2024 (2) TMI 1621 - AT - Income Tax

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 ... TP Adjustment - Addition of deemed Brand Development - assessee aggregated all major international transactions and benchmarked the same using entity level Transactional Net Margin Method (TNMM) method - TPO proposed adjustment on account of expenses incurred by the assessee for brand building allegedly incurred for the benefit of its AE - HELD THAT:- As is evident from the orders of Ld. TPO itself, this issue stood covered in assessee’s favor in all the earlier years. The bench, in [2022 (1) TMI 1030 - ITAT CHENNAI] held that learned TPO as well as learned DRP were erred in making transfer pricing adjustments towards brand services by adopting Spearman’s Rank Correlation method and concluded that there is positive accretion between brand value and market capitalization of HMC Korea and hence, directed the AO/TPO to delete transfer pricing adjustment made towards brand development services. Therefore, consistent with the view taken by the coordinate Bench, we direct the AO to delete addition made towards brand fee adjustment. Decided in favour of assessee. Disallowance u/s 14A - Expenditure incurred on earning exempt income - assessee submitted that it did not receive any income from investments and therefore, there was no question of incurring any expenses and making impugned disallowance - HELD THAT:- We find that this issue stood covered by earlier decisions of the Tribunal wherein the disallowance has been restricted to the extent of exempt income earned by the assessee. Similar view has been expressed in latest decision [2023 (10) TMI 1012 - ITAT CHENNAI]. Taking consistent view in the matter, we direct Ld. AO to restrict the disallowance to the extent of exempt income earned by the assessee. If no exempt income is earned, no such disallowance is called for. The corresponding grounds stand allowed for statistical purposes. Nature of Export Incentive under Focus Market Scheme / Merchandise Exports from India Scheme (MEIS) - We find that this issue is covered against the assessee by the order of Tribunal for AYs 2013-14 [2021 (9) TMI 1013 - ITAT CHENNAI] to 2016-17 [2022 (1) TMI 1030 - ITAT CHENNAI] as held held that as per amendment to sub-clause (xviii) to Sec.2(24) as effective from 01.04.2016, any subsidy or assistance, by whatever name called, even if capital in nature, shall be treated as income chargeable to tax except where it has been taken into account for determination of actual cost of assets in terms of Explanation-10 to Sec.43(1) of the act. In the present case, the cost was not reduced from cost of assets and therefore, the said claim could not be entertained. Depreciation on subsidy - State Industries Promotion Corporation of Tamil Nadu (SIPCOT) provided capital subsidy - It was submitted by the assessee that subsidy was not relatable to any fixed asset and this was also not offered to tax - AO opined that since capital subsidy was used for capital expenditure, the value of assets should have been reduced by the subsidy amount - HELD THAT:- We find that this issue is covered in favor of the assessee by the order of Tribunal for AYs 2013-14 [2021 (9) TMI 1013 - ITAT CHENNAI] to 2016-17 [2022 (1) TMI 1030 - ITAT CHENNAI] the bench followed decision in earlier years and allowed this claim of the assessee. Nature of Investment Promotion Subsidy - assessee accrued VAT incentive (investment promotion subsidy) of Rs.98.85 Crores as received from SIPCOT, Govt. of Tamil Nadu - Scope of expression ‘income’ as defined in Sec. 2(24) - assessee obtained final eligibility certificate from SIPCOT under the scheme on 17.04.2014. However, the said amount was not offered to tax on the ground that the subsidy is released by appropriate authority only on submission of proof of commodity taxation in the form of VAT among others under TN VAT Act, 2006 - prime argument of Ld. AR is that the aforesaid subsidy being capital in nature would not be taxable at all notwithstanding the fact that the definition of income as provided in Sec. 2(24) has been amended by Finance Act, 2015 with effect from 01.04.2016 wherein sub-clause (xviii) has been inserted in the definition of income - HELD THAT:- The expression ‘income’ as defined in Sec. 2(24) stares with the words “income includes” and thus, it is an inclusive definition of the income. The same is not exhaustive one and leaves room for further extension of the scope of the term. The word 'income' is of widest amplitude, and that it must be given its natural and grammatical meaning. We also observe that Income Tax is tax on income. Once a receipt is held to be the income, the natural consequences thereof would follow and the same would be taxable in the hands of the assessee unless exempted in any of the provisions under the Act. Consequently, the argument that the change in definition of ‘income’ was not substantive one does not find favor with us. The intention of legislature was specifically to include such receipt as the income of the assessee. The amendment was not merely to align with ICDS provisions. Further, the manner in which the amendment has been introduced by legislatures would wholly be irrelevant. Proceeding further, we find that the provisions of Sec.5 provide the scope of total income. It provides that subject to the provisions of this Act, total income of a person who is resident would include all income from whatever sources derived which is received or deemed to be received in India or income which accrue or arise or deemed to accrue or arise in India. The heads of income has been carved out in Section 14 of the Act. The provisions of Sec.14 provide for heads of income under which such income would be assessable. The scope of total income includes all types of income that is received or that accrues or arises to the assessee. The income has to be divided into five distinct heads one of which is ‘Profits and Gains of Business or Profession’. In our considered opinion, when the definition of income is not exhaustive one, it is not necessary that to tax the income, corresponding amendment should have been made in Sec.28 of the Act. The argument that the amendment is not a substantive amendment is not correct and we do not concur with this argument. The amended definition provide that all sorts of assistance received by an assessee from the specified persons, irrespective of its nature as capital or revenue, shall be taxable as income of the assessee unless the same falls in the exclusion category. In such a situation, the relevant case laws as cited by Ld. AR in support of the argument that ‘purpose test’ must be followed are to be disregarded and it was to be held that those case laws would have no application after the aforesaid amendment. We concur with the stand of Ld. CIT-DR, in this regard. Thus, the amount of subsidies as received by the assessee has rightly been brought to tax by Ld. AO in the assessment order. 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.