2022 (1) TMI 1200 - AT - Income Tax

Tribunal grants partial appeal, allows depreciation claim on fixed assets, adjusts international transaction, and directs fresh adjudication.

The Tribunal allowed the appeal partly, directing the Assessing Officer to allow the claim of depreciation on the purchase of fixed assets, deleting the ... TP adjustment made to the international transaction relating to purchase of medical equipments - assessee entered into international transaction with its overseas Associated Enterprise (AE) of providing business support services and marketing support services - HELD THAT:- As decided in own case [2021 (11) TMI 401 - ITAT DELHI] equipment would not have been -/imported at NIL price even in an independent scenario. Moreover, we do not find that the TPO has applied any method to benchmark the said transaction, which action of the TPO is in violation of Rule 10B of the Income Tax Rules. We find that while treating the purchase of capital goods as NIL, the TPO failed to provide any comparable data which would have suggested that the arm's length price for the purchase of capital goods can be NIL. In our understanding, no third party would have sold such goods free of cost. In our considered opinion, arm's length price could be lower or higher but cannot be NIL, as the goods have been imported. Incidentally, the same products purchased from the same AE, for the same price, in the same year, cannot be held to be at arm's length for trading goods and not at arm's length for capitalised goods at the same time and in the same breath. Considering the facts of the case in totality, we direct the Assessing Officer to allow the claim of depreciation on the purchase of fixed sub grounds is, accordingly, allowed. Adjustment towards interest on outstanding receivables - delay in receivables from the AE - HELD THAT:- The reason for delay in receiving outstanding invoices has to be looked into. Further, it has been submitted before us that as a matter of principle, the assessee has not charged interest on outstanding receivables, either from AE or non AE. This fact has not been factually examined, either by the TPO or learned DRP. It has to be ascertained, what is the average delay in case of AE and non AE transactions. Similarly, assessee's contention that on outstanding payables to the AE no interest has been charged, requires to be considered and, in case, there are outstanding payables, it has to be set off against outstanding receivables and interest has to be charged on net receivables. As regards, the contention of the assessee that working capital adjustment subsumes outstanding receivables, in our view, this may be correct in so far as receivables remaining outstanding at the end of the year. However, the invoices raised and realized during the year, but, beyond the credit period cannot get subsumed in the working capital adjustment. Since, all these factors have not been considered by the Departmental Authorities, we are inclined to restore this issue to the Assessing Officer for fresh adjudication. As far as the rate of interest is concerned, it is open to the assessee to furnish material before the Assessing Officer to demonstrate that the rate of interest, if any, chargeable on the outstanding receivables, would be less than, what has been determined by learned DRP. Addition of mark-up of 5% on recovery of expenses from AE - HELD THAT:- We find that certain expenses incurred by the assessee on behalf of the AE have been reimbursed on cost to cost basis. Similarly, certain expenses incurred by the AE on behalf of the assessee, have also been reimbursed on cost to cost basis. Learned counsel for the assessee has demonstrated before us that invoices towards the cost incurred have been raised on back to back basis on the AE. Thus, in our view, there is no need to charge any mark-up on such reimbursement of expenses, more so, when the AE is not charging any mark-up on the cost incurred by it on behalf of the assessee. In view of the aforesaid, we delete the adjustment. Non-grant of set-off of brought forward unabsorbed depreciation against the addition made to the total income on account of transfer pricing adjustment - HELD THAT:- We direct the Assessing Officer to grant set-off of brought forward unabsorbed depreciation after the issue is crystallized in the preceding assessment years. This ground is allowed for statistical purposes. Issues Involved:1. Adjustment to international transaction relating to purchase of medical equipment.2. Adjustment towards interest on outstanding receivables.3. Mark-up on recovery of expenses from AE.4. Non-grant of set-off of brought forward unabsorbed depreciation.Issue-wise Detailed Analysis:1. Adjustment to international transaction relating to purchase of medical equipment:The assessee, a resident company engaged in trading medical equipment, challenged the adjustment of Rs. 77,04,297 made to the international transaction relating to the purchase of medical equipment. The Transfer Pricing Officer (TPO) had determined the Arm's Length Price (ALP) of imported medical equipment at nil, leading to an adjustment in the depreciation claimed. The Dispute Resolution Panel (DRP) upheld this adjustment. However, the Tribunal found that in a similar case for the assessment year 2012-13, it was held that the TPO's determination of ALP at nil was incorrect. The Tribunal noted that the assessee had substantiated the import of goods with customs documentation and that the TPO had not applied any method to benchmark the transaction. Therefore, the Tribunal directed the Assessing Officer to allow the claim of depreciation on the purchase of fixed assets, deleting the adjustment of Rs. 77,04,297.2. Adjustment towards interest on outstanding receivables:The TPO noticed a delay in the realization of invoices from the AE and treated the outstanding receivables as unsecured loans, proposing an adjustment of Rs. 13,57,841. The DRP directed the TPO to re-compute the interest using a lower rate and a 60-day credit period. The assessee argued that outstanding receivables from AE cannot be treated as an international transaction and that no interest was charged on receivables from either AE or non-AE. The Tribunal recognized the need to examine the reasons for the delay and whether the assessee charged interest on receivables from non-AEs. It restored the issue to the Assessing Officer for fresh adjudication, considering the average delay and the possibility of setting off outstanding payables against receivables.3. Mark-up on recovery of expenses from AE:The TPO proposed a 5% mark-up on the recovery of expenses incurred on behalf of the AE, resulting in an adjustment of Rs. 36,83,982. The DRP upheld this decision. The assessee contended that the expenses were reimbursed on a cost-to-cost basis and that the AE also reimbursed expenses without any mark-up. The Tribunal found that the invoices for the costs incurred were raised on a back-to-back basis and that there was no need for a mark-up when the AE did not charge any mark-up on expenses incurred on behalf of the assessee. Consequently, the Tribunal deleted the adjustment of Rs. 36,83,982.4. Non-grant of set-off of brought forward unabsorbed depreciation:The assessee challenged the non-grant of set-off of brought forward unabsorbed depreciation against the addition made due to transfer pricing adjustments. Both parties agreed that the Assessing Officer should grant consequential relief based on the decisions in preceding assessment years. The Tribunal directed the Assessing Officer to grant the set-off after the issue is resolved in the preceding years.Other Grounds:Ground no. 1 was of a general nature and did not require specific adjudication. Ground no. 6 was not pressed and was dismissed. Ground no. 7 was considered premature and was also dismissed. The appeal was partly allowed, with the order pronounced in the open court on 20th January 2022.