Tribunal allows assessee's appeal for statistical purposes, dismissing Revenue's appeal on depreciation & insurance expenses.

The Tribunal allowed the assessee's appeal for statistical purposes, directing the Assessing Officer to re-examine the transfer pricing adjustment in light of previous judgments. The Revenue's appeal was dismissed, upholding the decisions of the Commissioner of Income Tax (Appeals) on the disallowance of depreciation and insurance expenses. The order was pronounced on 3rd February 2021.

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Issues Involved:
1. Transfer pricing adjustment on account of interest on overdue receivables.
2. Disallowance of depreciation on plant and machinery.
3. Disallowance of insurance expenses on plant and machinery.

Detailed Analysis:

1. Transfer Pricing Adjustment on Account of Interest on Overdue Receivables:
The assessee challenged the adjustment made by the Transfer Pricing Officer (TPO) regarding interest on overdue receivables, which was calculated at LIBOR plus 350 basis points. The TPO had initially held all international transactions at arm's length price but made an adjustment of Rs. 80,60,718/- due to outstanding receivables from associated enterprises (AEs) beyond the standard credit period of 60 days. The adjustment was based on an interest rate of 12.6% derived from the base rate of the State Bank of India with additional basis points for creditworthiness and risk assessment.

The Tribunal noted that this issue had been previously considered in the assessee's own case for earlier assessment years (AY 2008-09 to AY 2010-11 and AY 2011-12), where it was directed that if the margins under the Transactional Net Margin Method (TNMM) declared by the assessee and those of comparables accounted for working capital adjustment, no adjustment for delayed receivables should be made. This was in line with the judgment of the Hon'ble Delhi High Court in Principal CIT Vs. Kusum Health Care Pvt. Ltd., which emphasized that not all receivables constitute an international transaction and the impact on working capital must be studied.

The Tribunal restored this issue to the file of the Assessing Officer (AO)/TPO to re-examine it in light of the judgment in Kusum Health Care Pvt. Ltd., ensuring that a proper inquiry is conducted to discern a pattern indicating that the arrangement benefits the AE. The AO/TPO was instructed to pass a speaking order after giving the assessee an opportunity to present relevant workings and computations.

2. Disallowance of Depreciation on Plant and Machinery:
The Revenue challenged the deletion of disallowance of depreciation amounting to Rs. 10,03,84,485/- on plant and machinery. The AO had disallowed depreciation on the grounds that the assets were used by M/s. Rialto Enterprises (P) Ltd. for manufacturing goods for the assessee, and not directly by the assessee. The AO relied on the decision in Karan Raghav Exports (P) Ltd. v. CIT, arguing that the assets were not used for the assessee's business purposes.

The Tribunal, however, upheld the CIT(A)'s decision, which followed the earlier orders for AY 2010-11 and AY 2011-12, granting relief to the assessee based on the judgments of the Hon'ble Supreme Court in ICDS Ltd. v. CIT and CIT v. H. B. Leasing & Finance Ltd. The Tribunal concurred that the assets used by M/s. Rialto Enterprises (P) Ltd. for producing goods for the assessee's business were eligible for depreciation, as "used for the purposes of business" includes enabling the owner to carry on the business and earn profits. The Tribunal dismissed the Revenue's appeal on this issue, noting that the Revenue had accepted the Tribunal's decision for AY 2010-11 without further appeal.

3. Disallowance of Insurance Expenses on Plant and Machinery:
The Revenue also challenged the deletion of disallowance of insurance expenses amounting to Rs. 8,80,972/- on the same assets. The AO had disallowed these expenses for the first time in this assessment year, arguing that the assets were not used for the assessee's business purposes.

The Tribunal upheld the CIT(A)'s decision, which allowed the insurance expenses, noting that the assets were owned by the assessee and insured by it. The Tribunal observed that the AO had not disputed the incurrence of these expenses in earlier years, where they were consistently allowed. The Tribunal concluded that the insurance expenses were legally and properly allowable as they were incurred wholly and exclusively for the assessee's business. The Tribunal dismissed the Revenue's appeal on this issue as well.

Conclusion:
The appeal of the assessee was allowed for statistical purposes, directing the AO to re-examine the transfer pricing adjustment in light of previous judgments. The appeal of the Revenue was dismissed, upholding the CIT(A)'s decisions on the disallowance of depreciation and insurance expenses. The order was pronounced on 3rd February 2021.

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