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Income Tax Appellate Tribunal, DELHI BENCH: ‘I-1’ NEW DELHI
Before: SHRI R. S. SYAL & MS SUCHITRA KAMBLE
PER SUCHITRA KAMBLE, JM
This appeal has been filed by the assessee against the order dated 22/12/2014 passed by Assessing Officer u/s 143(3) read with Section 144 of the Income Tax Act.
The assessee company filed its revised return of income on 30.11.2011 declaring total income of Rs.59,22,60,532. Since the assessee company had undertaken international transactions with its associated enterprises, a reference was made by the Assessing Officer (AO) to the Transfer Pricing Officer, New Delhi, under section 92CA(1). Vide order dated 31.03.2010, the Transfer Pricing Officer (TPO) proposed an addition of Rs.47,26,39,889 and the AO vide his draft assessment order proposed to assess the taxpayer at an
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income of Rs.1,08,38,06,550. Aggrieved by the above action of the AO, the assessee filed the grounds of objection before the DRP. The DRP
The Ld. AR submitted that as related to depreciation on fixed assets the same is covered by the assessee’s own order for Assessment Year 2009-10 being ITA No. 2333/Del/2014 dated 22/12/2016. The Tribunal held as under:-
“3.4. Having gone through the orders of the authorities below, we find that the common issue involved in the cross appeals before us related to transfer pricing adjustment on international transaction of purchase of fixed assets. The submission of the Id. AR remained that the issue is squarely covered in favour of the assesse in the above-cited decisions of Delhi Bench of the Tribunal in the cases of Ciena India Pvt. Ltd. (supra) and Mercer Consulting India Pvt. Ltd. (supra). Having gone through these decisions, we find that the Tribunal has dealt with an identical issue in the case of Ciena India Pvt. Ltd. (supra) vide para Nos. 15.1 to 15.6 which are being reproduced hereunder for a ready reference:
“15.1. Ground nos. 5 and 8 are in respect of international transaction of 'Purchase of capital goods’. The factual matrix apropos this issue is that the assessee reported an international transaction of ‘Purchase of lixed assets’ with transacted value of Rs.33,50,51,611/-. The TPO required the assessee to submit book value of the goods so imported in the books of AE along with the details of costing methodology applied. ITA No. 1453/Del/2014 25 The assessee was also called upon to file copy of invoices along with the market price of the same or similar goods at the time of purchase. The assessee submitted vide its reply dated 3.1.2013 that it operates on a cost plus basis wherein it recharges all its operating costs including depreciation to its AE along with a mark up. However, the specific information called for by the TPO, was not submitted. In the absence of such details, the TPO computed the ALP of this international transaction at Nil. As regards the adjustment” u/s 92CA, the TPO required the AO to calculate proper depreciation on fixed assets as per the provisions of the Act. The DRP directed the assessee to submit item-wise particulars for the claim
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made by it with all the documents/evidence/proof showing the value of assets as appearing in the AE’s books to the satisfaction of the TPO. In case of failure on the part of the assessee to comply with the above directions, the DRP directed that the ALP of the relevant assets be taken as Nil. The assessee submitted certain details on sample basis before the TPO. The AO, in the final order, made an addition of Rs.32.07 crore by determining the ALP of this transaction at Rs.1.43 crore, against the transacted value of Rs.33.50 crore. Thereafter, ITA No.l453/Del/2014 26 rectification application was filed u/s 154 of the Act which was disposed of by the AO vide his order dated 27.03.2014 reducing the income with 'Cost of old fixed assets’ by Rs. 12.20 crore and adding depreciation of Rs.3.72 crore. Another rectification application was filed, which was also disposed of by the AO vide his order dated 26.9.2014, reducing the total income to Rs.25.48 crore from Rs.40.74 crore. The assessee is aggrieved against the addition made on account of this international transaction. 15.2. We have heard the rival submissions and perused the relevant material on record. It is noticed that the assessee purchased certain fixed assets from its AE with the declared value of Rs.33.50 crore. In our considered opinion the rightly reported Purchase of fixed assets with the transacted value as an international transaction, since the same is covered within the definition given in sub-section (1) of section 92B, which provides that "international transaction" means a transaction between two or more associated enterprises, either or both of whom are non- residents, in the nature of purchase, sale or lease of tangible or ITA No.l453/Del/2014 27intangible property, or……………’ Section 92(1) stipulates that: ‘Any income arising from an international transaction shall be computed having regard to the arm's length price’. The manner of computation of arm's length price is set out in section 92C. Sub- section (1) provides that the arm's length price in relation to an international transaction shall be determined by any of the methods given in the provision, being the most appropriate method, having regard to the nature of transaction or class of transaction etc. Amongst others, there is Comparable uncontrolled price (CUP) method and TNMM. The primary onus of proving that the international transaction is at ALP, is always on the assessee.
15.3. Reverting to the facts of the instant case, we find that the assessee applied TNMM as the most appropriate method for showing
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that this international transaction was at ALP. The TPO held that the correct method to be applied was CUP and as such the assessee was called upon to give uncontrolled comparable instances of the purchase of similar assets, which the assessee failed to do. This led the TPO to treat the ALP of this international transaction at. Nil. Normally, if the ITA No.l453/Del/2014 28 the assessee fails to give any comparable instance, then it becomes the duty of the TPO to search some comparable uncontrolled instances at his own and accordingly determine the ALP of the international transaction. In our view, both the assessee as well the TPO went wrong by not doing what was required to be done by them.
15.4 Once the ALP of an international transaction of purchase of fixed assets is determined, then the difference between the transacted value and the ALP does not directly lead to the transfer pricing adjustment. At this juncture, it is pertinent to note the language of section 92(1) which provides that any income arising from an international transaction shall be computed having regard to the arm's length price. It does not say that the total income is to be computed in accordance with the ALP. It is rightly so because the international transactions which have no direct bearing on the total income, cannot give rise to addition on account of difference between their transacted value and ALP. Since the transaction of purchase of fixed assets is a capital transaction, this, in itself, does not affect the total income of the assessee. It is only the off- ITA No.l453/Del/2014 29 shoot of such transaction in the capital field, being depreciation allowance on such ALP of the transaction, which affects the total income. To illustrate, if a fixed asset is purchased by an enterprise from its AE for a sum of Rs.100 and rate of depreciation on such asset is 10%, then the will charge depreciation amounting to Rs.10 in its account. If the ALP of such transaction is determined at Rs. 80, then the difference of Rs.20 cannot be considered as income. Rather, the amount of depreciation will be restricted to Rs.8 instead of Rs.10, thereby increasing the total income by Rs. 2. When we advert to the facts of the extant case, it is found that the TPO has rightly held to the effect that it is the amount of depreciation on the purchase of such fixed assets, which will be considered for making addition and not the difference between the transacted value and the ALP determined at Nil.
15.5. Ordinarily an international transaction of purchase of fixed
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assets by an assessee engaged in a manufacturing or trading business is required to be determined on CUP method, which is usually the most appropriate method in such circumstances. The TNMM on entity level ITA No. 1453/Del/2014 30 cannot be applied, because the transaction of purchase of fixed assets can have no relation with the transaction of purchase of raw material from AE or sales of goods to AEs. Rule 10A of the IT Rules, defines 'transaction’ as including 'a number of closely linked transactions’. The Hon’ble Delhi High Court in its judgment of March, 2015 in Sony Ericsson Mobile Communications India Pvt. Ltd. has held that the related transactions should be considered jointly for determining their ALP. However, in order to consider more than one international transaction as one, it is sine qua non that such transactions must be closely and not remotely linked. Every transaction done by an enterprise is somehow or the other linked with the carrying on of the business. But in order to be eligible for processing two or more transactions jointly for determining their ALP, it is essential that they should be closely linked. If two transactions are not closely linked, then they cannot be considered jointly. Considering the above case of a manufacturer or a trader, it cannot be held that the transaction of purchase of fixed assets is closely linked with the purchase of raw material or sale of finished goods etc. In ITA No.l453/Del/2014 31 such a scenario, it becomes important to examine the transaction of purchase of fixed assets independent of other transactions. 15.6. However, the above rule of scrutinizing international transaction of purchase of fixed asset as independent of all other transactions is not universal. It has its own exceptions as well. The instant case is a glaring example of exception to the above rule. It is so for the reason that the assessee is getting remuneration from its AE at costs incurred plus a particular mark-up. The cost base includes not only direct but all the indirect costs. The amount of depreciation allowance on fixed assets, including those purchased from AE, is also compensated with the same mark-up. Thus we can say that depreciation allowance and remuneration to the assessee on such depreciation are inseparable transactions. The income in the shape of remuneration to this extent directly depends upon the amount of deprecation allowance. When the assessee is getting mark-up of 13% the amount of deprecation at Rs.10 in our above hypothetical example will fetch remuneration of Rs. 11.30. If the amount of depreciation is reduced to Nil, the amount of income to ITA No.l453/Del/2014 32 that
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extent will also be Nil, because the mark-up can be applied only if there is depreciation cost to the assessee. In other words, the transactions of depreciation on one hand and the resultant revenue on the other, go hand in hand. In such a case, where the income is directly based on the costs incurred including depreciation, then these two transactions become ‘closely linked' transactions, eligible for processing under the TP provisions on a combined basis. It is illogical to compute the ALP of the transaction of purchase of fixed assets and consequently reduce or nullify the amount of depreciation allowance de hors the consideration of international transaction of the revenue from AE, which is equal to depreciation as claimed with mark-up. Both the transactions of claim of depreciation allowance and revenue of depreciation with mark-up have to be seen jointly. The TPO in the present case has simply reduced the amount of deprecation allowance to Nil without simultaneously considering the revenue side of this transaction. If we consider these closely linked transactions of deduction for depreciation allowance and revenue due to depreciation in unison, the position which follows is that no further addition can be made on account of transfer pricing ITA No. 1453/Del/2014 33 adjustment due to one-sided consideration of depreciation allowance at Nil. Rather, the determination of ALP of the international transaction of purchase of fixed assets, in the facts and circumstances of the instant case, is tax neutral. As such, we order for the deletion of addition made by disallowing or reducing the amount of depreciation on the assets purchased from AE. This ground is allowed.”
3.5. Again an identical issue has been dealt with by the Tribunal in the case of Mercer Consulting India Pvt. Ltd. (supra), the relevant para No. 5 thereof is being reproduced below:- “ 5. As a corollary to the ALP of the intra group services received by the assessee being treated as NIL, the price paid for these intra group services is required to be taken out from the computation of remuneration receivable in respect of IT enabled services rendered by the assessee. This is so for the reason that the pricing of IT enabled services is on the cost plus 20% basis, which has been upheld to be at arm’s length price by the DRP, and, therefore, anything removed from the cost will also have to be removed from the computation of amount receivable for the IT enabled services rendered by the assessee. Of course, as far as TPO is concerned, the action at that level was, from this perspective, could have been
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justifiable inasmuch as the ALP margin was taken at 29.53%, as against 20% taken by the assessee, and, therefore even after removing something from the cost base, due to increase in the mark-up rate, ALP of the services rendered could still be' higher vis-a-vis the amount chargeable after including lervibes in the cost base. Once DRP deletes the adjustment in the mark-up rate on cost plus basis, such a possibility ceases to exist. Therefore, in the present circumstances, any ALP adjustment in the consideration for intra group service, which is includible in the cost base, paid by the assessee will actually result in erosion of tax base, The reduction in ALP of consideration for such intra group services by Rs 100 will also result in under realization of revenue for IT enabled service by Rs 120 (i.e. recovery of cost of Rs 100 plus profit mark up of Rs 20). In effect thus, the taxability in the hands of the assessee, in such a situation, will go up by Rs 100 as an ALP adjustment, but then income of the assessee, from IT enabled service revenue, will also stand reduced by I.T.A. No. 1085/Del/2016 Assessment year: 2011-12 Page 6 of 7 Rs 120. Section 92(3) is quite clear and categorical in this regard. It states that “(t)he provisions of this section shall not apply in a case where the computation of income under sub-section (1)has the effect of reducing the income chargeable to tax or increasing the loss, as the case may be, computed on the basis of entries made in the books of account in respect of the previous year in which the international transaction was entered into”. Section 92(1), in turn, states that "(a)ny income arising from an international transaction shall be computed having regard to the arm's length price”. What follows is thus that when, as a result of computation of income on the basis of arm’s length price, the income of the assessee is lowered or the loss is increased, the provisions of computation of income on the basis of arm’s length price do not come into play. Viewed in this perspective, when we examine the facts of the present case, we find that the determination of ALP of the intra group service at NIL value does lower the profits of the assessee inasmuch as the revenue of the assessee from the IT enabled services will reduce correspondingly, and infact 20% more than the adjustment- as a result of loss of mark up as well. The ALP adjustment of Rs 8,40,95,610 by the revenue authorities is, therefore, essentially required to be coupled with reduction of 10,09,14,732. That would erode our tax base, rather than augmenting it. The computation of income from international transactions on the basis of arm’s length price, in the given situation, would result in lowering the income of the assessee vis-a-vis the income
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“computed on the basis of entries made in the books of accounts in respect of the previous year in which the transactions were entered into”. In the light of this factual position coupled with the relief granted by the DRP on the ALP adjustment in the markup rate of the cost plus basis billing to the AE in respect of revenues for the IT enabled services, and in the light of the provisions of section 92(3), the transfer pricing provisions cannot be invoked in respect of intra group services, which admittedly form part of the cost base of the assessee, availed by the assessee. This is a case in which transfer pricing provisions cannot be applied because the application of ALP adjustment will indeed result in erosion of Indian tax base- as visualized by the scheme of Section 92(3) inasmuch for every rupee of ALP adjustment in intra group service, the revenue of the assessee, on the basis of application of arm’s length price, will stand LT.A. No. 1085/Del/2016 Assessment year: 2011.- 12 Page 7 of 7 reduced by one and one fifth times of the ALP adjustment. Section 92(3) does not permit computation of income on the basis of arm’s length price in such a situation; as a matter of fact, it prohibits application of arm’s length principle in such a situation. The plea of the assessee, as specifically taken up in ground no. 5 (g), is thus indeed well taken and merits our acceptance.” 3.6. In the present case as well the business model of the assessee is compensation on cost + mark up basis as it is evident from the agreement as per clause 4 of the said agreement and fee payable under this agreement, detailed at page No. 311 of the paper book in para 1 as “the profit is measured as margin between Revenue on the total cost incurred for providing the same (including an appropriate allocation of in-direct cost) a reasonable profit is determined with reference similar companies engaged in similar activities and is currently 10%.”. This compensation model of business of the assessee has not been disputed by the Id. TPO. In this regard it is pointed out that the assessee had purchased from its AEs assets worth Rs.8,00,04,512/-. The Id. TPO required the assessee to furnish WDV of these assets in the books of the account of the AE making it clear that failure to furnish such details would lead to determination of the arm’s length value of the Transaction at ‘NIL'. The submission of the assessee remained that the Impact of the transaction on the tax payers’ profit and loss account is through depreciation charged on these assets. Considering that the tax payer is remunerated for depreciation and other costs incurred in provisions of TRS services on a cost plus basis, the above transaction pertaining to purchase of fixed assets was treated
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as “closely linked” to the transaction pertaining to provision of TRS services. Hence, the same was not evaluated separately from a transfer pricing prospective and was considered to be a part of the provision of TRS service transaction of BT India by adopting a combined transaction approach for the purpose of determining the arm’s length price. The Rules also clarify that a “transaction” includes a number of closely linked transactions. Accordingly, the purchase of fixed assets transaction had been clubbed with the provision of TR Services and does not require a separate arm’s length analysis. The Id. TPO did not agree and enhanced the. income of the taxpayer by Rs.8,00,04,512/-. The Id. DRP after considering the objections of the assessee has given partial relief. In compliance the effect of the direction of the Id. DRP has been given by limiting the TP adjustment on account of purchase of fixed assets to depreciation debited to profit and loss account. As a result, Rs. 1,10,42,986/- has been added to the returned income.
3.7. Since the issue raised in the present case is .covered by the above- cited -decisions under almost similar set of facts, hence respectfully following the same, we order for deletion of addition made by disallowing or reducing the amount of depreciation on the assets purchased from AE.
In result, appeal preferred by the assessee is allowed and that of the Revenue is dismissed.”
Thus, the issue of depreciation on fixed assets the same is covered by the assessee’s own order for Assessment Year 2009-10 being ITA No. 2333/Del/2014 dated 22/12/2016.
As related to receivables, the Ld. AR relied upon the order of Kusum Health Care of the Hon’ble Delhi High Court (ITA No. 765/2016 dated 25/4/2017 held as under:- “9. Mr. Raghvendra Singh, learned counsel appearing for the Revenue submitted that the ITAT overlooked the fact that the expression “international transaction” as defined in Explanation (i)(c) to Section 92B of the Act included “payments or deferred payment or receivable or any other debt arising during the course of business”, and therefore, the outstanding receivables could by themselves constitute an international transaction. He further referred to the OCED Transfer Pricing Guidelines for Multinational Enterprises
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and Tax Administrations. Paras 3.48 & 3.49 under Chapter III para A.6.1 of the said Guidelines titled “Different types of comparability adjustments” spoke of the need to eliminate differences that may arise from different accounting practices between controlled and uncontrolled transactions. In particular, it was noted under para 3.49 that “a significantly different level of relative working capital between the controlled and uncontrolled parties may result in further investigation of the comparability characteristics of the potential comparable.” Mr. Singh submitted that the ITAT erred in disagreeing with the TPO, who had characterised the outstanding receivables as an international transaction by itself which required benchmarking.
The Court is unable to agree with the above submissions. The inclusion in the Explanation to Section 92B of the Act of the expression ‘receivables’ does not mean that de hors the context every item of ‘receivables’ appearing in the accounts of an entity, which may have dealings with foreign AEs would automatically be characterised as an international transaction. There may be a delay in collection of monies for supplies made, even beyond the agreed limit, due to a variety of factors which will have to be investigated on a case to case basis. Importantly, the impact this would have on the working capital of the Assessee will have to be studied. In other words, there has to be a proper inquiry by the TPO by analysing the statistics over a period of time to discern a pattern which would indicate that vis-a-vis the receivables for the supplies made to an AE, the arrangement reflects an international transaction intended to benefit the AE in some way.
The Court finds that the entire focus of the AO was on just one AY and the figure of receivables in relation to that AY can hardly reflect a pattern that would justify a TPO concluding that the figure of receivables beyond 180 days constitutes an international transaction by itself. With the Assessee having already factored in the impact of the receivables on the working capital and thereby on its pricing/profitability vis-a-vis that of its comparables, any further adjustment only on the basis of the outstanding receivables would have distorted the picture and re- characterised the transaction. This was clearly impermissible in law as explained by this Court in CIT v. EKL Appliances Ltd. (2012) 345ITR 241 (Delhi).
Consequently, the Court is unable to find any error in the
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impugned order of the ITAT giving rise to any substantial question of law for determination. The appeal is, accordingly, dismissed.”
The Ld. AR further submitted that there was an additional evidence application filed by the assessee on 28th August 2017 in respect of salary of employee disallowance of TDS and disallowance of sales promotion expenses which needs to be go back to the Assessing Officer.
The Ld. DR relied upon the order of the TPO & DRP as well as Assessing Officer.
We have heard both the parties and perused the material available on record. As relates to the depreciation on fixed assets the same is covered by the assessee’s own order for Assessment Year 2009-10 being ITA No. 2333/Del/2014 dated 22/12/2016. As relates to the issue of receivables, the same is also covered in favour of the assessee by the decision of the Hon’ble Delhi High Court in case of Kusum Health Care. As relates to issue in respect of salary of employee and disallowance of TDS and sales promotion expenses the same need to be verified by the Assessing Officer as there is additional evidence filed by the Assessee at this stage. The said additional evidence needs to be taken into account while making observation by the Assessing Officer. Therefore, this issue is remanded back to the file of the Assessing Officer. Needless to say, the assessee be given the opportunity of hearing by following principles of natural justice. 9. In result, the appeal of the assessee is partly allowed for statistical purpose. Order pronounced in the Open Court on 26th February, 2018.
Sd/- Sd/- (R. S. SYAL) (SUCHITRA KAMBLE) VICE PRESIDENT JUDICIAL MEMBER
Dated: 26/02/2018 R. Naheed *
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