) deleted the adjustment.- Arguments: The Revenue argued that the CIT(A) erred in deleting the adjustment without sufficient cause and without considering the credit rating of the AE. The assessee contended that the higher profit margins were due to factors like excise duty exemption and lower cost of production.- Decision: The Tribunal agreed with the CIT(A) that the TPO's adjustment was unsustainable, as the eligible units' higher profits were attributable to various legitimate factors. The Tribunal also noted that the TPO failed to provide a detailed analysis of how the purchases yielded excess profits.- Conclusion: The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s deletion of the downward adjustment.Conclusion:The Tribunal partly allowed the assessee's appeal and dismissed the Revenue's appeal, providing detailed reasoning for each issue based on judicial precedents and the specific facts of the case.