Output VAT Refund Received By Hyundai Motor Towards Investment Promotion Subsidy Is Non-Taxable Capital Receipt: ITAT

The Chennai Bench of Income Tax Appellate Tribunal (ITAT) has held that the output VAT refund received by Hyundai Motor towards investment promotion subsidy is a non-taxable capital receipt.

The bench of V. Durga Rao (Judicial Member) and Manjunatha G (Accountant Member) has observed that the output VAT incentive (investment promotion subsidy) granted for the purpose of setting up or expanding its manufacturing facility is a capital receipt and hence cannot be treated as income under the provisions of the Income Tax Act.

The appellant/assessee is a wholly owned subsidiary of M/s. Hyundai Motor Company Ltd., South Korea. The assessee is in the business of manufacturing and selling passenger cars in domestic and export markets.

The Tamil Nadu government issued a GO on February 26, 2007, for the formulation of the Ultra Mega Integrated Automobile Projects Policy to bring out an exclusive policy for encouraging the set-up of major Integrated Automobile Projects in Tamil Nadu. The assessee had entered into a Memorandum of Understanding with the Government of Tamil Nadu for the setting up or expansion of its manufacturing facility. As per policy, an incentive was granted for the purpose of setting up a Phase II manufacturing facility (expansion along with a new engine and transmission plant with an installed capacity of 3.30 lakh cars per annum). The scheme further envisages that the incentive was given by way of a refund of output VAT under state policy.

The Government of Tamil Nadu agreed to provide a structured package of support to the assessee in the form of fiscal and other incentives, subject to fulfilling certain conditions within the investment period of ‘7’ years from June 1, 2006. The obligations to be fulfilled by the assessee to avail of the infrastructure support, utilities, and various incentives offered by the Government of Tamil Nadu are investments of INR 4,000 crore in eligible fixed assets within a period of ‘7’ years from June 1, 2006.

Based on the sales, the assessee accrued a refund of output VAT amounting to INR 33 crores from the Government of Tamil Nadu and credited the same to P&L a/c under the heading ‘Other Operating Revenue’. The assessee has included the incentives as revenue receipts in the original return of income filed for the assessment year. However, the assessee has made an additional claim before the AO in which it was claimed that the IPS received from the Government of Tamil Nadu was capital in nature and not taxable.

The AO observed that IPS accrued to the assessee in the form of a refund of output VAT is revenue in nature, and the assessee has rightly treated it as income in the return of income filed for the relevant assessment year. Therefore, the Assessing Officer has rejected additional claims by the assessee for considering IPS as capital in nature and not liable for tax.

The assessee submitted that the form of receipt of subsidy would not change the character of receipt because, in many cases, the subsidy has been quantified in terms of fiscal incentives like VAT/Sales Tax, refund, etc., but what is required to be seen is the purpose of granting such subsidy. In the present case, the government of Tamil Nadu has given subsidies to encourage investment in the integrated automobile manufacturing sector. If you go by the purpose test, then the subsidy is for the setting up or expansion of a manufacturing facility, and thus, it would partake in the nature of capital receipt.

The department contended that the AO, after considering relevant facts, has rightly rejected the additional claim made by the assessee for treating IPS as a capital receipt.

The tribunal held that subsidies have been given to encourage the setting up or expansion of existing manufacturing facilities, even though such subsidies have been quantified in terms of refunds of output VAT payable by the assessee after the commencement of production. The subsidy received towards accelerating industrial investment or setting up of units is to be treated as capital in nature, even if such subsidy has been quantified in terms of reimbursement of expenses, VAT, etc.

Counsel For Appellant: Sriram Seshadri

Counsel For Respondent: Marudhu Pandian,

Case Title: M/s. Hyundai Motor India Ltd. Versus ACIT

Case No.: IT (TP) A No.51/Chny/2021

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