Background. Facts. produce articles or things or completes. substantial expansion.
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1 03 June 2015 EY Tax Alert Chandigarh Tribunal denies fresh five year 100% profit-linked deduction to new units undertaking substantial expansion Executive summary Tax Alerts cover significant tax news, developments and changes in legislation that affect Indian businesses. They act as technical summaries to keep you on top of the latest tax issues. For more information, please contact your EY advisor. This Tax Alert summarizes a recent ruling of the Chandigarh Income Tax Appellate Tribunal (Tribunal) in a group of cases, with the case of Hycron Electronics (Taxpayer) [1] as the lead matter, where the common issue before the Tribunal was whether a new industrial unit set up in specified areas in North Indian states on or after 7 January 2003 is entitled to a fresh five-year profitlinked incentive deduction of 100% under Section 80IC (S.80IC) of the Indian Tax Laws (ITL), if such a unit undertakes substantial expansion before 1 April After a comprehensive analysis of the scheme of package incentives granted by the Central Government (including S.80IC), the Circular No. 7/2003 dated 5 September 2003 issued by the Central Board of Direct Taxes (CBDT) and cross contentions of the Taxpayer and the Tax Authority, the Tribunal ruled in favor of the Tax Authority. The Tribunal held that, considering the overall context of S.80IC and the harmonious construction of all sub-sections thereof, a new unit set up on or after 7 January 2003 is entitled to 100% deduction for the first five years and 25% (30% for corporate taxpayers) for the next five years. Although S.80IC also provides for a similar profit-linked deduction for a unit which undertakes substantial expansion between 7 January 2003 and 31 March 2012 (qualifying period), this benefit can be availed of only by units which existed prior to 7 January 2003 and cannot be availed of by new units set up after 7 January [1] Hycron Electronics v. ITO [ITA No. 798/Chd/2012]
2 Background produce articles or things or completes substantial expansion. With a view to give effect to a package of fiscal and non-fiscal concessions announced by the Central Government, a new S.80IC was inserted by the Finance Act, 2003 in the ITL, which allows a twotier income-linked tax holiday at a prescribed percentage for ten years viz., full tax holiday (100%) for the first five years followed by a partial (25%/30%) tax holiday for the next five years. Tax holiday is given either to: (a) A new unit which begins to manufacture or produce qualifying articles or things or (b) An existing unit which implements substantial expansion. Substantial expansion is defined to mean an increase in the investment in the plant and machinery by at least 50% of the book value of the plant and machinery (before taking depreciation in any year), as on the first day of the tax year in which the substantial expansion is undertaken. The qualifying period between which unit should begin to manufacture/produce or complete substantial expansion in certain specified areas of the North Indian states of Himachal Pradesh and Uttaranchal was 7 January 2003 and 31 March The unit should also satisfy certain other conditions, inter alia, that it should not be formed by splitting up or reconstruction of a business already in existence or it should not be formed by the transfer to a new business of machinery or plant previously used for any purpose (commonly referred to as formative conditions ). The tax holiday period of ten years for units located in certain specified areas of the North Indian states of Himachal Pradesh and Uttaranchal is divided into two parts viz., 100% deduction for the first five years and 25% (30% for corporate taxpayers) deduction for the next five years. In contrast, the tax holiday period for new units or existing units undertaking substantial expansion located in North Eastern States is full 100% for ten years. The tax holiday period of ten years begins from the initial assessment year which is, inter alia, defined to mean the tax year in which the unit begins to manufacture or S.80IC contains a specific provision which states that the total period of deduction cannot exceed ten years. Facts The Taxpayer is engaged in the business of manufacturing assembly and sub-assembly of electronic energy meters and allied products. It set up a new unit in a specified area in Himachal Pradesh and started commercial production from 17 January The Taxpayer claimed 100% deduction for the first five years from tax years to , which was allowed by the Tax Authority. Subsequently, in the sixth year i.e., tax year , the Taxpayer undertook substantial expansion by way of investment in the plant and machinery. The Taxpayer claimed 100% deduction for the entirety of the profits of the unit from tax year onwards by contending that it became entitled to a fresh five-year tax holiday period of 100% by virtue of completion of substantial expansion. To note, the Taxpayer claimed 100% deduction with respect to the entirety of the profits of the unit as substantially expanded and did not make any distinction between the old unit and the substantially expanded portion. The Tax Authority held that the benefit of tax holiday for substantial expansion was available to units which existed prior to 7 January 2003 and had completed substantial expansion during the qualifying period. The benefit of substantial expansion was not available to new units set up after 7 January Accordingly, the Tax Authority held that the Taxpayer was entitled to only 25% deduction from the sixth year to the tenth year and cannot avail a fresh five-year tax holiday of 100% on account of substantial expansion. There was no dispute on compliance of any other conditions of S.80IC. The dispute was restricted to the quantum of
3 deduction available (i.e., 100% or 25%) for a new unit set up during the qualifying period, which also completes substantial expansion before expiry of the qualifying period. The comparative contentions of the Taxpayer and the Tax Authority in support of their respective positions are summarised in the table below: Particulars Taxpayer Tax Authority s contentions as upheld by the Tribunal Primary Issue Whether a new unit set up on or after 7 January 2003 is entitled to a fresh fiveyear tax holiday of 100% if it completes substantial expansion during the qualifying period? Yes. S.80IC does not contain any specific restriction denying benefit to such a unit No. The package incentives scheme and an overall reading of S.80IC make it clear that the benefit of substantial expansion is available only to units existing prior to 7 January 2003 Consequential Issues What is the initial assessment year for a new unit which completes substantial expansion during the qualifying period? First initial assessment year is when a new unit first commences manufacture Second initial assessment year is when substantial expansion is completed Both events are referred to in the definition of initial assessment year There cannot be two initial assessment years for the same unit. The definition of initial assessment year should be read contextually to mean either commencement of manufacture for a new unit or completion of substantial expansion for an existing unit set up prior to 7 January 2003 What is the quantum of deduction available to a new unit which completes substantial expansion in the sixth 100% for the first five years from Year 1 to Year 5 as a new unit 100% for the first five years from Year 1 to Year 5 25% (30% for corporates)
4 year? 100% for the five years from Year 6 to Year 10 as a substantially expanded unit from Year 6 to Year 10 The First Appellate Authority ruled against the Taxpayer and upheld the Tax Authority s action of restricting deduction to 25% from the sixth year onwards. Although CBDT Circulars may not be binding on the Court, the Court is not precluded from considering them for interpretation of a particular provision. Being aggrieved, the Taxpayer appealed to the Tribunal. Issue before the Tribunal Whether the Taxpayer which had set up a new unit post 7 January 2003 and completed substantial expansion in the sixth year was entitled to 100% deduction from the sixth to the tenth year. Tribunal s ruling The Tribunal ruled against the Taxpayer and held that it was not entitled to a fresh five-year tax holiday period of 100% for substantial expansion completed in the sixth year, for the following reasons: Relevant principles of interpretation If the language of the statute is clear then only the literal meaning has to be given to such language so long as the same does not result in absurdity or unintended consequences. In case of ambiguity, the real intention of the Legislature has to be found out and, for this purpose, it is possible to consider all relevant material (including contemporaneous Circulars issued by the CBDT) for ascertaining the true meaning of the provision. Reliance was placed, inter alia, on the Supreme Court s (SC) ruling in the case of K.P.Verghese [2] for this proposition. [2] [(1981)(131 ITR 597)] It is also equally well-settled that a provision has to be read as a whole and it should not be interpreted in a manner which renders any part of the provision otiose or meaningless. Scheme of S.80IC envisages benefit of substantial expansion only for units existing prior to 7 January 2003 Applying the above referred well-settled principles of interpretation to S.80IC, it can be seen that S.80IC does not expressly permit a new unit to claim a fresh five-year 100% tax holiday by undertaking substantial expansion during the qualifying period. There is indeed an ambiguity in S.80IC and effort is required to ascertain the correct Legislative intent by applying well-settled principles of interpretation. However, having regard to the following, it is possible to interpret that the benefit of tax holiday on substantial expansion is restricted to an existing unit set up prior to 7 January 2003: Terms of comprehensive incentive package announced by the Central Government cover income tax, excise duty and subsidy benefits, with a view to boost the economies of the hilly states of Himachal Pradesh and Uttaranchal. For excise duty and subsidy benefits, the existing unit is defined to mean a unit existing as on 7 January The fact that the existing unit is not specifically
5 defined for S.80IC purposes as a unit existing as on 7 January 2003, is not relevant. CBDT Circular No. 7/2003 dated 5 September 2003 explains the scope of S.80IC. This Circular clarifies that S.80IC was inserted to give effect to the incentive package announced by the Central Government. This Circular refers to existing units which complete substantial expansion. The term existing referred to in this Circular, on a plain reading, would mean units which existed when the provision was inserted. Internal support within S.80IC for restricting substantial expansion benefit to units existing on 7 January 2003 S.80IC carves out a distinction between units located in North Indian states and units located in North Eastern states by granting differential tax holiday of 100% for the first five years and 25%/30% tax holiday for the next five years for units located in North Indian states, as against the full 100% for ten years for units located in North Eastern states. If the Taxpayer s view is accepted, then the differential benefit granted to units located in North Indian states and North Eastern states would be rendered meaningless. Furthermore, S.80IC requires every unit (including existing units which undertake substantial expansion) to comply with the formative condition i.e., it should not be formed by splitting up or reconstruction of an existing business and/or by use of second-hand machinery in excess of 20%. If a new unit, set up after 7 January 2003 and which undertakes substantial expansion by making an investment of at least 50%, is granted a fresh lease of 100% tax holiday, the formative condition will be rendered redundant. It is true that initial assessment year is defined to mean the tax year in which the unit begins to manufacture or completes substantial expansion. But the expression or has to be read in this definition as a mutually exclusive expression which refers to a particular situation by excluding the other. There cannot be more than one initial assessment year for the same unit. Liberal interpretation of incentive provision possible only if there is doubt It is true that the incentive provision should be interpreted liberally. But, this applies only if there is any doubt in its interpretation. The burden is on the taxpayer to prove that its case clearly falls within the scope of the exemption provision. For this proposition, reliance was placed on the SC ruling in the case of Novapan India Ltd. [3]. A harmonious reading of all the subsections of S.80IC leaves no doubt that the benefit for substantial expansion was meant only for units existing as on 7 January The benefit cannot be extended to a new unit merely because there is no express restriction in the provision. Earlier Delhi Tribunal ruling in favor of the Taxpayer is per incuriam The Tribunal referred to an earlier Delhi Tribunal ruling relied upon by the Taxpayer in the case of Tirupati LPG Industries Ltd. [4]. which was concerned with a unit existing prior to 7 January 2003, which completed substantial expansion twice i.e., the first in tax year and the second in tax year (sixth year). The Delhi Tribunal permitted tax holiday claim of 100% for ten years in the above situation by holding that there is no bar on more than one initial assessment year. It held that, since S.80IC benefit is geared towards additional investment, the taxpayer can claim a fresh five-year 100% tax holiday within the overall period of ten years by making an investment of more than 50%. [3] [Civil Appeal No. 3356/1984] [4] [(2014)(45 taxmann.com 326)]
6 According to the Tribunal in the present case, the Delhi Tribunal did not consider all the provisions of S.80IC and, hence, its decision is per incuriam and cannot be followed. Comments Ever since S.80IC was inserted in the ITL in 2003, there existed an ambiguity on whether taxpayers setting up new units can make a fresh claim of tax 100% for five years by undertaking substantial expansion during the qualifying period. This is because there is no express prohibition in S.80IC for grant of such benefit. While the Delhi Tribunal, in the case of Tirupati LPG Industries Ltd. (supra), took a view favoring the taxpayer, the Tribunal, in the present case, has taken a view against the Taxpayer by holding that the Delhi Tribunal ruling is per incuriam. The conflict of views between two benches of the Tribunal reflects that the issue is highly debatable and that taxpayers would need to evaluate the impact of the rulings and the evolving jurisprudence on the issue.
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