2023 (3) TMI 1300 - AT - Income Tax

Tribunal affirms CIT(A) decisions on depreciation & transfer pricing for 2010-11, 2011-12

The Tribunal upheld the learned CIT(A)'s decisions on disallowance of depreciation and transfer pricing adjustments for the assessment years 2010-11 and ... Depreciation on editing equipment - Depreciation on the additions to plant and machinery made during the year - HELD THAT:- We find that this issue is recurring in nature since the assessment year 2004–05. We further find that assessee is claiming depreciation on computer-based editing equipment, part of which was acquired in preceding years and part was purchased during the year under consideration. As noted addition during the year mainly consist of processors, hard disk and hard drives, software, workstation platforms, drivers, monitors, servers, display, and control panels with different types of software. In assessee’s own case in the immediately preceding assessment year, in DCIT vs Prime Focus Ltd [2017 (4) TMI 1614 - ITAT MUMBAI] following the judicial precedent in assessee’s own case decided a similar issue in favour of the assessee. Decided against revenue. TP adjustment - assessee raised an amount in the UK via FCCB at a compound rate of 7.375% - AO made a reference under section 92CA(1) to TPO to determine the arm’s length price of the international transactions entered into - HELD THAT:- Since the funds are borrowed in USD and advanced in USD the learned CIT(A) came to the conclusion that the question of currency and exchange risks is minimal and therefore, only risk that needs to be factored in was the lending risks by the assessee to its AE. Accordingly, CIT(A) computed the arm’s length rate of interest on loan granted to AE at 8.375% i.e. rate of FCCB borrowings of 7.375% + markup of 1% for other lending rates. Since it is undisputed that advance was made by the assessee to its AE out of the funds generated from FCCB, therefore, we are of the considered view that the learned CIT(A) was right in considering the FCCB compound rate of 7.375% as the base rate. Since the funds have been borrowed in USD and also advanced in USD, the currency and exchange risks are minimised and the only risk to be considered is the lending risk for determining the markup. The learned CIT(A) considered 1% markup as an appropriate markup in the above circumstances. No infirmity in the impugned order in treating 7.375% plus markup of 1% as the arm’s length rate of interest in respect of loan advanced by the assessee to its AE. Accordingly, ground No. 3 raised in Revenue’s appeal is dismissed. Issues Involved:1. Disallowance of depreciation on additions to plant and machinery.2. Transfer pricing adjustment related to interest on deemed loan.Issue-wise Detailed Analysis:1. Disallowance of Depreciation on Additions to Plant and Machinery:The Revenue challenged the learned CIT(A)'s decision to allow the assessee's claim for depreciation on additions to plant and machinery made during the assessment years 2010-11 and 2011-12. The primary contention was that the AO had restricted depreciation to 15% instead of the 60% claimed by the assessee on computer-based plant and machinery. The learned CIT(A) allowed the assessee's appeal by relying on previous orders in the assessee's favor for identical issues in earlier years. The Tribunal noted that this issue was recurring since the assessment year 2004-05 and had been consistently decided in favor of the assessee. The Tribunal found no reason to deviate from the earlier decisions and upheld the learned CIT(A)'s order, allowing depreciation at 60%. Therefore, the grounds raised by the Revenue on this issue were dismissed.2. Transfer Pricing Adjustment Related to Interest on Deemed Loan:The AO referred the matter to the TPO to determine the arm's length price of international transactions, specifically focusing on an advance of Rs. 23 crore to the assessee's AE, initially classified as share application money. The TPO treated this amount as a deemed loan and proposed an adjustment by applying an interest rate of 11.56% (8.56% weighted cost of borrowed capital plus a 3% markup). The learned CIT(A) reduced the arm's length interest rate to 8.375% (7.375% FCCB rate plus 1% for lending risks) and upheld the treatment of the advance as a loan. The Tribunal agreed with the learned CIT(A) that the advance was effectively a loan and upheld the reduced interest rate, finding it reasonable given the circumstances. Consequently, the grounds raised by the Revenue and the assessee on this issue were dismissed.Separate Judgments Delivered:The Tribunal addressed the issues for the assessment years 2010-11 and 2011-12 separately but consistently upheld the learned CIT(A)'s decisions across both years. The appeals by the Revenue for the assessment year 2010-11 and the cross-appeals for the assessment year 2011-12 were dismissed.Conclusion:The Tribunal dismissed the appeals by the Revenue and the cross-appeals by the assessee, upholding the learned CIT(A)'s decisions on the disallowance of depreciation and the transfer pricing adjustments. The Tribunal found no infirmity in the learned CIT(A)'s orders and followed the judicial precedents set in the assessee's own cases for earlier assessment years.