M/S. GE MONEY FINANCIAL SERVICES PVT. LTD.,NEW DELHI vs. DCIT, NEW DELHI

A conjoint reading of the above provisions indicates that firstly, a transaction between two or more associated enterprises is called an international transaction; secondly, any income from such international transaction is required to be determined at ALP; thirdly, the ALP in respect of such international transaction should be determined by one of the prescribed methods, which also includes the TNMM. Under this method, the net profit margin realized by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base, which is then compared with the net profit margin realized by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction. The modus operandi of determining ALP of an international transaction under this method is that firstly, the profit rate realized or earned by the assessee from a transaction with its AE is determined (say, profit A), which is then compared with the rate of profit of comparable cases (say, profit B) so as to ascertain if profit A is at arm’s length vis-à-vis the profit B. If it is not, then, an addition on account of transfer pricing adjustment, subject to other provisions, is made in the hands of the assessee having regard to the difference between the rates of profit A and profit B. The rate of profit of comparable cases (profit B) may be computed from internally or externally comparable cases, depending upon the FAR analysis and the facts and circumstances of each case. Thus the calculation of profit B may undergo change with the varying set of comparable cases.

The Hon’ble jurisdictional High Court in ChrysCapital Investment Advisors (India) P. Ltd. VS. DCIT (2015) 376 ITR 183 (Del) has held that : `Thus, the Courts are primarily bound by the law on the subject in India; if the law is clear and unambiguous, there is no question of resorting to extrinsic sources. The only rider is that if the terms of such conventions or treaties are similar to the law applicable in India, courts may consider precedents in that regard; however those are only of persuasive value’. In reaching this conclusion, the Hon’ble High Court took note of its earlier judgment in CIT VS. Mentor Graphics (Noida)

Coming back to the context, we find that the obligation under the Indian law is to compute the income from an international transaction between two AEs having regard to its ALP and the same is required to be strictly determined as stipulated. The contention, that the foreign AE be considered as a tested party and then foreign companies be considered as comparable for determining the ALP of the international transaction, having no statutory sanction, is sans merit and hence jettisoned.

To sum up, we hold that the methodology adopted by the assessee for computation of ALP in respect of its international transactions of intra-group services by choosing foreign AE as a tested party is completely unfounded and deserves to be and is hereby rejected in entirety.

Notwithstanding the above legal position and to provide completeness to our order, we will also deal with the argument made by the ld. AR in the form in which it was put forth before us. He submitted that the transaction of foreign AE is least complex as the data of foreign comparables companies is accurate for comparison which can be used with minimal adjustments. On a pointed query, the ld. AR took us through page 360 of the paper book, which is a part of its transfer pricing report, indicating that the foreign AE charged mark-up between 3.70% to 11% depending upon the nature of services. On a further query, he took us through page 385 of the paper book showing a list of foreign companies chosen by the assessee as comparable for the international transaction of intra group services. There is a chart containing name of 20 companies with the data given for the year 2007 and ROTC at varying percentages with average of 13.23%, as under : -

Page 384 of the paper book discusses about the screening of companies. It is mentioned on this page that the companies providing dissimilar services were rejected and 20 companies were identified as providing comparable services. Next para of the transfer pricing study report reads as under :- 22

On going through the mechanism for screening of foreign companies adopted by the assessee as comparable, it clearly emerges that the assessee, inter alia, received routine administrative and IT services, but could not find any comparable and, hence, comparables for such services remained altogether absent. The above extracted para completely belies the ld. AR’s contention about the availability of reliable data of foreign companies, inasmuch as there is no company providing routine administrative and IT services, as were also availed by the assessee from its AE, in the finally selected list of companies.

In the ultimate analysis, we hold that the argument of the ld. AR for selection of foreign AE as a tested party is neither legally sustainable nor acceptable on the yardstick of his own contention. We, therefore, direct that the assessee itself should be considered as a tested party.

The next issue is determination of the ALP of such transactions. In the light of the foregoing discussion it is manifest that the view point of the AO/TPO that the assessee did not receive any services or these were not required or were duplicate in nature and hence the ALP of the international transactions be taken as Nil, cannot be approved. We have held above that the assessee did receive the intra group services from its foreign AEs. Ex consequenti, the working of Nil ALP by the TPO/AO becomes meaningless and is hereby set aside. We have also held supra that the AO/TPO have rightly held that the assessee should be considered as tested party. In the backdrop of such a conclusion, the working of the ALP by the assessee, based on foreign AE as a tested party and foreign companies as comparable, is also vitiated. Under such circumstances, the only course which remains is to direct the TPO/AO to recompute the ALP of the international transaction in terms of the discussion made above.

At this juncture, we consider it appropriate to consider the ratio of the judgment in CIT v. Cushman & Wakefield (India) (P.) Ltd. (2014)

When we advert to the facts of the instant case, it turns out that the TPO proposed the transfer pricing adjustment equal to the stated value of transaction with Nil ALP by holding that no benefit etc. was received by the assessee because of the intra-group services received by it and hence no payment on this account was warranted. The AO in his draft order has taken ALP of this international transaction at Nil on the basis of recommendation of the TPO without carrying out any independent investigation as to the deductibility or otherwise of such payment in terms of section 37(1) of the Act. This addition has been made by the AO in his final assessment order giving effect to the direction given by the DRP and not by invoking section 37(1) of the Act. As per the ratio decidendi in Cushman & Wakefield India (P.) Ltd. (supra), the TPO was required to simply determine the ALP of the international transaction unconcerned with the fact, if any benefit accrued to the assessee and thereafter, it was for the AO to decide the deductibility of this amount u/s 37(1) of the Act. As the TPO in the instant case initially determined Nil ALP by holding that no benefit accrued to the assessee and the AO made the addition without examining the applicability of section 37(1) of the Act, we find the actions of the AO/TPO run in contradiction to the ratio laid down in Cushman & Wakefield (supra).

The next issue raised in this appeal is against the disallowance of Rs.24,81,93,879/- made by the AO by denying depreciation in respect of vehicles given on lease. Succinctly, the facts of the case are that the assessee is a non-banking finance company engaged in the business of consumer and auto finance. The AO during the draft proceedings noticed that like preceding years the assessee claimed depreciation on leased out vehicles. On being called upon to explain as to why depreciation on the leased vehicles be not disallowed as the leased transactions were, in fact, financial transactions, the assessee relied on the judgment of the Hon’ble Supreme Court in the case of ICDS Ltd. vs. CIT (2013) 350 ITR 527 (SC) to contend that it would be entitled to claim depreciation. The AO perused the relevant clauses of lease agreement entered into by the assessee with lessors and found that the vehicles were directly delivered to the lessees who were bearing the insurance and holding warranty and also retaining the right to the exclusion of even the lessor. Repairs were to be carried out at the sole expense of the lessee. Though the sale invoices were raised in the name of the assessee-lessor, the AO held that in substance it was a case of finance lease. After considering certain judgments and following the view taken by him in preceding years, the AO disallowed the claim of depreciation on leased cars amounting to Rs.24.81 crore. The assessee also remained unsuccessful before the Dispute Resolution Panel (DRP) which observed that the assessee failed to establish that depreciation was not claimed by the lessees on the vehicles leased to them and the assessee was evasive on this account and did not disclose the truthful picture despite the fact that various lessees were the assessee’s related companies. In reaching this conclusion, the DRP also took into consideration the observations made by the Tribunal in its order passed in the assessee’s own case for the AYs 2001-02 and 2002-03, in which 29 the matter was remitted to the file of the AO for deciding this issue afresh, after taking cognizance of the fact of claim of depreciation by the lessees and difference in covenants to the agreement in the case of the tax payer and ICDS Ltd. The AO made the disallowance vide the impugned order. The assessee is aggrieved against the disallowance of depreciation.

We have heard the rival submissions and perused the relevant material on record. It is noticed that this issue came up for consideration before the Tribunal for the first time in relation to the assessment years 2000-01 and 2002-03. Vide its order dated 21.6.2013, a copy of which is available on page 2883 onwards of the paper book, the Tribunal considered the contention of the assessee about the applicability of the judgment of the Hon’ble Supreme Court in the case of ICDS Ltd. (supra) and held in para 8.2: “that the covenants are not identical to the agreement as was under consideration in ICDS Ltd. by Hon’ble Supreme Court. Further, we find that Hon’ble Supreme Court also took into consideration the fact recorded by the Tribunal that the lessee had not claimed any depreciation which finding is not recorded by AO in the present case”. It was, therefore, considered: “necessary that the terms of lease agreement be examined afresh in the light of the decision of the Hon’ble Supreme Court and also a specific finding is recorded by AO regarding claim of depreciation by lessees”. Eventually, the issue was restored to the file of AO for deciding it afresh. The assessee filed miscellaneous application against the order passed by the Tribunal.

The next ground is against the addition of Rs.21,58,87,262/- made by the AO treating interest on sticky loans as income of the assessee.

We have heard the rival submissions and perused the relevant material available on record. It is noticed that this issue came up for consideration before the Tribunal in its order for the A.Ys. 2000-01 and 2002-03. Following the decision of the Hon’ble Supreme Court in the case of UCO Bank vs. CIT (1999) 237 ITR 889 (SC), the Tribunal held that interest on sticky loans and advances could not be charged to tax.

In the result, the appeal is partly allowed.