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‘GRANT’ IT TO THE WISDOM

March 17, 2017[2017] 79 taxmann.com 137 (Article)
196 Views

Summary: The Supreme Court decision in the Siemen's case recently has revived the issue of taxing grants received by Companies. In this landmark decision the Court has answered the question in favour of the assessee and held that Grants from a Parent Company to its Loss-making subsidiary should be viewed in a different light. It can be argued that if such grant is for Protection and Maintenance of Capital it should be allowed as a business deduction in the hands of the payer. A suggestion is made that the Government can effectively use this window to find ways for mitigating the Banks' NPA woes.

Introduction

The Supreme Court in a very recent decision has upheld the filial obligation of a Parent Company to sustain its (ward) so to say a Subsidiary Company. This decision has far reaching implications in not just dealing with the revenue nature of Grants received from a Parent to its Subsidiary but also could open up questions on the allowability of expenses to fund the losses of Subsidiary Company by its Parent Company. The Supreme Court has laid down a principle which could pave the way for infusion of Capital into ailing subsidiaries of Companies in a simpler tax efficient way.

The Decision in Siemens Pub.communication Network (P.) Limited

In its decision in the case of Siemens Pub.communication Network (P.) Ltd. v. CIT [2017] 390 ITR 1/244 Taxman 188/77 taxmann.com 22 (SC) [Arising out of Special Leave Petition (Civil) No.6946/2014] the Supreme Court had to deal with the issue of treatment of Grant received from a parent company to fund the losses of its subsidiary. The Supreme Court had before it, the decision of the Karnataka High Court treating the Grant as revenue receipt on the basis of two earlier decisions of its own viz., Sahney Steel & Press Works Ltd. v. CIT [1997] 94 Taxman 368/228 ITR 253 (SC) and CIT v. Ponni Sugars and Chemicals Ltd. [2008] 174 Taxman 87/306 ITR 392 (SC).

Distinction between Government Grants and Parent Company's

In both the cases under reference the Supreme Court had held Grants as Revenue Receipt. In both the cases the grant was from Government. Seeking to distinguish the decisions from the issue on hand, the Supreme Court has quoted with approval the decision of the Delhi High Court in the case of CIT v. Handicrafts and Handlooms Export Corpn. of India Ltd. [2014] 360 ITR 130/226 Taxman 178/49 taxmann.com 488 (Mag.). The significant observation of the Supreme Court in this regard is: "...the voluntary payments made by the parent Company to its loss making Indian company can also be understood to be payments made in order to protect the capital investment of the Assessee Company. If that is so, we will have no hesitation to hold that the payments made to the Assessee Company by the parent Company for Assessment Years in question cannot be held to be revenue receipts."

Protection of Capital Investment

Hence it is clear that any infusion of funds which is called as 'Subvention' here for protecting the capital investment by a parent company cannot be held as Revenue Receipt and hence cannot be brought to tax. Now Subvention according to Webster's dictionary is "the provision of assistance or financial support". The moot question that arises is should there be an intention of provision of assistance at the inception or if a waiver of liability could be regarded as a subvention. In this connection though not directly related, the decision of Karnataka High Court in the case of CIT v. Compaq Electric Ltd. [2011] 16 taxmann.com 385/[2012] 204 Taxman 58 (Kar.) (Mag.). This decision effectively answers our doubts if such subvention would include Waivers of Loans taken earlier, necessitated by circumstances such as losses incurred by subsidiary. Here again such waiver were held as Capital Receipt and not liable for assessment under Section 41(1).

Parent Company Perspective

The second part of this issue is a curious question if such subvention by the parent company could be claimed as revenue expenditure. No doubt, in the case on hand the parent company was not an Indian assessable entity. However if an Indian holding company extends assistance to its ailing Indian Subsidiary whether the same could be claimed as a deduction. A compelling argument in this regard is the significant observation of the Supreme Court in the Siemen's case, cited supra. The court had considered this as one necessitated by the instinct of 'Protection of Capital Investment' by the parent company. If that be so, any expenditure for protection and maintenance of capital investment is revenue expenditure. In the following cases courts have held that expenses incurred for protection of capital assets to be revenue in nature and hence allowable as a deduction.

(a)   Transport Co. (P.) Ltd. v. CIT [1962] 46 ITR 1009 (Mad.)
(b)   Mangalore Ganesh Beedi Works v. CIT [2015] 62 taxmann.com 400/378 ITR 640 (SC)

What if it is "Loan Loss"?

In case the claim represents Loss on account of Loan losses on loans lent to Subsidiary companies the decision of the Madras High Court in the case of CIT v. Spencers and Co. Ltd. (No.1) [2014] 47 taxmann.com 55/227 Taxman 144 (Mad.) is in favour of the assessee. In this case the holding company had incurred losses on account of invocation of Guarantee given by the holding company In this decision the Madras High court has held that "since the amounts in question were incurred by the assessee for the business expediency of the wholly owned subsidiary companies and when it is not disputed that there existed a business nexus between the assessee and the subsidiary companies, such expenditure should be treated as having been incurred for the purpose of business and directly relatable to the business of the assessee and thus eligible for deduction as business expenditure in their return of business income."

Different Treatment between Giver and Receiver

Now the claim for such subvention as a business expenditure/loss cannot be denied on the sole ground that such expenditure has been considered as capital receipt in the hands of the recipient. That's a settled law in view of the decision of the Supreme Court in the case of Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1/3 Taxman 69. In this case, the Supreme Court categorically held on the authority of an English decision in the case of Race Course Betting Control Board v. Wild 22 TC 182, quoted with approval the observation of Lord Justice Macnagten that a "payment may be a revenue payment from the point of view of the payer and a capital payment from the point of view of the receiver and vice versa." And held that "The fact that a certain payment constitutes income or capital receipt in the hands of the recipients is not material in determining whether the payment is revenue or capital disbursement qua the payer"

Way Forward

Be that as it may the recent decision of the Supreme Court gives a ray of hope for Promoter Companies to tax efficiently try and nurse their sick subsidiaries to health; it also becomes necessary for the Government to think in these lines to reduce the mounting NPAs of Banks by facilitating promoter infusion of capital. Alternatively, the Government instead of waiting for Judicial intervention or settlement on this issue can pro-actively legislate a deduction in Chapter-VIA on these lines for Promoter Parent Companies who infuse capital to nurse the Sick subsidiary companies. A scheme on these lines can go to reduce the NPAs of Banks and facilitate revival of sick companies. The Scheme can provide for either a one-time or staggered deduction on the lines of 80JJAA.

Conclusion

The Supreme Court in its wisdom has come to the rescue of beleaguered businesses by its landmark pronouncement that a receipt necessitated by mounting losses from its parent would not constitute Income liable for taxation. This decision can be adopted for the recipient and the payer should be allowed tax deduction on such contribution as business expediency. This view makes sound economic sense especially in this time of mounting NPAs of Banks and Industry being poised for a recovery.

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