2021 (11) TMI 1155 - AT - Income Tax

Tribunal directs AO to reconsider depreciation issue, upholds benchmarking approach

Cisco Systems Capital (India) Private Limited Versus The Deputy Commissioner of Income Tax, Circle 2 (1) (1), Bangalore

Cisco Systems Capital (India) Private Limited Versus The Deputy Commissioner of Income Tax, Circle 2 (1) (1), Bangalore - TMI Issues Involved:1. Disallowance of depreciation on assets given under finance lease.2. Not allowing set-off of brought forward depreciation loss.3. Initiating scrutiny proceedings in relation to specified domestic transactions.4. Transfer pricing adjustment on account of re-characterization of payment for administrative support services.5. Bundled approach for benchmarking.6. Rejection of benchmarking analysis and selection of non-comparable companies.7. Initiation of penalty proceedings under section 271(1)(c).Detailed Analysis:1. Disallowance of Depreciation on Assets Given Under Finance Lease:The assessee claimed depreciation on networking equipment leased out under a finance lease arrangement. The AO disallowed this claim, citing that the assessee could not be regarded as the owner of the assets based on the decision in Asea Brown Boveri Ltd. The AO disallowed a net sum of INR 138,77,07,776 after reducing the lease rentals received. The Tribunal, referencing its own previous decisions and the Karnataka High Court's ruling, remanded the issue back to the AO for fresh adjudication. The Tribunal directed the AO to examine the lease agreements and verify if the terms are similar to those in the ICDS Ltd. case, where the Supreme Court allowed depreciation.2. Not Allowing Set-off of Brought Forward Depreciation Loss:The assessee claimed set-off of brought forward depreciation losses amounting to INR 229,94,53,483. The AO denied this claim, stating that the income for AY 2013-14 and AY 2014-15 had resulted in positive figures. The Tribunal found that the assessee is eligible to claim the set-off based on the Order giving effect to the Tribunal's order for earlier years, directing the AO to allow the brought forward depreciation loss.3. Initiating Scrutiny Proceedings in Relation to Specified Domestic Transactions:The assessee argued that the AO/TPO erred by initiating scrutiny proceedings for specified domestic transactions, disregarding the deletion of clause (i) of section 92BA by the Finance Act, 2017. The Tribunal did not specifically address this issue as the grounds were considered academic and dismissed without adjudication.4. Transfer Pricing Adjustment on Account of Re-characterization of Payment for Administrative Support Services:The assessee contended that the agreement for administrative support services with Cisco India was bona fide and should not be treated as an international transaction. The Tribunal did not adjudicate on this issue as the grounds were considered academic and dismissed.5. Bundled Approach for Benchmarking:The assessee argued that the TPO had accepted the bundled approach of aggregation of payment of fees for administrative support services in preceding years and that there was no change in the functions, assets, and risk analysis. The Tribunal upheld the bundled approach for benchmarking, stating that payment for administrative and marketing support services is part of the operating cost and no separate adjustment is warranted.6. Rejection of Benchmarking Analysis and Selection of Non-comparable Companies:The assessee raised issues regarding the rejection of its benchmarking analysis and the selection of non-comparable companies. The Tribunal did not specifically address these issues as the grounds were considered academic and dismissed without adjudication.7. Initiation of Penalty Proceedings Under Section 271(1)(c):The assessee contended that the AO erred in proposing to initiate penalty proceedings under section 271(1)(c) for various disallowances/additions. The Tribunal did not specifically address this issue as the grounds were considered academic and dismissed without adjudication.Conclusion:The Tribunal remanded the issue of disallowance of depreciation on assets given under finance lease back to the AO for fresh adjudication with specific directions. It directed the AO to allow the set-off of brought forward depreciation loss. The Tribunal upheld the bundled approach for benchmarking and dismissed the remaining grounds as academic. The appeal of the assessee was partly allowed for statistical purposes.