2023 (1) TMI 828 - AT - Income Tax

Tribunal upholds CIT(A)'s decisions on Revenue's appeal: additions, expenses, and depreciation rates

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on all grounds. This included the deletion of additions on account of margin ... Addition on account of margin @ 11% on the transaction of reimbursement of expenses - addition of delayed recovery on the transaction as per order of TPO - assessee has contended that no services were rendered in lieu of these expenses incurred by the assessee on behalf of the AE being payment of statutory dues etc. which involved no services to be rendered by the assessee at all - CIT-A deleted additions - HELD THAT:- Revenue has been unable to controvert before us the fact that all the expenses made by the assessee on behalf of the AE involved no services to be rendered by the assessee but was merely meeting the expenses of statutory dues/fees/charges of the AE. Revenue has also not disputed the fact that all the expenses were made out of advances given by the AE to the assessee. CIT(A), has given detailed finding with respect to both the aspects ,noting that all the payments made by the assessee on behalf of its AE were majorly on account of fees/duty to be paid to the government for the project which clearly did not involve any rendering of services by the assessee. DR was unable to clarify the nature of services which the AO/TPO found the assessee to have rendered while making these payments on behalf of the assessee. We agree with the Ld.CIT(A) therefore that in such circumstances there arises no question at all of making any adjustment to the reimbursements of any operational profit element therein. Even with respect to the findings of the Ld.CIT(A) that all expenses of the AE were met out of advances given by the AE to it, we find that the findings of the Ld.CIT(A) are exhaustive and detailed, pointing out the fact that the AE has throughout the year maintained sufficient advances with the assessee to the tune of Rs. 12 Crs odd and even when the assessee has made any payments on its behalf during the year the same were immediately reimbursed. CIT(A) has noted that details to this effect were before the AO/TPO also who had made no adverse observations with respect to the same. Even before us no infirmity was pointed out by the Ld. DR on the factual findings of the Ld.CIT(A) as above. We find no infirmity in the order of the CIT(A) holding that in the light of the fact where there is no finding of nature of the services rendered by the assessee to the AE while meeting the expenses of the AE and further on account of the fact that all these expenses were made out of advances given by the AE to the assessee, there was no reason to make any adjustment to the ALP of the international transactions of reimbursement of expenses either on account of profit element or the interest element. In view of above, the grounds of appeal Nos. (a) and (b) raised by the Revenue are dismissed. Preliminary expenses written off as per the provisions of Section 35D - assessee had claimed deduction to the extent of 1/5th as per Section 35D relating to expenses incurred on incorporation of the company and 1/5th of the expenditure incurred during the impugned year on increase in share capital of the company - AO had denied the entire claim to the effect that expenditure incurred on increase in share capital was a capital expenditure not entitled to deduction - HELD THAT:- DR was unable to controvert the factual finding of the learned CIT(A) to the effect that the amount claimed by the assessee under Section 35D pertained to preliminary expenses incurred on the incorporation of the company; 1/5th of which the assessee had been claiming consistently in the preceding years. We see no reason to disagree with the learned CIT(A) that the said claim of the assessee was allowable as per law. The decision of the Hon’ble Apex Court in the case of Brooke Bond India [1997 (2) TMI 11 - SUPREME COURT] relates only to expenditure incurred on increase in share capital which not being the fact pertaining to the impugned expense before us, the said decision has been rightly held as not applicable to the same by the CIT(A). We uphold the order of the learned CIT(A) allowing the claim of expenses under Section 35D of the Act. The ground of appeal No. (c) is accordingly dismissed. Rate of depreciation applicable on certain assets which as per the Revenue quality as office equipments entitled to rate of depreciation @ 10% while as per the assessee they quality as plant and machinery entitled for rate of depreciation @ 15% - CIT(A), after considering the nature of assets, held that they qualify as plant and machinery entitled for depreciation @ 15% - HELD THAT:- DR was unable to controvert the factual finding with respect to the nature of assets on which the issue of rate of depreciation applied that they were in the nature of machineries being vacuum cleaner, water dispenser, EPBAX installation etc. Clearly, the same are not in the nature of “furniture and fittings” to which 10% rate of depreciation is applicable. CIT(A) has taken note of the provisions of Section 32A of the Act relating to investment allowance as well as to the provisions of Section 32(iia) of the Act relating to the additional deprecation on plant and machinery which rule out the allowance or additional depreciation on old plant and machinery and while doing so provide an exemption to office appliances. CIT(A) has derived that office appliances qualify as plant and machinery for depreciation @ 15%. DR has been unable to point out any infirmity in this finding of the learned CIT(A). CIT(A) has relied on the decision of Park Devis (India) Limited [1994 (12) TMI 46 - BOMBAY HIGH COURT] which has laid down the proposition that even office appliances qualify as plant and machinery for depreciation @ 15%. DR has been unable to distinguish the said case before us. In view of the above, we do not find any infirmity in the order of the learned CIT(A) holding the assessee entitled to depreciation @ 15% on office equipments. This ground of appeal of the Revenue is accordingly dismissed. Issues Involved:1. Deletion of addition on account of margin on reimbursement of expenses.2. Deletion of addition on account of delayed recovery on transactions.3. Disallowance of preliminary expenses under Section 35D of the Income Tax Act.4. Rate of depreciation applicable on certain office equipment.Issue-wise Detailed Analysis:1. Deletion of addition on account of margin on reimbursement of expenses:The Revenue contested the deletion of Rs.1,06,54,295/- made by the CIT(A) regarding the margin on the transaction of reimbursement of expenses of Rs.9,68,57,231/-. The TPO had added a markup of 11%, equivalent to the operating margin of the assessee, arguing that the reimbursement involved services rendered by the assessee. However, the CIT(A) found that the expenses were statutory dues paid on behalf of the AE and reimbursed from advances given by the AE, thus involving no services rendered by the assessee. The Tribunal upheld the CIT(A)'s decision, noting no services were rendered and the expenses were paid from advances, thus no markup was justified.2. Deletion of addition on account of delayed recovery on transactions:The Revenue also contested the deletion of Rs.90,18,586/- added by the TPO as interest on delayed recovery of expenses. The TPO argued that the delayed recovery implied an indirect funding by the assessee to its AE. The CIT(A) found that the expenses were met from advances provided by the AE, and thus, there was no delayed recovery or funding involved. The Tribunal agreed with the CIT(A), noting that the AE maintained sufficient advances with the assessee throughout the year, and thus no interest adjustment was warranted.3. Disallowance of preliminary expenses under Section 35D of the Income Tax Act:The AO disallowed the entire claim of Rs.4,91,063/- under Section 35D, citing the Supreme Court decision in Brooke Bond India Vs. CIT. However, the CIT(A) allowed Rs.4,66,063/-, noting it pertained to preliminary expenses on company incorporation and not related to share capital increase. The Tribunal upheld the CIT(A)'s decision, finding no reason to disallow the claim for preliminary expenses as they were not related to share capital increase.4. Rate of depreciation applicable on certain office equipment:The dispute was over the rate of depreciation on assets like EPBAX equipment, vacuum cleaner, and water dispenser. The AO applied a 10% rate, treating them as office equipment, while the assessee claimed 15% as plant and machinery. The CIT(A) ruled in favor of the assessee, considering these assets as plant and machinery based on Section 32A and relevant case laws. The Tribunal upheld the CIT(A)'s decision, finding the assets qualified as plant and machinery entitled to a 15% depreciation rate.Conclusion:The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on all grounds, including the deletion of additions on account of margin and interest on reimbursement of expenses, allowance of preliminary expenses under Section 35D, and the application of a 15% depreciation rate on certain office equipment.