AI Drafter 
TaxTMI 
TaxTMI 
2024 (12) TMI 1053
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.... by the assessee as a capital receipt without appreciating that if the subsidy does not fulfil the purpose of sharing the burden of the capital outlay but instead enables the assessee to recoup its profits in a recurring fashion, it must be treated as a revenue receipt." Ground III) "Whether, on the facts and in the circumstances of the case and in law, the Id. CIT(A) is justified in considering the income received on account of sale of the Carbon Credit by the assessee as a capital receipt without appreciating that the income received by the assessee is purely linked to production of goods and not to capital expenditure undertaken by the assessee." Ground IV) Whether, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is justified in considering the saving approach is appropriate basis for determination of market value of services for computation of 80-IA deduction without appreciating that the assessee has calculated its revenue from the rail system as the difference between the cost of transporting the same goods by road and by the India Railways, however, the assessee has actually not transported goods by road and this is an estimatio....
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....2018 for AYs 2012-13 & 2011-12 in favour of the assessee and against the revenue. 6. Insofar as the Sales Tax subsidy is concerned, the Co-ordinate Bench has considered the same vide Ground No. 3(a) & 3(b) in its order (supra) and held as follows:- "50. Considered the rival submission of both Ld. Counsels on this issue and material placed on record, we notice that Coordinate Bench of ITAT in the case ACIT v. Mihir Packaging (ITA No.5629/Mum/2011) and in the case of John Deere India Pvt. Ltd v. ITO (ITA No. 828/Pun/2014) has already decided this issue in detail. For the sake of clarity, relevant portion of the decision of Mihir Pacakging case is reproduced below:- 14. We have carefully considered the rival contentions, perused the findings given by the authorities below and the material available on record. It is an undisputed fact that the assessee has established a small scale industries undertaking in a duly notified backward area in the District of Thane, which has been categorized as "D+" locality i.e., remote backward area for the purpose of new Package Scheme of Incentive, 1993. The preamble of the said scheme, reads as under:- "In order to achie....
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.... for "D+" category has been put at Rs. 20,00,000. 16. The assessee had fulfilled the eligible criteria and also complied with the effective steps to be taken and thereafter, it has received the subsidy under special capital incentive for SSI unit based on its capital investment, which finally worked out to Rs. 20,00,000. Thus, from the preamble and also various other terms, it is seen that the purpose of the subsidy was to set-up a new unit in the notified backward areas particularly those between Bombay, Thane, Pune, belt for the development of the remote area. The said scheme provide special capital incentive for SSI unit and, therefore, the subsidy received under the scheme is clearly on account of capital only. This has been also mentioned in the eligible certificate dated 29th June 2000, issued by the District Industrial Centre, implementing agency for the SSI unit. The Hon'ble Supreme Court in Ponni Sugars and Chemicals Ltd. (supra), after relying upon the judgment in Sahani Steels and Press Works Ltd. (supra), held that character of the receipt in the hands of the assessee has to be determined with respect to the purpose for which subsidy is given. The "Propose ....
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.... test to be applied in judging the character of a subsidy. That test is that the character of the receipt in the hands of the assessee has to be determined with respect to the purpose for which the subsidy is given. In other words, in such cases, one has to apply the purpose test. The point of time which the subsidy is paid is not relevant. The source is immaterial. The form of subsidy is immaterial. The main eligibility condition in the scheme with which we are concerned in this case is that the incentive must be utilized for repayment of loans taken by the assessee to setup new units or for substantial expansion of existing units; On this aspect there is no dispute. If the object of the subsidy scheme was to enable the assessee to run the business more profitably then the receipt is on revenue account. On the other hand, if the object of the assistance under the subsidy scheme was to enable the assessee to set up a new unit or to expand the existing unit then the receipt of the subsidy was on capital account. Therefore, it is the object for which the subsidy/assistance is given which determines the nature of the incentive subsidy. The form of the mechanism through which the subsi....
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....'ble Jurisdictional High Court held that the sale of carbon credit is to be considered as capital receipt, therefore not liable to tax. The same reasoning was followed by Hon'ble Allahabad and Rajasthan High Court. Therefore, considering the consistent view of the different High Courts in the country, we see no reason to take a different stand since the different High Courts has decided this issue in favour of the assessee. Respectfully following the aforesaid decisions of various High Courts which are applicable mutatis mutandis in the present case, we are inclined to allow the ground no. 5 raised by the assessee." 8. Respectfully following the decision of the Co-ordinate Bench (supra), Ground Nos. 1, 2 & 3 are dismissed. 9. Coming to the grievance raised vide Ground No. 4, before proceeding any further, let us first understand the quarrel. 10. While scrutinising the return of income, the AO noticed that the assessee has claimed deduction u/s 80IA of the Act certified in Form 10B amounting to Rs. 32.01 Crores, in respect of rail system developed, operated and maintained by the assessee. 11. The assessee explained that the said rail system has been set up between its ce....
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.... that savings approach adopted by the assessee is an estimate and is unacceptable as the assessee has in actuality not transported goods by road. Cost of transporting goods by road is seen to be approximately eight times the cost of transporting goods by Indian Railways and taking the difference between the two as the revenue of the Rail System for the purpose of deduction u/s 80IA of the Act, results in artificial inflation of revenue of the rail system which in turn leads to a higher deduction being claimed by the assessee. 11.3. Allowing the deduction u/s 80IA of the Act, the AO recomputed the revenue from the rail system as follows:- Profit from Rail system eligible for deduction u/s 80 IA = Income from Rail System - Expenditure of the Rail System The expenditure is taken as per the assessee's own calculation in its Profit and Loss Account for the Rail System, which is Rs 4,90,43,749/- 11.3.1. The income was computed as under:- Cost of transporting goods by Indian Railways, calculated using the statement of railway freight as per the Railway Rates Circular at Rs 6,11,22,022/- to which a markup of expenditure directly attributable to the loading and u....
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....king' Rs. 5 Cr. Calculation of eligible profit as per the A.O.: (i) Revenue Freight as per railway fares Rs. 6 Cr. Loading and unloading charges (with 5% markup) Rs. 5 Cr. Total Rs. 11 Cr. (ii) Less: Expenses incurred Rs. 5 Cr. (iii) Eligible profit Rs. 6 Cr. Calculation of eligible profit as per assessee: Freight charged to cement undertaking Rs. 37 Cr. Less: Expenses incurred Rs. 5 Cr. Eligible profit Rs. 32 Cr. 15. The cost of road freight shown at Rs. 48 Crores is based on the actual expenditure incurred in earlier year when the goods were transported by road. 15.1. It is also an admitted fact that in order to curtail transport and logistics cost incurred for transportation of raw materials as well as furnished goods being cement, the assessee has developed an integrated rail system for Unit-I at Satna, M.P. The deduction u/s 80IA of the Act has been computed by following the savings approach wherein the revenue of the Rail System was computed by taking excess of the road freight & handling charges payable for transportation of goods by road to the nearest rail....
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....cessary technical know-how to the assessee-company, but only after acquiring at least 51 per cent of the equity share capital of the assessee-company. The said arrangement would however, result in outflow of foreign exchange on account of payment of dividend of MCCP. As such in order to save the foreign exchange reserves of the country, the Government of India and the RBI stipulated that the foreign collaborator would have to necessarily buy-back 55 per cent of the annual production of the impugned goods over a period of 5 years and that the outflow of foreign exchange on account of dividend should be covered by export earnings of the assessee-company during a period of 7 years from the date of commencement of commercial production. 7.10 Taking into consideration the fact that MCCP was itself producing NH coke at substantially low cost of production, the said company could not be compelled to buy-back NH coke from the assessee-company at the prevailing market price which was inevitably high due to forces of demand and supply. Even the assessee- company agreed to export NH coke to MCCP at the price dictated by the latter out of compulsion and in order to fulfil the conditio....
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....dia any person willing to procure the same would have to import it from the Morgan group. Prior to setting up of Unit-I, even the assessee had been importing the said intermediary product from Morgan Electrical Carbon Ltd. As such, taking into consideration the fact that the impugned product was an import substitute, the only way to arrive at the representative market value was to take the notional landed cost of import. The term 'open market value' has been defined in the Advanced Law Lexicon (supra) at p. 3349 as under: "Open market value (OMW). The price which would be paid by a willing buyer to a willing seller at the port of landing, it the open market value of the goods. Byrne v. Low [1972] 3 ALL ER 526, 529 (OBD)." 7.13 In view of the above, the assessee was completely justified in valuing the internal transfer for captive consumption of NH coke (i.e., transfer of NH coke to Unit-II) at the landed cost. For arriving at such price, the sole way out was to obtain the quotation from the company's erstwhile foreign supplier viz., Morgan Electrical Carbon Ltd. As regards the Assessing Officer's allegation that the proforma invoice from Morganite Electrical Carbo....
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....l units for captive consumption at the rate of Rs. 3.72 per unit. Assessing officer took the view that the assessee had declared inflated profits by showing supply of power at the rate of Rs. 3.72 per unit to its sister units i.e., for captive consumption. According to the assessing officer, there was no justification to claim electricity charge at the rate of Rs. 3.72 per unit for supply to its own industrial units when the assessee was supplying power to the State Electricity Board at the rate of Rs. 2.32 per unit. Assessing officer observed that the profit calculated by the assessee (power generating units) at the rate of Rs. 3.72 per unit was not the real profit; the price per unit was inflated so that profit attributable to the power generating units could qualify for deduction from the taxable income under the Act. Thus, it was held to be a colourable device to reduce taxable income. On such an assumption, the assessee was asked to explain its claim of deduction under section 80-IA of the Act which the assessee complied with." 17.1. And after considering Section 80IA(8) of the Act read with Explanation thereon, the Hon'ble Supreme Court held as under:- "26. Under ....