Expert Corner


Mr. Simachal Mohanty, Director (Taxation), Dr. Reddy\'s Laboratories Limited
Availing Investment Allowance Incentive - " Practical Challenges & Solutions.

Union Budget 2013 has focussed on few but important measure to promote socio economic growth. Promoting the industrial activity both in manufacturing of the plant and machinery and use of such plant and machinery would propel such socio economic growth in terms of accelerated industrialisation as well as in employment generation. Accordingly, it is proposed that an eligible company will be entitled for following Incentives on acquisition and installation of new plant or machinery and Sec.32AC has been introduced for the purpose.
 
a)      FY 13-14 : Deduction @ 15% once it invests Rs.100 Crs in P&M  in FY 13-14 or
b)      FY 14-15: Deduction @ 15% upon value of investment exceeding Rs.100 Crs in FY 13-14 & FY 14-15( in aggregate) as reduced by such deduction availed in FY 13-14.
 
According to an article published in a leading business news paper “about 217 out of 570 listed manufacturing companies spent an amount exceeding Rs100 Cr” which may be the reason behind introduction of this section to confer the benefit to the manufacturing sectors.
 
Some of the aspects of these provisions need critical analysis to understand the provision in its true spirit which is as follows:
a)      Eligible Company: A company which is engaged in manufacture or production of article or thing is regarded as an eligible company to get these  benefits.
b)      Manufacture: The word ‘manufacture’ has not been defined in Sec.32AC. However, Sec.2 (29BA) defines the term manufacture to mean a change in a non living physical object or article or thing resulting in transformation of the object or thing into a new thing or with a different chemical composition or structure.
c)      Article or thing: Manufacture or Production of article or thing has been subject to continuous litigation from the time profit linked incentives and location based incentives have been place. Courts, vide various judgments have laid down the principles that activities like mere processing, assembling will not be eligible to be categorised as manufacture of article or thing. Similarly companies engaged in power generation   may also not be construed as engaged in manufacture.
 
The other aspect of the eligibility criteria is that the assessee must ‘acquire and install’ the new plant and machinery. In order to claim the investment allowance assessee must not only acquire the asset but also install the P&M in the same financial year to be eligible for investment allowance. At the same time, if any P&M has been already purchased in FY 12-13 but lying in Capital WIP pending installation, same will not be eligible for investment allowance in FY 13-14 simply on installation.
 
At present some business houses are of the view that, acquiring and installing P&M worth of Rs. 100 Crs plus in a span of two years will be very difficult considering a shorter timeframe available to them.
 Refer the following example for a better understanding:

                                                                                                                                       Rs.Crs


Scenario 1

 

Scenario 2

Description

Rate

FY 14

FY 15

 


Description

Rate

FY 14

FY 15


 

  Asset Type

 

New

New

Op WDV

 


Asset Type

 

New

New

Op WDV


Cost of assets(P&M)

 

101

20

66

 


Cost of assets(P&M)

 

20

81

13


Normal Depreciation

15%

15

3

10

 


Normal Depreciation

15%

3

12

2


Additional Depreciation

20%

20

4

-

 


Additional Depreciation

20%

4

16

-


Total Depreciation

 

35

7

10

 


Total Depreciation

 

7

28

2


Investment Allowance

15%

15

3

-

 


Investment Allowance

 

-

15

-


 
From the example it can be understood that even if one is not able to achieve the P&M investment of Rs.100 Crs in first year (FY 14), still if the aggregate of investment of FY 14 and FY 15 exceeds Rs.100 Crs, one can get investment allowance @15% in FY 15.
Further considering the fact that erstwhile investment allowance u/s 32A was in place from FY 76 to FY 90 , one can optimistically assume that the provision of Sec.32AC may get extended beyond FY 15. Hence aggregating the overall investment over consecutive two years on a rolling over basis will be key to avail investment allowance on a continuous basis. Direct Tax Code also provides for benefits for investment incentives.
 
Unlike depreciation provision u/s.32, Se.32AC does not reduce depreciation rate by   50% in case asset is used for less than 180 days in a financial year. Hence, even if an asset is acquired and installed even in the month of March, will be eligible for Investment allowance.
 
‘Use’ of asset as stipulated u/s 32, is not a criteria as per Sec.32AC. Hence, only ‘acquisition and installation’ of an asset will be sufficient for getting benefit u/s 32AC.
 
While acquisition of an asset can always be substantiated by purchase invoice, ‘installation’ of the asset will hold key to establish claim u/s 32AC. Installation report by internal qualified engineer will suffice the purpose. Ideally, such installation certificates must be attached to the asset capitalisation document in a ‘soft form’ in a SAP environment. 
 
Sale of the asset within 5 years from the date of its ‘installation’ (not from date of ‘acquisition’) will require the assessee to offer the incentive so availed as Business Income in the year of such sale. Hence keeping track of date of ‘installation’ is critical to ensure right treatment of tax both in the year of availing tax incentive and also in the year of sale.
 
Let me summarise the key challenges a corporate is likely to face and the ways to handle this:

Challenges.

Way forward approach

Aggregating investments of Rs.100 Crs during FY 14, FY 15 is a key challenge for a medium size corporates. While this allowance is granted for all the corporates, only the large corporates are likely to benefit from this incentive. 

Medium sized corporate can also aggregate their investments at least over two years of periods to claim this benefit.

‘Installation’ of an asset is an important condition for availing this Investment Allowance.
Installation of  P&M amounting worth exceeding Rs.100Crs typically takes longer time for final installation. Two year timeframe may be inadequate to achieve this.

Robust planning for the timely acquisition and installation should be in place to avail this Investment Allowance.
 

Sale of P&M within 5 years from the date of installation will require the assessee to surrender the tax benefit availed on the investment allowance.

As these P&M will not form regular block of assets from investment allowance point of view, one needs to keep detailed documentation for these assets to give correct treatment at the time of acquisition, installation and sale thereof.

 
There might have been certain  positives and negatives in Union Budget FY 13, but  I could clearly infer FM telling that  offering investment allowance incentive to manufacturing sector  is yet another way to say ‘WE CARE’.
 
 
(The views expressed above are author’s personal views. )
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