Tribunal revises ALP for international transactions, remits depreciation issue to AO, disallows interest on sticky loans

The Tribunal partly allowed the appeal by directing the AO/TPO to recompute the arm's length price (ALP) of international transactions with the assessee as the tested party. The issue of disallowance of depreciation on leased vehicles was remitted to the AO for fresh examination. The addition of interest on sticky loans was disallowed based on earlier Tribunal decisions and a Supreme Court judgment. The order was pronounced on 08.07.2016.

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Issues Involved:
1. Addition on account of transfer pricing adjustment.
2. Disallowance of depreciation on leased vehicles.
3. Addition of interest on sticky loans as income.

Issue-wise Detailed Analysis:

1. Addition on Account of Transfer Pricing Adjustment:

The first issue concerns an addition of Rs. 25,79,63,344/- due to transfer pricing adjustments. The assessee engaged in international transactions with its associated enterprises (AEs) and reported them in Audit Report Form No. 3CEB. The transactions included availing consulting, IT, and administration services from AEs in the US and Asia. The assessee applied the Transactional Net Margin Method (TNMM) and chose the foreign AE as the tested party, showing these transactions at arm's length price (ALP). The Assessing Officer (AO) referred the determination of ALP to the Transfer Pricing Officer (TPO), who disagreed with the method and the tested party selection, opting instead for the Comparable Uncontrolled Price (CUP) method, and determined the ALP at Nil, leading to the proposed transfer pricing adjustment.

The Tribunal previously accepted that the services were rendered and not duplicative, restoring the matter to the TPO for redeciding the issue of the tested party, the most appropriate method, and comparability analysis. The Tribunal held that the need for services cannot be ascertained by the TPO/AO as long as the services are actually received. The Tribunal directed that the assessee should be considered as the tested party, and the TPO/AO should recompute the ALP of the international transaction. The Tribunal also referenced the judgment in CIT v. Cushman & Wakefield (India) (P.) Ltd. (2014), which limited the TPO's authority to determining the ALP and not the existence or benefits of services. The matter was remitted to the AO/TPO for a fresh determination of the ALP, adopting the assessee as the tested party and considering the most appropriate method.

2. Disallowance of Depreciation on Leased Vehicles:

The second issue involves the disallowance of Rs. 24,81,93,879/- claimed as depreciation on leased vehicles. The AO, following the view taken in preceding years, disallowed the claim, considering the lease transactions as financial transactions. The Dispute Resolution Panel (DRP) upheld the AO's decision, noting that the assessee failed to establish that depreciation was not claimed by the lessees and that the lessees were related companies.

The Tribunal had previously remanded the issue to the AO for fresh examination in light of the Supreme Court judgment in ICDS Ltd. vs. CIT (2013). The Tribunal's directions for examining the terms of the lease agreement and recording specific findings regarding the claim of depreciation by the lessees were upheld by the Delhi High Court. The Tribunal, following its earlier decisions, restored the matter to the AO for a fresh decision, adhering to the detailed directions given in the previous orders.

3. Addition of Interest on Sticky Loans as Income:

The third issue pertains to the addition of Rs. 21,58,87,262/- as interest on sticky loans and advances. The AO, following the view taken in earlier years, held such interest as chargeable to tax. The assessee remained unsuccessful before the DRP, and the AO made the addition in the final order.

The Tribunal, referencing its earlier decisions and the Supreme Court judgment in UCO Bank vs. CIT (1999), held that interest on sticky loans and advances could not be charged to tax. The Tribunal reiterated this view in its decision for the immediately preceding three years. In the absence of any distinguishing feature for the instant year, the Tribunal held that interest on sticky loans amounting to Rs. 21.58 crore could not be charged to tax.

Conclusion:

The appeal was partly allowed, with the Tribunal directing the AO/TPO to recompute the ALP of the international transactions, considering the assessee as the tested party, and restoring the issue of depreciation on leased vehicles to the AO for fresh examination. The addition of interest on sticky loans was disallowed, following the precedent set by the Supreme Court and earlier Tribunal decisions. The order was pronounced in the open court on 08.07.2016.

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