Transfer pricing on "deemed brand development" and taxability of export incentives and VAT subsidies; most adjustments deleted, subsidies taxed

Deemed brand development TP adjustment was impermissible because the issue was consistently decided in earlier years and the TPO/DRP's approach to impute brand services was rejected; deletion of the adjustment was directed. Disallowance under s.14A had to be confined to the quantum of exempt income, as per settled Tribunal view; the AO was directed to restrict disallowance accordingly and make no disallowance if no exempt income arose. Export incentives under the Focus Market Scheme/MEIS were taxable as income under s.2(24)(xviii) (post-amendment) since the subsidy was not reduced from actual cost under Expln.10 to s.43(1); the claim was rejected. Depreciation reduction on capital subsidy was disallowed, following prior years; assessee's claim was allowed. Investment promotion/VAT subsidy was held taxable as income under the widened, substantive definition in s.2(24) read with s.5; addition was sustained.

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Issues: (i) Whether the Transfer Pricing adjustment attributing notional income for deemed brand development/AMP expenses is sustainable; (ii) Whether disallowance under section 14A r.w.r. Rule 8D is sustainable and quantum thereof; (iii) Whether export incentives under FMS/MEIS are capital receipts not taxable; (iv) Whether depreciation should be disallowed to the extent of a capital subsidy received earlier; (v) Whether Investment Promotion Subsidy (IPS) in the form of refund of output SGST is assessable as income.

Issue (i): Whether the Transfer Pricing adjustment of Rs.209.18 crores for deemed brand development/AMP expenses is sustainable.

Analysis: The Tribunal examined prior consistent decisions in assessee's own case for earlier assessment years where similar brand-related TP adjustments were deleted. The facts of the years were considered identical and the TPO's separate benchmarking of brand promotion (including allocation of 50% of AMP and 7.10% mark-up) was contrasted with the entity-level TNMM approach earlier accepted. The Tribunal noted the TPO/TPO-DRP approach and the availability of preceding Tribunal rulings applying to identical issues.

Conclusion: The Transfer Pricing adjustment for deemed brand development/AMP expenses is deleted in favour of the assessee.

Issue (ii): Whether the disallowance under section 14A read with Rule 8D amounting to Rs.1,37,00,000 is sustainable and how it should be quantified.

Analysis: The Tribunal relied on prior Tribunal decisions restricting disallowance under section 14A/Rule 8D to the extent of exempt income actually earned. It observed that where no exempt income arises, no disallowance is required, and applied consistent precedent for the assessee.

Conclusion: The disallowance is restricted to the extent of exempt income earned; if no exempt income, no disallowance is called for. The ground is allowed for statistical purposes in favour of the assessee.

Issue (iii): Whether export incentives under FMS/MEIS are capital receipts not chargeable to tax.

Analysis: The Tribunal considered prior Tribunal decisions adverse to the assessee on identical claims and the legislative amendment inserting clause (xviii) in section 2(24). It applied the consistent view in earlier Tribunal orders for AYs 2013-14 to 2016-17 and subsequent coordinate bench decisions which treated such incentives as revenue in nature.

Conclusion: The claim that FMS/MEIS incentives are capital receipts is dismissed; the ground stands dismissed in favour of the revenue.

Issue (iv): Whether depreciation should be disallowed to the extent of a capital subsidy (SIPCOT) received earlier.

Analysis: The Tribunal noted earlier decisions in the assessee's favour for relevant years where the disallowance on account of subsidy adjustment against asset cost was deleted. The factual position and precedents were held to be identical and applicable.

Conclusion: The disallowance of depreciation on account of the earlier SIPCOT subsidy is deleted; the ground is allowed in favour of the assessee.

Issue (v): Whether the Investment Promotion Subsidy (IPS) in the form of refund of output SGST accrued earlier and is taxable as income notwithstanding previous case-law applying the "purpose test" and subsequent amendment to section 2(24).

Analysis: The Tribunal found that the assessee's right to receive the IPS vested on issuance of final eligibility certificate on 17.04.2014. The Tribunal examined the amendment to section 2(24)(xviii) (w.e.f. 01.04.2016) expanding the inclusive definition of "income" to include assistance/subsidies "by whatever name called" except where taken into account under Explanation 10 to section 43(1). The Tribunal held that the amendment broadened the scope to include various subsidies as income and displaced the earlier exclusive application of the "purpose test" for determining taxability; prior case-law distinguishing capital and revenue subsidies would not operate post-amendment in respect of receipts covered by the amended definition unless excluded by Explanation 10.

Conclusion: The IPS (refund of output SGST) amounting to Rs.98.85 crores is assessable as income; grounds claiming it to be capital receipt are dismissed in favour of the revenue.

Final Conclusion: The appeal is partly allowed Transfer Pricing adjustment for deemed brand development and certain grounds including restriction of section 14A disallowance and deletion of depreciation disallowance are allowed in favour of the assessee, while claims that various export incentives/IPS are capital receipts are dismissed in favour of the revenue.

Ratio Decidendi: The amendment by Finance Act, 2015 inserting clause (xviii) in section 2(24) of the Income-tax Act, 1961 operates as an inclusive definition bringing assistance in the form of subsidies/grants/incentives within "income" (subject to the exclusion in Explanation 10 to section 43(1)), thereby altering the prior practical effect of the "purpose test" for taxation of such receipts.

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