2025 (12) TMI 187 - AT - Income Tax

Deletion of corporate guarantee TP adjustment under Section 92B upheld; MEIS incentives confirmed as capital receipts

ITAT Ahmedabad upheld the order of CIT(A) in favour of the assessee on both issues. Regarding transfer pricing adjustment on corporate guarantee ... TP upward adjustment - guarantee fee/commission charged for the guarantee given by the assessee to its AEs - HELD THAT:- We find that the issue of Corporate Guarantee Fee stands settled by the orders of the Co-ordinate Benches of the Tribunal for AY 2015-16, AY 2016-17, AY 2018-19 & AY 2015-16 in assessee’s own case. In the absence of any change in the factual matrix and legal preposition, we decline to interfere with the order of the Ld. CIT(A). MEIS receipts - nature of receipts - We find that the issue stands adjudicated by the orders of the Co-ordinate Benches of the Tribunal for AY 18-19 & AY 20-21 in assessee's own case. Further reliance is being placed on the judgments of the Hon’ble Apex Court like Shree Balaji Alloys [2016 (4) TMI 1161 - SC ORDER] and Ponni Sugars and Chemicals Ltd [2008 (9) TMI 14 - SUPREME COURT] In the absence of any change in the factual matrix and legal preposition, we decline to interfere with the order of the Ld. CIT(A) holding the additional claim of MEIS receipts as capital in nature. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether transfer pricing adjustment under section 92C/92CA on account of corporate guarantee fee charged to associated enterprises was justified, in light of earlier years' acceptance of the same transaction as being at arm's length and the principle of consistency. 1.2 Whether the appellate authority could admit and allow an additional claim that export incentives received under the Merchandise Exports from India Scheme (MEIS) were capital receipts, without the assessee having revised its return of income. 1.3 Whether MEIS receipts are capital in nature and therefore not taxable under the normal provisions and also excludible from 'book profit' for the purposes of section 115JB. 2. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Transfer pricing adjustment on corporate guarantee fee Legal framework (as discussed) 2.1 The matter arose from an adjustment made by the Transfer Pricing Officer under sections 92C and 92CA on the basis of external Comparable Uncontrolled Price (CUP) data obtained from banks under section 133(6), leading to an arm's length rate of 1.5% for corporate guarantee commission. The assessee relied on internal CUPs (0.20%-0.30%) and on the fact that similar guarantees had been accepted at arm's length in earlier assessment years. 2.2 The appellate authority referred to the 'Principle of Consistency' and relied on the ratio of decisions which hold that, where a fundamental aspect permeating different assessment years has been decided one way and allowed to attain finality, it should not be disturbed in a subsequent year in the absence of a change in facts or law. Interpretation and reasoning 2.3 The appellate authority found that the very same international transaction of provision of corporate guarantee had been examined and accepted as being at arm's length in earlier assessment years (AYs 2015-16, 2016-17, 2018-19) by the transfer pricing authorities and the Assessing Officer. 2.4 It was specifically recorded that there were no material or fundamental changes in the facts pertaining to the corporate guarantee transaction in the year under consideration as compared to those earlier years. 2.5 Applying the principle of consistency, and relying on judicial precedents which deprecate reopening or re-litigating settled positions in subsequent years absent change in facts or law, the appellate authority held that the transfer pricing adjustment for guarantee commission in the current year was a deviation from the established treatment and thus impermissible. 2.6 The Tribunal noted that co-ordinate benches had already adjudicated the issue of corporate guarantee fee in favour of the assessee in the assessee's own case for earlier years (AYs 2015-16, 2016-17, 2018-19, and another year referenced), and that the factual matrix and legal position remained unchanged. Conclusions 2.7 The Tribunal upheld the appellate authority's deletion of the upward transfer pricing adjustment on corporate guarantee fee, solely on the ground that the issue stood settled in earlier years in the assessee's favour and no change in facts or law was demonstrated. The Revenue's grounds challenging rejection of external CUP data, alleged violation of Rule 10C, and reliance on other decisions were rejected by declining to interfere with the order of the appellate authority. Issue 2 - Power of appellate authority to admit additional claim of MEIS receipts as capital without revised return Legal framework (as discussed) 2.8 The assessee did not claim MEIS receipts as capital in the original return but raised the claim during assessment proceedings by letter, and further before the first appellate authority. The Assessing Officer did not accept or specifically deal with the claim, relying on the principle that fresh claims could not be entertained except through a revised return and on the decision that limited the Assessing Officer's power in this respect. 2.9 The appellate authority referred to section 254 (as interpreted in case law) and to judicial precedents holding that appellate authorities (Commissioner (Appeals) and Tribunal) have plenary powers co-terminous with those of the Assessing Officer, including the power to admit new grounds or claims not made in the return, where relevant facts are on record and the issue is a question of law. 2.10 The appellate authority relied on decisions holding that the limitation in entertaining fresh claims without a revised return applies only to the Assessing Officer and does not curtail the powers of appellate authorities, and also on earlier orders in the assessee's own case where additional grounds had been admitted and decided on merits. Interpretation and reasoning 2.11 It was found that the assessee's claim regarding the nature of MEIS receipts required only application of law to facts already on record; no new factual investigation was necessary. 2.12 The appellate authority emphasised that the purpose of assessment and appellate proceedings is to correctly determine tax liability according to law, and that no tax can be imposed without sanction of law. Hence, bona fide legal claims affecting taxability of amounts already disclosed in the accounts and return should not be rejected merely on technical or procedural grounds relating to absence of a revised return. 2.13 The appellate authority also noted that, in the assessee's own earlier year, a similar additional ground (on a different issue) had been admitted by the Commissioner (Appeals), upheld by the Tribunal, and not challenged by the Revenue before the High Court on the point of admissibility, indicating acceptance of the principle that such additional legal grounds could be entertained. 2.14 The appellate authority therefore held that the additional ground/claim seeking to treat MEIS receipts as capital receipts was admissible and should be adjudicated on merits, notwithstanding the absence of a revised return. Conclusions 2.15 The Tribunal, while not separately re-reasoning this point, affirmed the order of the appellate authority and directed that the assessee's additional claim regarding MEIS receipts be allowed, implying acceptance of the appellate authority's view that such a claim can be entertained and granted without a revised return when it is a pure question of law on admitted facts. Issue 3 - Characterization of MEIS receipts as capital receipts and their treatment under section 115JB Legal framework (as discussed) 2.16 The appellate authority examined: (a) The definition of 'income' in section 2(24), particularly clause (xvi) (subsidy, grant, etc.), and section 28. (b) The Foreign Trade Policy (2015-2020) and the stated objective of MEIS: 'to offset infrastructural inefficiencies and associated costs involved in export of goods/products... thereby enhancing India's export competitiveness.' (c) The judicially developed 'purpose test' for determining whether a subsidy or incentive is a capital or revenue receipt, as laid down by higher courts: the nature of the receipt is determined by the object for which the subsidy is granted, not by its form, source, timing, or mode of computation. (d) Section 115JB and the limited scope for adjustment to net profit as per the Explanation, as well as case law on the powers of the Assessing Officer to verify whether the profit and loss account is prepared in accordance with the Companies Act and to exclude items which are not in the nature of 'income.' Interpretation and reasoning - Nature of MEIS receipts under normal provisions 2.17 The appellate authority analysed the MEIS scheme and held that the incentive is aimed at offsetting infrastructural inefficiencies and associated costs of exports, and at improving competitiveness, employment generation, and the development of robust infrastructure and capabilities to meet international standards. 2.18 Applying the 'purpose test,' it was held that the object of the MEIS scheme is to promote and strengthen the capital base and export capabilities of the industry rather than to provide general operational assistance in the ordinary course of business. Therefore, the incentives have the character of capital assistance. 2.19 It was further reasoned that MEIS benefits are granted in the form of non-cash duty credit scrips that can only be utilized for payment of specified duties or transferred, and are not in the nature of direct cash subsidy or reimbursement of specific expenditures. The appellate authority viewed these as 'rewards' aimed at building export competitiveness and infrastructure, not as trading receipts. 2.20 The appellate authority concluded that such MEIS scrips do not fall within section 2(24)(xvi) or section 28, and hence are not 'income' chargeable under section 4. Therefore, although they are connected with the business, they are capital receipts, not taxable under the normal computation of income. 2.21 The appellate authority supported this conclusion by referring to judgments where similar export-linked incentives and subsidies, granted for promoting industrial development or exports, were held to be capital receipts based on their purpose, even where the quantum was computed with reference to turnover or power consumption. Interpretation and reasoning - MEIS receipts under section 115JB 2.22 On the question whether MEIS receipts, even if capital, could still be included in 'book profit' under section 115JB, the appellate authority noted that: (a) Under sections 4 and 2(45), the subject matter of tax is 'total income,' which consists of items falling within the statutory concept of 'income' under section 2(24). (b) If a receipt is not 'income' at all, it cannot be brought to tax under section 115JB, since that section operates as a mechanism of computing tax on income by reference to book profit, not as an independent charging provision for non-income items. 2.23 Relying on judicial authority that distinguished the Supreme Court's decision limiting the Assessing Officer's power to recast book profit, the appellate authority observed that where an item credited to the profit and loss account is not in the nature of 'income,' it cannot form part of book profit for section 115JB, notwithstanding the absence of an explicit exclusion in the Explanation. 2.24 It was further held, based on case law, that the Assessing Officer has an implied mandate to verify whether the profit and loss account is prepared in accordance with the Companies Act and to adjust for items that are not permissible or not in the nature of income, and that this power is not curtailed where the adjustment is required to bring the computation in line with the statute. 2.25 The appellate authority thus concluded that MEIS receipts, being capital and not 'income,' must be excluded from book profit for the purposes of section 115JB. Tribunal's affirmation 2.26 The Tribunal noted that the identical issue regarding characterization of MEIS receipts and their treatment under normal provisions and under section 115JB had already been adjudicated in the assessee's favour by co-ordinate benches for earlier assessment years (AYs 2018-19 and 2020-21). 2.27 The Tribunal further recorded reliance on decisions of the Supreme Court concerning subsidy characterization and application of the 'purpose test,' and observed that there was no change in the factual matrix or legal position in the year under consideration. Conclusions 2.28 The Tribunal upheld the appellate authority's finding that MEIS receipts are capital receipts, not taxable as income under the normal provisions of the Act. 2.29 The Tribunal also upheld the direction to exclude MEIS receipts from the computation of book profit under section 115JB, treating them as not forming part of 'income' that can be subjected to minimum alternate tax. 2.30 Accordingly, the appellate authority's direction to reduce MEIS receipts from both normal total income and book profit was confirmed, and the Revenue's appeal on this issue was dismissed.