Delhi ITAT Rules Excise Duty and Interest Subsidies Granted to Promote Industrial Growth Are Capital Receipts
Pranav B Prem
The New Delhi Bench of the Income Tax Appellate Tribunal has extended substantial relief to Balaji Powertronics by holding that the excise duty subsidy and interest subsidy received by the assessee, pursuant to industrial incentive schemes framed for backward areas, constitute capital receipts and are therefore not taxable. The Tribunal examined the underlying purpose of the incentives granted under Central Excise Notification No. 49-50/2003-CE, noting that the scheme was specifically introduced to intensify and accelerate industrial growth in the backward districts of Himachal Pradesh and Uttarakhand, with the broader objective of generating perpetual employment and addressing regional economic imbalance. The Bench observed that the subsidies were received “with the object of creating avenues for perpetual employment, to eradicate the social problem of unemployment in the State by accelerating industrial development,” and concluded that such incentives bore the characteristics of capital receipts and not operational revenue.
The assessee, engaged in the business of trading UPS systems and transformers, had set up a manufacturing unit in a specified backward area and was consequently eligible for a ten-year excise duty exemption. Relying on the “purpose test,” the Tribunal examined the nature of the subsidy and clarified that where the incentive is linked to the setting up of an industry and is aimed at promoting economic development, such receipts cannot be treated as revenue. The Bench referred to Notification No. 49-50/2003-CE to reinforce that the incentive was introduced not for supplementing day-to-day business operations but rather for supporting industrial expansion. The Tribunal noted that the assessee had availed excise duty exemption even after the tenth year, and held that the subsidy must be excluded while computing the total income under both normal provisions and Alternate Minimum Tax.
On the transfer pricing issues, the Tribunal accepted the assessee’s contention that operating profit margins must be computed without factoring in excise duty, CST waiver, and income tax. It noted that the assessee’s unit was located in a backward area and enjoyed significant statutory waivers, which had the effect of inflating the operating margins in comparison to comparable companies. The Bench referred to a prior ruling of the Delhi Bench in Sheela Foams Ltd. wherein it had been directed that the operating margins be recalculated without considering excise duty, sales tax, and income tax. Applying the same principle, the Tribunal held that the benefit arising out of statutory incentives could not form part of operating profit for benchmarking purposes.
The Tribunal also examined several objections raised by the assessee in relation to the selection of comparables, the characterisation of its business activities, and the application of TP principles to its trading segment. Observing that several aspects of the assessments required fresh scrutiny, including questions relating to product similarity and segmental analysis, the Tribunal restored these issues to the Assessing Officer for a fresh determination after providing the assessee with an opportunity of hearing.
Ultimately, the Tribunal held that the excise duty subsidy and interest subsidy must be treated as capital receipts and excluded from the assessee’s taxable income. It also directed the AO/TPO to recompute operating margins for transfer pricing purposes without considering excise duty, CST waiver, and income tax. Other TP issues were remanded for reconsideration. With these findings, the appeal was partly allowed for statistical purposes.
Appearance
Assessee by S/Shri SS Nagar & Basant Maheshwari, CAs.
Department by Shri Chetan P.S. Rao, CIT DR
Cause Title: M/s. Balaji Powertronics V. DCIT, Circle-43(1), New Delhi
Case No: ITA No. 2743/Del/2022
Coram: Vimal Kumar (Judicial Member), M. Balaganesh (Accountant Member)
