TaxTMI 
TaxTMI 
2024 (2) TMI 1621
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....e same, a draft assessment order was passed on 22.09.2021 which was subjected to assessee's objections before Ld. DRP. Pursuant to the directions of Ld. DRP, final assessment order was passed against which the assessee is in further appeal before us. 2. The ground of appeal read as under: - TRANSFER PRICING GROUNDS The directions of the Dispute Resolution Panel (DRP), the Transfer Pricing order and the Final Assessment order are erroneous in so far as the following issue/adjustment: 1. Attribution of notional income towards deemed brand development 2.1 The NeAC/DRP erred in facts and circumstances of the case and in law in confirming the action of the TPO in attributing notional income of Rs.209,18,90,000/-on the premise that the Appellant has undertaken brand promotion/building activity for its AE i.e., Hyundai Motor Corporation, Korea. TPO exceeded jurisdiction 2.2 The NeAC/DRP failed to appreciate the fact that the TPO exceeded her jurisdiction by analyzing brand promotion/building as a separate international transaction though the NeAC has not referred the same for determination of ALP as per Section 92CA of the Income Ta....
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....he adjustment made by the TPO that the Appellant does Brand promotion/building activity for its AE. 2.12 The NeAC/DRP without appreciating the fact that the marketing expenses incurred by the Appellant to promote the sale of cars (licensed products) manufactured by it in the capacity of an entrepreneur has erroneously confirmed the conclusion of the TPO as a Brand promotion/building activity. 2.13 The NeAC/DRP failed to appreciate that even an independent entity would have charged for brand building service only if the brand building activity has been actually agreed to/ undertaken as the primary activity and not where the promotion of brand name is ancillary to the core business activity of manufacture and sale of vehicles. Separate benchmarking is void 2.14 The NeAC/DRP failed to appreciate the fact that the TPO having accepted the Royalty transaction which is inclusive of right to use "Brand" is at arm's length, is precluded from once again independently benchmarking the brand usage as separate international transaction. 2.15 The NeAC/DRP failed to recognize that the TPO having accepted that the overall net margin of the Appellant und....
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....Brand" and as such the Appellant cannot be deemed to receive income for using such brand. Economic Ownership 2.24 The NeAC/DRP erred in facts and circumstances of the case and in law in not appreciating that the Appellant is the economic owner of the brand name and uses the brand for its own benefit. 2.25 Without prejudice to the above and assuming without admitting that the Appellant has been providing brand building service, the NeAC/DRP failed to appreciate that the income, if any, can be attributed only when brand is alienated at a future date and as such the question of attributing a notional income for the deemed brand building service does not arise for AY 2018-19. 2.26 The NeAC/DRP erred in facts and circumstances of the case and in law by incorrectly analyzing the functions performed by the Appellant from the perspective of Development, Enhancement, Maintenance, Protection and Exploitation ('DEMPE') functions by drawing erroneous inference from the OECD Guidelines in relation to the principle laid down in this regard. 2.27 The NeAC/DRP erred in facts and circumstances of the case and in law in stating that the Appellant has not ....
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....le companies to determine the ALP of the transaction. 2.36 Without prejudice to our above grounds, the NeAC/DRP ought to have appreciated that the TPO has reckoned incorrect quantum of advertisement expenses (i.e., including expenses not in the nature of Advertisement). CORPORATE TAX GROUNDS 2. Disallowance of expenditure under section 14A of the Act r.w.r 8D of the Rules 3.1 The NaFAC/DRP erred in disallowing a sum of Rs.1,37,00,000 under section 14A of the Act by applying the provisions of Rule 8D of the Rules. 3.2 The NaFAC/DRP ought not to have made disallowance under section 14A of the Act when the Appellant has not claimed any exemption for the divided income amounting to Rs.1,40,827 earned during the year. 3.3 The NaFAC/DRP ought to have appreciated that the Assessee has not incurred any expenditure which may be attributable towards earning of dividend income and no exemption was claimed during the subject AY. 3.4 The NaFAC, having acknowledged the fact that the Assessee had sufficient surplus funds in earlier AY's to make the investments, ought not to have resorted to making ad hoc disallowance under section 14A....
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....under MEIS amounting to Rs.189,34,43,651 should be treated as capital receipt not liable to tax. 4.2 The NaFAC/DRP ought to have appreciated that they are duty bound to assess the correct income liable to tax and as such the NaFAC/DRP itself ought to have considered the issue and treated the incentive from FMS / MEIS as capital receipt. 4.3 The NaFAC/DRP ought to have appreciated that it is a well settled principle that the "purpose" for which an incentive is granted should be considered to determine whether the nature of subsidy / incentive is revenue or capital. 4.4 The NaFAC/DRP ought to have appreciated that the purpose of the export incentive under FMS/MEIS was for promoting Indian exports to markets other than developed economies and not for running the business of the Appellant more profitably and as such the export incentive is a capital receipt not chargeable to tax. 4.5 The NaFAC/DRP ought to have appreciated that the manner of utilization of an incentive cannot determine its tax treatment. 4.6 The NaFAC/DRP erred in relying on the amendment to the definition of income by way of insertion of clause (xviii) to section 2(24) of t....
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....that the manner of utilization of an incentive cannot determine its tax treatment. 6.6 The NaFAC/DRP ought to have appreciated that the amendment to the definition of income by way of insertion of clause (xviii) to section 2(24) of the Act does not apply to non-taxable capital subsidies as it was introduced only to align with the provisions of Income Computation and Disclosure Standards (ICDS). 3. The Ld. AR, at the outset, placed on record, issue-wise chart and submitted that substantial issues have already been adjudicated by the Tribunal in earlier years and therefore, facts being identical, the adjudication of earlier years may be followed. The same could not be controverted by Ld. CIT-DR. Having heard rival submissions and upon perusal of case records, the appeal is disposed-off as under. The assessee being resident corporate assessee is stated to be engaged in manufacturing and trading of motor vehicles and components. The assessee is manufacturing and selling cars in India as well as exporting them to its AEs and non-AEs abroad. This case was put up for clarification from time to time which was duly responded to by both the sides. The assessee also placed on reco....
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....the reasoning that the assessee had to recover this increase in brand value. However, in this year, increase in brand value was computed only to demonstrate the extent of benefits that accrued to the AE. The adjustment was being proposed only as a percentage of AMP expenses actually incurred by the assessee which could be attributed to increase in brand value. Finally, 50% of AMP expenses with markup of 7.1% was held to TP adjustment which resulted into an adjustment of Rs.209.18 Crores in the hands of the assessee. The Ld. DRP, following DRP directions for AYs 2009-10 to 2017-18, rejected the objections raised by the assessee. 3.3 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 IT(TP)A No.39/Chny/2021 dated 22.12.2021 for AY 2016-17 chose to follow earlier view of the Tribunal and held as under: - 7.3 We have heard both the parties, perused material available on record and gone through orders of the authorities below. An identical issue has been considered by Tribunal in assessee's own case for the assessment year 2015-16 in IT(TP) No.10/CHNY/2020, dated 17.09.2021, wherein the Tribun....
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....e decision of Hon'ble Apex Court in Goetze India Ltd. Vs. CIT (284 ITR 323). The Ld. AO also 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. The Ld. DRP confirmed the same on the ground that the scheme compensates to offset high freight costs and other disadvantages to select international markets with a view to enhance country's export competitiveness in foreign countries. Focus Market Scheme was launched in 01.04.2006 and it was merged with MEIS as per 2015 trade policy. The incentives were given for the purpose of revenue expenditure related to the exports to the designated countries. Therefore, these receipts were revenue in nature as already offered by the assessee to tax. Aggrieved, the assessee is in further appeal before us. 5.2 We find that this iss....
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....d subsidy subject to satisfaction of all the conditions and terms specified in the Memorandum of Understanding (MOU). The assessee submitted that appropriate authority was entitled to withhold the release of the incentives if some of the conditions were not fulfilled. However, Ld. AO brought the same to tax on the ground that the subsidy had already accrued to the assessee. The Ld. DRP confirmed the same against which the assessee is in further appeal before us. 8. Submissions on behalf of Assessee 8.1 The Ld. AR made elaborate submissions, oral as well as written, for the pleadings that the subsidy would be capital in nature and therefore, the same is not assessable to tax at all. In the written submissions, it has been contended that Investment Promotion Subsidy (IPS) as received from Govt. of Tamil Nadu in the form of refund of output SGST is a capital receipt not chargeable to tax. The Ld. AR has submitted that the assessee is engaged in manufacturing and trading of motor vehicles and components. During this year, the aforesaid subsidy has accrued to the assessee based on sales made. The same has been credited to Profit & Loss account under 'Other Operating Revenue' and t....
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....elt it necessary to bring out an exclusive Policy for encouraging the setting up of major integrated automobile projects in Tamil Nadu which has led to formulation of the said scheme which would attract major investment over a period of 7 years. The proposed investment includes investment in eligible fixed assets and Investment in intangibles, which form an integral part of manufacturing process. Considering various benefits accruing to State of Tamil Nadu in the form of increase in State Gross domestic Product, enhancing brand equity of Chennai, Ancillary development and Enhancement in employment potential, the policy envisages grant of subsidy to the eligible assessee. In order to avail this incentive, the assessee entered into a MoU with the GoTN on 22.01.2008 for expansion of its existing plant and to establish a new engine and transmission plant near the existing plant. The MoU envisages various obligations, support and incentives. The assessee was, inter-alia, obligated to make investment of over Rs. 4000 Crores over a period of 7 years, creation of incremental plant capacity of 3.30 Lacs vehicles per annum. The GoTN would give support by way of infrastructure support in the ....
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....if the purpose of the subsidy is for encouraging investment, it is a capital receipt not chargeable to tax. On the other hand, if the subsidy if given for meeting any expenses, it is a revenue receipt chargeable to tax. After the amendment, the moot question is whether the principles laid down by Supreme Court would still prevail or whether the subsequent amendment has the effect of overruling those decisions. 8.7 The Ld. AR submitted that nature of amendment to income definition u/s 2(24)(xviii) was not a substantive amendment and no corresponding amendment was made in the charging provisions u/s 28. It has been submitted that the provisions of Sec.2 of the Act define various terms and phrases used in the Act and it is merely a definition provision and does not deal with the charge of income tax. As per Section 14 of the Act, the charge of income tax and computation of total income is governed under the respective heads of income. Section 2(24) of the Act was amended vide Finance Act, 2015 w.e.f. 01.04.2016 (i.e., from AY 2016-17) to include 'subsidies' within the definition of income vide insertion of clause (xviii). However, amendment was not made in the charging section i.e.....
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....ture were being chargeable to tax. Therefore, it cannot be said that all subsidies are being covered within the tax net only post amendment. If this position is accepted, i.e., all subsidies are taxable only post amendment to section 2(24), then it would mean that even revenue subsidies prior to insertion of the term 'subsidies' in income definition will not be chargeable to tax. Since revenue subsidies even prior to the amendment were always chargeable to tax under section 28, the above interpretation that all subsidies are covered within the tax net post amendment is not consistent with the position of law. Since there is no change in the charging provisions under section 28 of the Act, the principles laid by the Apex Court and other High Courts would still hold the field in order to interpret whether a particular receipt is capital or revenue in nature even post amendment to section 2(24) of the Act. The Ld. AR thus submitted that the taxability of subsidies is dependent on whether it is revenue or capital in nature and the determination of this is based on the "Purpose test" as laid down by several judicial precedents including the Apex Court. Considering the purpose test, thes....
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....8; CIT vs. Ponni Sugars and Chemicals Ltd. [2008] (174 Taxman 87) etc. as also by other High Courts and Tribunals. Therefore, it was to be held that the intention of the amendment was not to make a substantive amendment to bring a new item of income within the charging provisions of section 28 of the Act. The intention was only to align the definition of income under section 2(24)(xviii) of the Act with the provisions of ICDS. 8.10 The Ld. AR cited instance of insertion of Explanation-10 to section 43(1) of the Act vide Finance Bill 1998. The Explanation-10 to section 43(1) of the Act states that where a portion of the cost of an asset acquired by an assessee has been met directly or indirectly by the Central Government or State Government or any authority established under any Law or by any other person, in the form of subsidy or grant or reimbursement, then in a case where the subsidy is directly relatable to the asset, such subsidy shall not be included in the actual cost of the asset. Since this is a substantive amendment, this has been introduced in the Finance Bill 1998 itself and not directly in the Finance Act 1998. Wherever a new substantive amendment was made, it was u....
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....ing out aforesaid amendment. The last argument was that the amended provisions of Section 2(24)(xviii) of the Act is not applicable for the IPS since the vested right to receive the subsidy was established on 17.04.2014 i.e., prior 01.04.2016. The vested rights to an assessee cannot be diluted by a subsequent amendment. The amendment would apply only to Schemes granted on or after the date of amendment i.e., 01.04.2016 and it cannot have a retrospective effect on Schemes granted/vested prior to the date of amendment. Without prejudice, Ld. AR submitted that the subsidy should be taxed only in the year of receipt. 8.12 Submissions on behalf of revenue The Ld. CIT-DR, on the other hand, submitted that the amendment was very clear and the income would include any type of subsidies, irrespective of nature or purpose. The amendment does not leave any scope of any other interpretation. The Ld. CIT-DR also submitted that the subsidy has been credited in the Profit & Loss Account as revenue item. However, the same not offered to tax in the computation of income simply on the plea that the right to receive the same did not accrue to the assessee in this year. The Ld. CIT-DR pleaded th....
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....fits and Gains of Business or Profession. The Ld. AR has also submitted that the amendment in Sec. 2(24) is not substantive amendment since the definition of income is mere explanation of a particular item or phrase used in the Act and not a charging section by itself. If the provisions of Sec.2 are considered to be charging provisions, the provisions of Sec.28 dealing with charging provisions of Profits and Gains would lose its relevance. The definition of Sec.2(24) has to be read along with the charging provisions of Section to determine whether the income as per the definition section would be chargeable to tax as per the charging provisions. The Ld. AR has cited the example of 'non-compete fees which was brought to tax as per clause (va) of Sec.28 of the Act and correspondingly, the same was included in the definition of income by way of insertion of clause (xii) of Sec.2(24) of the Act. 11. To evaluate the arguments of Ld. AR, it would be useful to consider the amended definition of income w.e.f. 01.04.2016 which read as under: - 2(24) Income includes.... xxxx xxxx (xviii) assistance in the form of a subsidy or grant or cash incentive or ....
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....tural and grammatical meaning of the word 'income'? According to the dictionary, it means 'a thing that comes in'. (See Oxford Dictionary, Vol. V, p. 162; Stroud, Vol. II, pp. 14-16). In the United States of America and in Australia both of which also are English speaking countries the word 'income' is understood in a wide sense so as to include a capital gain. Reference may be made to - 'Eisner v. Macomber', [1919] 252 US 189 (K); - 'Merchants' Loan and Trust Co. v. Smietankd, [1920] 255 US 509 (L) and - 'United States of America v. Stewart', [1940] 311 US 60 (M) and - 'Resch v. Federal Commissioner of Taxation', [1943] 66 CLR 198 (N). In each of these cases very wide meaning was ascribed to the word 'income' as its natural meaning. The relevant observations of learned Judges deciding those cases which have been quoted in the judgment of Tendolkar, J. quite clearly indicate that such wide meaning was put upon the word 'income' not because of any particular legislative practice either in the United States or in the Commonwealth of Australia but because such was the normal concept and connotation of the ordinary....
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....ture whatsoever. All crossword puzzles are not of a gambling nature. Some are; some are not. See State of Bombay v. R.M.D. Chamarbaugwala AIR 1957 SC 699. Even in card games there are some games which are games of skill without an element of gamble [See State of Andhra Pradesh v. K. Satyanarayan 1968 (2) SCR 515]. The words 'other games of any sort' are of wide amplitude. Their meaning is not confined to games of a gambling nature alone. It, thus, appears that sub-clause (ix) is not confined to mere gambling or betting activities. But, says the High Court, the meaning of all the aforesaid words is controlled by the word 'winnings' occurring at the inception of the sub-clause. The High Court says, relying upon certain material, that the expression 'winnings' has come to acquire a particular meaning, viz., receipts from activities of a gambling or betting nature alone. Assuming that the High Court is right in its interpretation of the expression winnings, does it follow that merely because winnings from gambling/betting activities are included within the ambit of income, the monies received from non-gambling and non-betting activities are not so included? What....
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....all within sub-clause (ix) of section 2(24), erred in concluding that it does not constitute income. The High Court has read the several sub clauses in section 2(24) as exhaustive of the definition of income when in fact it is not so. In this connection it is relevant to notice the finding of the Tribunal. It found that the receipt in question was casual in nature but - it opined - it was nevertheless not an income receipt and fell outside the provision of section 10(3). We have found it difficult to follow the logic behind the argument. It was thus observed by Hon'ble Court that it was difficult to define income in any precise general formula. Anything that could properly be described as income is taxable under the Act unless expressly exempted. Even if a receipt does not fall within the ambit of any of the sub-clauses in section 2(24), it may still be income if it partakes the nature of the income. The idea behind providing inclusive definition in section 2(24) was not to limit its meaning but to widen its net. The Hon'ble Court further held that the expression 'income' is of the widest amplitude and that it includes not merely what is received or what comes in by expl....
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....ng carried on by the assessee at any time during the previous year shall be chargeable to tax under the head 'Profits and Gains of Business or Profession'. From the scheme of the Act, it could be seen that the definition of income as provided in Sec. 2(24)(xviii) is of widest amplitude and it is an inclusive definition and not an exhaustive definition. 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. 13. It could also be observed that even before this amendment, the subsidy was not specifically spelt out in Sec.28 yet the subsidies which were of revenue in nature were always brought to tax under the head "Profits and Gains of Business or Profession' and capital receipts were held to be non-taxa....