Refund of Duty Drawback is Capital receipt if it was part of project cost:Delhi High Court

By | November 27, 2015

Facts of the Case

The assessee in the relevant assessment year 2009-10 was in the process of setting up a thermal power generation plant at Maithon, Jharkhand. It applied to the Ministry of Power, Government of India for grant of mega power status which was under examination during the assessment year 2009-10. The project was at the stage of construction and installation of power plants, pending the grant of mega power status. The assessee was required to pay excise and customs duty on goods and materials wherever applicable. Accordingly, the assessee paid excise duty of Rs. 2,606.45 lakhs to its vendors. It lodged a claim for Rs. 1,246.29 lakhs with the Director General of Foreign Trade under paragraph 8.2(g) of the Foreign Trade Policy as “deemed export benefits”. The Director General of Foreign Trade by a letter dated February 24, 2009, admitted the claim of the assessee to the extent of Rs. 1,059.35 lakhs but had not yet reimbursed the said amount to the assessee in the assessment year in question. It is stated that, being a part of the equipment cost, the excise duty has been accounted for as part of the project cost and the amount refunded will be reduced from the project cost.

Issue 

The Assessing Officer treated the excise duty drawback claimed by the assessee as income of the assessee in the year of the claim itself.

Held

Any refund or drawback would go to ultimately reduce the cost of the project and had, therefore, to be treated as a capital receipt.

HIGH COURT OF DELHI

Commissioner of Income-tax

v.

Maithon Power Ltd.

DR. S. MURALIDHAR AND VIBHU BAKHRU, JJ.

IT APPEAL NO. 5 OF 2015

JULY  21, 2015

P. Roy Chaudhuri, Sr. Standing Counsel and Ajit Sharma, Jr. Standing Counsel for the Appellant. Ms. Shashi M. Kapila,R.R. Maurya, Pravesh Sharma and Sanjay Kumar, Advs. for the Respondent.

JUDGMENT

1. This appeal under section 260A of the Income-tax Act, 1961 (“the Act”) is directed against the order dated May 9, 2014, passed by the Income-tax Appellate Tribunal (“the ITAT”) dismissing the Revenue’s appeal, i.e., I.T.A. No. 2644/Del/2013 for the assessment year (“the AY”) 2009-10.

2. In the present appeal the court has by its order dated April 20, 2015, framed the following question of law for consideration:

“Whether the Income-tax Appellate Tribunal has rightly upheld the decision of the Commissioner of Income-tax (Appeals) allowing the relief to the assessee-company by holding that refund of excise duty amounting to Rs. 12,46,29,000 claimed by the assessee-company from the Director General of Foreign Trade is not income under section 5 read with section 28(iii)(b) of the Act in the hands of the assessee-company ?”

3. At the outset question Mr. P. Roy Chaudhuri, learned senior standing counsel for the Revenue, clarifies that the relevant provision is section 28(iiic) of the Act. The above question will stand corrected accordingly.

4. The background facts are that the assessee is a joint venture of the Tata Power Co. Ltd. and Damodar Valley Corporation with 74 per cent. and 26 per cent. shareholding, respectively. The assessee-company was incorporated on July 26, 2000, with the principal object of operating and maintaining the electric power generating stations based on conventional/non-conventional resources. The assessee in the relevant assessment year 2009-10 was in the process of setting up a thermal power generation plant at Maithon, Jharkhand. It applied to the Ministry of Power, Government of India for grant of mega power status which was under examination during the assessment year 2009-10. The project was at the stage of construction and installation of power plants, pending the grant of mega power status. The assessee was required to pay excise and customs duty on goods and materials wherever applicable. Accordingly, the assessee paid excise duty of Rs. 2,606.45 lakhs to its vendors. It lodged a claim for Rs. 1,246.29 lakhs with the Director General of Foreign Trade under paragraph 8.2(g) of the Foreign Trade Policy as “deemed export benefits”. The Director General of Foreign Trade by a letter dated February 24, 2009, admitted the claim of the assessee to the extent of Rs. 1,059.35 lakhs but had not yet reimbursed the said amount to the assessee in the assessment year in question. It is stated that, being a part of the equipment cost, the excise duty has been accounted for as part of the project cost and the amount refunded will be reduced from the project cost.

5. At this stage, it requires to be noticed that the assessee initially claimed depreciation on the equipment in its return. The Assessing Officer (“the AO”) disallowed the deduction on the ground that the assessee was “claiming double deduction of depreciation” wherein the capitalised project cost includes depreciation as per the company law as well as depreciation under the Act. This disallowance was challenged by the assessee before the Commissioner of Income-tax (Appeals) in grounds 5 and 6. However, in the written submissions filed before the Commissioner of Income-tax (Appeals), the assessee clarified that in the assessment year 2009-10, it had transferred the depreciation to capital work-in-progress and inadvertently reflected it as unabsorbed depreciation in the return filed by it. On its own, while filing the return for the subsequent assessment year 2010-11, the assessee had reversed the above claim for depreciation and brought forward nil amount of depreciation to the assessment year 2010-11. In other words, it was clarified by the assessee that no benefit of depreciation was claimed for the assessment year 2009-10. This was accepted by the Commissioner of Income-tax (Appeals) and grounds 5 and 6 of the appeal of the assessee as regards the claim of depreciation were disposed of as not pressed.

6. The Assessing Officer treated the excise duty drawback claimed by the assessee as income of the assessee in the year of the claim itself. The Assessing Officer referred to section 28(iii)(b) which deals with cash assistance to exporters. Mr. P. Roy Chaudhuri, learned counsel for the Revenue, sought to clarify that this was perhaps a typographical error and the Assessing Officer might have intended to refer to section 28(iiic) which refers to “any duty of customs or excise repaid or repayable as drawback to any person against exports under the Customs and Central Excise Duties Drawback Rules, 1971”.

7. The factual position as regards the actual dates of commencement of commercial operation of the two units of the thermal power plant were September 1, 2011, and July 24, 2012, respectively. The Commissioner of Income-tax (Appeals) accepted this fact and this was affirmed by the Income-tax Appellate Tribunal as well. This factual position has not been challenged by the Revenue. It is therefore, not in dispute that the project was not operational during the assessment year in question, i.e., 2009-10.

8. Consequently, the finding of the Commissioner of Income-tax (Appeals) that the business of the assessee had yet not been set up during the assessment year 2009-10 and that all the costs incurred by it would have to be taken as capital work-in-progress cannot be faulted. Where there is a refund of excise duty it would go to reduce the project cost/capital work-in-progress since it is relatable only to the capital assets. Even for the purpose of section 28(iiic) of the Act, the excise duty repaid to the assessee as drawback would have to relate to the business income of the assessee in order to be chargeable to tax under the head of “Profits and gains of business”. In the present case, however, it relates to the cost of acquisition of a capital asset which forms part of the overall project cost incurred in the pre-commissioning phase of the project. The duty drawback would, therefore, to that extent reduce the project cost and, therefore, cannot, in the assessment year in question, be treated as business income.

9. The legal position in this regard is well-settled. In Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167, the Supreme Court explained that the “accepted accountancy rule for determining the cost of fixed assets is to include all expenditure necessary to bring such assets into existence and to put them in working condition”. In the facts of that case it was held that the interest incurred before the commencement of production on money borrowed by a newly started company which was in the process of constructing and erecting its plant “can be capitalised and added to the cost of the fixed assets which have been created as a result of such expenditure”.

10. In CIT v. Bokaro Steel Ltd. [1999] 236 ITR 315 , the Supreme Court was considering the nature of the amounts received by the assessee from its contractors, engaged for the construction of its steel plant, under three heads : (i) as rent for housing the workers and staff, (ii) hire charges for plant and machinery made available to the contractors and (iii) interest from advances made to the contractors. The court found that the arrangements between the assessee and its contractors pertaining to the above three receipts were “intrinsically connected with the construction of its steel plant”. The receipts had been adjusted against the charges payable to the contractors and had, gone to reduce the cost of construction. Therefore they were “rightly held as capital receipts and not income of the assessee from any independent source”.

11. The court in Bokaro Steel Ltd.‘s case (supra) approved the decision of this court in Addl. CIT v. Indian Drugs & Pharmaceuticals Ltd. [1983] 141 ITR 134 . In that case, receipts from sale of tender forms and supply of water and electricity from the contractors at the stage when the construction of the factory was in progress and the production had not yet commenced were held to be “directly related to the capital structure of the business” and therefore of “capital nature”.

12. The above legal position has been further reiterated in CIT v. Karnataka Power Corpn. [2001] 247 ITR 268 (SC), and CIT v. Ponni Sugars & Chemicals Ltd. [2008] 306 ITR 392  (SC). In Ponni Sugars & Chemicals Ltd.‘s case (supra), the court was considering the nature of the subsidy received by a co-operative society from the Government for the running of a sugar mill. The court applied the “purpose test” It held that the character of the receipt of subsidy in the hands of the assessee under the scheme had to be determined with respect to the purpose for which the subsidy was granted. 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 would be capital account”. It was clarified that “the form or the mechanism through which the subsidy is given are irrelevant”.

13. In view of the aforementioned settled legal position, the court concurs with the views expressed by the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal that any refund or drawback would go to ultimately reduce the cost of the project and had, therefore, to be treated as a capital receipt.

14. Consequently, the question of law is answered in affirmative, i.e., against the Revenue and in favour of the assessee.

15. The appeal is dismissed but with no order as to costs.

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