2019 (6) TMI 1489 - AT - Income Tax

Appeals Outcome: Depreciation allowed on leased assets; Comparable companies updated for transfer pricing.

Reliance Corporate IT Park Ltd. Versus Deputy Commissioner of Income-tax, Circle- 3 (3) (1), Mumbai

The appeals were decided as follows: The CIT(A)'s decision allowing depreciation on leased assets was upheld. Allsec Technologies Ltd. was included as a ... Disallowance of depreciation on assets leased (finance lease) - AO has disallowed depreciation claim merely on the ground that as per AS-19 issued ICAI, in finance lease the risk and rewards incidental to ownership of the asset transferred to the assessee - CIT-A deleted the disallowance - HELD THAT:- Assessee continued to have ownership of the asset even after leave and license agreement with Reliance Industries Ltd and the assessee has claimed depreciation for earlier two years. In fact, it has been accepted by the Department in assessment proceedings. The assessee further explained that the lessee did not claim depreciation on the leased asset. Considering over all facts of this case and also by following the ratio of ICDS [2013 (1) TMI 344 - SUPREME COURT] we are of the considered view that the assessee is entitled for depreciation on the leased asset as per provisions of section 32(1)(ii) - CIT(A) after considering relevant facts has rightly deleted additions made by the AO towards disallowance of depreciation, hence, we are inclined to uphold the findings of the ld CIT(A) and reject the ground taken by the Revenue. TP Adjustment - inclusion of Allsec Technologies Ltd., as comparable - It is an admitted fact that the Allsec Techonlogy Ltd. has incurred losses for past three financial years - HELD THAT:- CIT(A) has recorded categorical finding to the effect that the PBIT margins for the aforesaid years have turned negative on account of charges towards depreciation and amortization which is a normal cost which arises during the course of business operations and not on account of some extraordinary factors. The Ld. CIT(A) further stated that for the previous year ended 31st March, 2007, the company had positive PBIT - once comparable is similar to the functions carried out by the assessee, then consistent loss of one or two years is not good ground for rejection of company for comparables. See JOY ALUKKAS INDIA PVT. LTD. [2014 (6) TMI 80 - KERALA HIGH COURT]. Exclusion of Eclerx Services Ltd. as comparable - As in Maersk Global Service Centres [2015 (1) TMI 917 - ITAT MUMBAI] had taken similar view and excluded Eclerx Services Ltd. from the list of comparable where the taxpayer is engaged in providing captive services to its AE in the area of ITeS service. The Id. CIT(A), after considering relevant facts has rightly rejected Eclerx Services Ltd. from the list of comparables and we are inclined to uphold the findings of the ld. CIT(A) and reject ground taken by the Revenue. Comparable for international transaction of provision of business support services to AEs - exclusion of TVS-E Services Ltd. - HELD THAT:- TVSE Services Ltd. is providing warranty management services for leading IT brands, break fix services for credit cards terminals and e-auction services which is mainly an electronic sector. Therefore, we are of the considered view that the ld. CIT(A) was rightly in rejection of TVS-E Services Ltd. from the final set of comparables, because the same cannot be compared with functions carried out by the assessee to its AE, hence, we reject the ground taken by the assessee. Inclusion of Aptico Ltd. as comparable - This company cannot be comparable to the assessee which is mainly engaged in providing business support services to its AE in the area of evaluation and recommendation for finalization of contracts for procurement of goods and services and also back office support in matters relating to accounting, taxation, insurance, HR & Administration. Further, this company has been considered in the light of business support services related services to AE by various Tribunal including case of Rolls-Royce India (P.) Ltd. [2016 (4) TMI 1178 - ITAT DELHI] where it was held that Apitco Ltd. cannot be comparable on account of functional in comparability. Therefore, we are of the considered view that the ld. CIT(A) was incorrect in inclusion of Apitco Ltd. in the final set of comparables. ICRA Management Consulting Services Ltd. as comparable - ICRA Management Consulting Services Ltd. is mainly involved in multi-line management and development in the field of risk management, process improvement, public policy and transaction advisory services. We further noted that the assessee is a captive service provider to its AE which cannot be considered to a company which is involved in various kind of services including several complex services in the area of policy advisory and PPP transaction. TPO as well as the Ld. CIT(A) was erred in considering ICRA Management Consulting Services Ltd. as comparable for the purpose of determination of ALP of international transaction. Issues Involved:1. Reference to the TPO under section 92CA of the Act.2. Adjustment of INR 52,13,311 in respect of international transaction of provision of Business Support Services (BSS) to AEs.3. Disallowance of depreciation on assets (finance lease).4. Adjustment of INR 1,05,26,570 in respect of providing Information Technology Enabled Support Services to AEs.Detailed Analysis:1. Reference to the TPO under section 92CA of the Act:The assessee challenged the reference to the TPO without the AO applying his mind and without recording satisfaction, making the process invalid. The CIT(A) confirmed the AO's action, stating that the AO did not provide reasons to show that any conditions mentioned in clauses (a) to (d) of Section 92C(3) were satisfied before making an adjustment to the total income. The CIT(A) also noted that the AO did not demonstrate the motive of the assessee to shift profits outside India by manipulating prices in its international transactions.2. Adjustment of INR 52,13,311 in respect of international transaction of provision of Business Support Services (BSS) to AEs:The CIT(A) erred in determining the ALP for BSS provided to AEs at INR 9,01,18,079 instead of INR 8,49,04,768 determined by the assessee, confirming the addition of INR 52,13,311 made by the AO. The CIT(A) rejected TVS-E Service tec Ltd from the final set of comparables selected by the assessee for benchmarking margins earned from BSS to AEs on the ground of being functionally different. The CIT(A) accepted Apitco Ltd and ICRA Management Consulting Services Ltd as comparables for benchmarking the margins earned from BSS to AEs.3. Disallowance of depreciation on assets (finance lease):The AO disallowed depreciation claimed by the assessee on assets leased to M/s Reliance Industries Ltd., citing AS-19, which states that in a finance lease, all risks and rewards incidental to ownership are transferred to the lessee. The AO concluded that the assessee is not entitled to claim depreciation on the leased plant and machinery, following the decision of the Hon'ble Delhi High Court in Industrial Finance Corpn. of India v. Dy. CIT. The CIT(A) reversed this decision, relying on the Hon'ble Supreme Court's ruling in I.C.D.S Ltd. v. CIT, which allows depreciation in the hands of the owner of the property, irrespective of its location.4. Adjustment of INR 1,05,26,570 in respect of providing Information Technology Enabled Support Services to AEs:The TPO made an adjustment of INR 1,05,26,570 after rejecting certain comparables and selecting others, resulting in an average margin of 25.15%. The CIT(A) accepted Allsec Technologies Ltd. as a comparable, following the ITAT Mumbai's decision in Maersk Global Service Centres (India) (P.) Ltd. v. Dy. CIT, which held that a company cannot be rejected merely for incurring losses. The CIT(A) also rejected E-clerx Services Ltd. as a comparable, noting it provides high-end KPO services, which are not comparable to the low-end ITES provided by the assessee.Conclusion:The appeals were decided with the following key outcomes:- The CIT(A)'s decision to allow depreciation on leased assets was upheld, following the Supreme Court's ruling in I.C.D.S Ltd. v. CIT.- The inclusion of Allsec Technologies Ltd. as a comparable was upheld, while E-clerx Services Ltd. was excluded.- Apitco Ltd. and ICRA Management Consulting Services Ltd. were excluded from the final set of comparables for benchmarking BSS, and the TPO was directed to recompute the transfer pricing adjustment accordingly.- The other grounds raised by the assessee were dismissed as not pressed, given the adjustments to the comparables list.