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The Commissioner of Income Tax Central Circle, Bangalore & Another v/s M/S. Siemens Public Communication Networks Ltd.

    I.T.A. No. 489 of 2007 C/w I.T.A. No. 59 of 2007 & I.T.A. No. 488 of 2007

    Decided On, 09 October 2013

    At, High Court of Karnataka

    By, THE HONOURABLE MR. JUSTICE DILIP B. BHOSALE & THE HONOURABLE MR. JUSTICE B. MANOHAR

    For the Petitioners: K.V. Aravind, Advocate. For the Respondent: Malhara Rao for P. Dinesh, Advocate.



Judgment Text

(Prayer: THIS ITA IS FILED UNDER SECTION 260-A OF I.T. ACT 1961 ARISING OUT OF ORDER DATED 31.01.2007 PASSED IN IT.A. NO.3752/BANG/2004, FOR THE ASSESSMENT YEAR 2001-02, PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW AND TO ALLOW THE APPEAL AND SET ASIDE THE ORDERS PASSED BY ITAT, BANGALORE IN I.T.A. N0.3752/BANG/2004 DATED 31.01.2007 AND CONFIRM THE ORDER OF THE APPELLATE COMMISSIONER CONFIRMING THE ORDER PASSED BY ASSISTANT COMMISSIONER INCOME TAX, CIRCLE-12(2), BANGALORE.)

Oral Judgment:

Dilip B, Bhosale, J.

1. These three appeals are arising from two orders passed by the Income Tax Appellate Tribunal in three appeals, filed by one and the same assessee. The assessment year in ITA 59/2007 is 1999-2000; in ITA No.488/2007:2000-2001 and in ITA No.489/2007:2001-2002. The order of the Tribunal, impugned in ITA No.59/2007, is dated 16.06.2006 whereas, the order passed by the Tribunal in the appeals, from which, ITA Nos.488/2007 and 489/2007 arise is dated 31.01.2007. The facts and circumstances involved in three appeals and the substantial questions of law raised therein are similar.

2. For the sake of convenience, we would refer to the facts in ITA No.59/2007. Before we narrate the facts, it would be necessary to reproduce the question of law that was formulated at the time of admission of the appeal for consideration, which read thus:-

"Whether the findings of the Income Tax Appellate Tribunal that the income of Rs.1,33,45,000/- received by the assessee cannot be treated as revenue receipt is perverse, arbitrary and contrary to law?

The amount reflected in the question is for the assessment year 2000-2001. Insofar as the assessment year 1999-2000 is concerned, the amount of income is Rs.21,28,40,000/- and Rs.2,95,84,556/- for the assessment year 2001-2002.

3. Before we proceed further, it would be necessary to state as to what happened when hearing of these appeals commenced. When these appeals were called out for hearing, and Mr.Aravind, learned counsel for the appellant- Revenue started addressing the Court, Mr.Malhara Rao, learned advocate appearing for the assessee, with Mr.P.Dinesh in ITA No.489/2007 requested to keep these appeals back for some time. He submitted that one Mr.Nageshwar Rao would appear on behalf of the assessee and that he was busy in some other Court. Mr.Aravind,. learned counsel for the revenue submitted that he would continue and when Mr.Nageshwar Rao appears, he may be heard on behalf of the respondent-assessee, to which Mr.Malhara Rao and Mr.Vinay,, Advocates, for the assessee consented. Accordingly, Mr.Aravind commenced his argument and within 10-15 minutes, when the arguments were in progress, Mr.Nageshwar Rao entered the Court. Mr.Malhara Rao and Mr.Vinay for M/s.Harish & Co., were present in the Court throughout. After the arguments of Mr.Aravind were heard for about an hour, Mr.Nageshwar Rao requested for adjournment on the ground that he had received vakalatnama on behalf of the assessee last evening and that he would file it after obtaining no objection from the advocates on record in all the three matters, and would argue on merits in the next week. We asked Mr.Nageshwar Rao, whether he had instructions to appear as a counsel in the matter on behalf of the assessee, to which, his reply was in the negative. He submitted that he would like to file his vakalat and then argue the appeals as an advocate on record. We, therefore, rejected his request for adjournment and asked Mr.Malhara Rao and Mr.Vinay for M/s.Harish & Co., the advocates on record to make submissions on merits. They both, it seems were ready to argue on merits, advanced arguments on behalf o'; the assessee, to which we would make reference in the later part of the judgment.

4. The assessee is a company incorporated under the provisions of the Companies Act, 1956. The assessee is engaged in the business of manufacturing Digital Electronic switching systems, computer software and also software services. They had filed return of income for the Assessment years 1999-2000, 2000-2001 and 2001-2002 declaring loss of Rs.9,OS,30,417/- for the assessment year 1999-2000; Rs.7.-29,68,898/- for 2000-01 and Rs.45,64,59,705/- for 2001-02. Insofar as the assessment year 1999-2000 is concerned, it was processed under Section 143(l)(a) of the Income Tax Act (for short 'the Act') on 30.03.2001 accepting the returned loss and accordingly a refund of Rl;.33,79,222/- including interest under Section 244A of Rs.7,13,155/- was granted. Subsequently, the case was selected for scrutiny by issue of notice under Section 143(2) of the Act. In response to the notice, one Sri.C.R.Krishna, F.C.A. appeared on behalf of the assessee on different dates and furnished details and after discussion, the assessment was completed on 26.03.2002.

5. In the statement of computation, the assessee had shown a sum of Rs.21,28,40,000/- as monies received from Siemens AG Germany Company. M/s.Siemens AG is the principal shareholder of the assessee's company. The assessee's representative in the letter dated 14.02.2002 had explained the said sum as "subvention payment" from the principal shareholder of the assessee-company, and that was paid to the assessee company for two reasons, namely, the company was potentially sick company, and that its capacity to borrow had reduced substantially leading to shortage of working capital. In the letter dated 24.09.1998 issued by Siemens AG, and the assessee's letter dated 19,02.2002, they explained that M/s.Siemens AG being a parent company, had agreed to infuse further capital by reimbursing the accumulated loss. In short, case of the assessee is that the payment made by Siemens AG was to make good the loss incurred by them and payment/receipt cf the subvention monies is capital receipt in nature and hence, cannot be treated as income or revenue receipt.

6. The Assessing Officer vide his order dated 26.03.2002 rejected the contention of the assessee. The Appellate Authority, however, in appeal, reversed the order of the Assessing Officer treating the said monies received from Siemens AG as capital receipt. The Appellate Tribunal, in the appeal filed by the revenue, confirmed the findings recorded by the Appellate Authority. The relevant observations in paragraph-6 of the impugned order read thus:-

"6. The rival contentions in regard to the above have been very carefully considered. The assessee company (Siemens public communications) apparently paid the assessee or compensated the assessee in view of the continued lossess, and this in fact was to augment the capital base and to improve the net worth which had eroded due to losses suffered by the company. With a view to compensate the erosion in the reserves in surplus, the parent company pumps into its subsidiary company funds to stabilize its capital account. It was considering all these reasons that the Commissioner of Income Tax (A) came to the conclusion that it was on capital account. If the amount so paid by the company is treated as revenue income, it would amount to taxing the parent company itself. The other reason is that the parent company paying its subsidiary company, is within the same group and not for any purpose which is in the nature of income so as to be treated as taxable income".

(Emphasis supplied)

7. Mi.Aravind, learned counsel appearing for the revenue submitted that the monies paid by Siemens AG to the assessee were of revenue account and was paid not only to make good the loss but to make the assessee's company run which had no monies to spend over day today expenditure to keep it running at the relevant time. He submitted that on the basis of the said monies/aid extended by Siemens AG, the assessee not only made their loss good, but started running their business in profit. He submitted that who paid the amount is absolutely on irrelevant fact and what is important is the object for which such assistance was extended. From the facts of the present case, he submitted that, it is clear that in the assessment year 1999-2000, the assessee's company had suffered loss. Whereas in the subsequent assessment years, 2000-01 and 2001-02, it started making profit which fact clearly shows that the amount paid by Siemens AG was used for running the business and therefore, it would fall under the category of revenue receipt and not capital receipt. In support of his submissions, he placed reliance upon the judgment of the Supreme Court in Commissioner of Income Tax vs. Ponni Sugars & Chemicals Ltd. & 0rs.(2008) 306 ITR 392 and Sahney Steel & Press Works Ltd. etc. vs. Commissioner of Income Tax (1997) 228 ITR 253(SC). 

8. On the other hand, learned counsel on behalf of the assessee, submitted that the appeal deserves to be rejected outright, since no substantial question of law is involved. It was further submitted that having regard to the findings of fact recorded by the Appellate Authority and the Tribunal, the questions of law as raised, does not fall for consideration being a substantial question of law. They further submitted that the findings of the Tribunal even on the question of law are justified and the Tribunal has rightly treated the amount paid by Siemens AG as "Subvention payment" and has rightly treated it against the capital account. It was further submitted that the judgments relied upon on behalf of the revenue are not applicable to the facts of the present case. The submissions advanced by both the learned counsel for the assessee are similar. They did not make any other submissions.

9. At the outset, we would like to look into the judgment of the Supreme Court in Ponni Sugars & Chemicals Ltd., wherein, the question of law that fell for consideration was, whether the incentive subsidy received by the assessee is a capital receipt not includible in the total income ?. The incentives conferred under that Scheme were two fold. One, in the nature of a higher free sale sugar quota and two, in allowing the manufacturer to collect excise duty on the sale price of the free sale sugar in excess of the normal quota, but pay to the Government only the excise duty payable on the price of levy sugar. The main controversy arose in view of the fact that the incentives were given through the mechanism of price differential and the duty differential. According to the Department, price and costs were essential items and that were basic to the profit making process and that any price related to mechanism would normally be presumed to be revenue in nature. In other words, it was contended on behalf of the revenue that since the incentives were given through price and duty differentials, the character of the impugned incentive in that case was revenue and not capital in nature. On the other hand, according to the assessee, what was relevant to decide the character of the incentive is the purpose test and not the mechanism of payment. In this backdrop, the Supreme Court in paragraph-14 of the report observed thus:-

"In our view, the controversy in hand can be resolved if we apply tne test iaid down in the judgment of this Court in the case or Sahney Steel & Press Works Ltd. (supra). In that case, on behalf of the assessee, it was contended that the subsidy given was up to 10 percent of the Capital investment calculated on the basis of the quantum of investment in capital and therefore, receipt of such subsidy was on capital account and not on revenue account. It was also urged in that case that subsidy granted on the basis of refund of sales tax on raw materials, machinery arid finished goods were also of capital nature as the object of granting refund of sales tax was that the assessee could set up new business or expand his existing business. The contention of the assessee in that case was dismissed by the Tribunal and, therefore, the assessee had come to this Court by way of a special leave petition. It was held by this Court of the facts of that case and on the basis of the analysis of the Scheme therein that the subsidy given was on revenue account because it was given by way of assistance in carrying on of trade or business. On the facts of that case, it was held that the subsidy given was to meet recurring expenses. It was not for acquiring the capital asset. It was not to meet part of the cost. It was not granted for production of or bringing into existence any new asset. The subsidies in that case were granted year after year only after setting up of the new industry and only after commencement of production and, therefore, such a subsidy could only be treated as assistance given for the purpose of carrying on the business of the assessee. Consequently, the contentions raised on behalf of the assessee on the facts of that case stood rejected and it was held that the subsidy received by Sahney Steel could not be regarded as anything but a revenue receipt. Accordingly the matter was decided against the assessee. The importance of the judgment of this Court in Sahney Sieei case (supra) lies in the fact that it has discussed and analysed the entire case law and it has laid down the basic 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 at 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 set up 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 assesee 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 the mechanism through which the subsidy is given is irrelevant."

(emphasis supplied)

10. Further, the Supreme Court after considering its judgment in Sahney Steal, observed and noted that the assessee was free to use the money in its business entirely as it liked. It was not obliged to spend the money for a particular purpose. In the case of Seaham Harbour Dock Co., vs. Crook (1931) 16 Tax Cases 333 (HL), the assessee was obliged to spend the money for expansion of six docks. That aspect was taken into consideration as an important aspect. In this backdrop, the Supreme Court further observed that "in the present case (Ponni Sugars & Chemicals) also, receipt of the subsidy was capital in nature as the assessee was obliged to utilize the subsidy only for repayment of term loan undertaken by the assessee for setting up new units/expansion of existing business."

11. In Sahney steel's case, the payments were made only after the industries had been set up. Payments were not made for the purpose of setting up of the industries, but the package of incentives in that case were given to the industries to run more profitably for a period of five years from the date of the commencement of production. In other words, a helping hand was given to the industries during the early days to enable them to come to a competitive level with other established industries. It is in this backdrop, in Sahney Steel, the Supreme Court held that incentive which assessee extended was revenue and not capital in nature. Supreme Court also observed that by no stretch of imagination can the subsidies whether by way of refund of sales tax or relief of electricity charges or water charges can be treated as an aid to setting up of the industry of the assessee. It was also noticed that the payments were made only when the assessee commenced its production. The said payments were made for a period of five years calculated from the date of commencement of- production in the assessee's factory. It is held that the subsidies were operational subsidies and not capital subsidies.

12. Applying the above principles to the facts of the present case, and keeping in view the objective behind the payment made by Siemens AG, we are satisfied that it was received by the assessee on revenue account. From the facts of the case, it is clear that huge amounts were paid by Siemens AG not only to make good the loss, but also to see that the assessee would run more profitably. It was by way of assistance in carrying on the business. It is not the case of the assessee that the monies paid by Siemens AG were utilized either for repayment of the loan undertaken by the assessee for setting up their unit or for expansion of existing unit/business. As observed by the Supreme Court, the point of time at which the subsidy is paid is not relevant. The source and the form of subsidy is immaterial. The main eligibility condition with which we are concerned is that the amount ought to have been utilized by the assessee to meet recurring expenses and/or to run their business more profitably and so also to get out of the loss that they were suffering at the relevant time. In any case, it was not for acquiring capital assets or to bring into existence any new asset. As a matter of fact, after getting the financial aid from the Siemens AG, the assessee company turned its business from loss to profit, which is evident from the facts reflected in the return of income filed for all the three assessment years i.e., 1999-2000, 2000-2001 and 2001-2002. In this backdrop, if the purpose test is applied, it is clear that the payment was made by Siemens

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AG as recurring expenses/working capital. 13. It is not clear from the order of the Tribunal on what basis it observed that M/s.Siemens AG paid the assessee or compensated the assessee in view of the continued losses, and such financial aid was extended to augment the capital base and to improve the nee worth which had eroded the losses suffered by the company. The facts on record speak otherwise. Only in the assessment year 1999- 2000, the assessee had suffered loss arid thereafter, in the assessment years 2000-01 and 2001-02, the assessee made profit. These facts, on the other hand, support the case of the revenue that the financial aid was extended by Siemens AG not only co make good the loss for the assessment year 1999-2000 but to see that the company run more profitably. 14. It is the object which is relevant for the financial assistance which determines the nature of such assistance. In other words, the character of the receipts in the hands of the assessee has to be determined with respect to the purpose for which payment was made. If the financial assistance is extended for repayment of the loan undertaken by the assessee for setting up new unit or for expansion of existing business then the receipt of such aid could be termed as capital in nature. On the other hand, if the financial assistance is extended to run business more profitably or to meet recurring expenses, such payment will have to be treated as revenue receipt. It is not the case of the assessee, in the present case, that the financial assistance was extended by Siemens AG either for setting up any unit or expansion of existing business or for acquiring any assets. 15. In the result, the revenue succeeds. The question of law is accordingly answered in favour of the revenue and against the assessee. Consequently, the orders passed by the Tribunal and the first appellate authority are set-aside. No costs. The appeals are accordingly disposed of in terms of this judgment.
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