2023 (10) TMI 646 - AT - Income Tax

Appeal partly allowed: Grounds 1 & 4 allowed, Ground 2 dismissed, Ground 3 allowed. Deletions made, issues remanded.

The appeal was partly allowed with Grounds No. 1 and 4 allowed, Ground No. 2 dismissed, and Ground No. 3 allowed, resulting in the deletion of certain ... Transfer pricing - arm's length pricing of interest on international transactions - application of comparable uncontrolled price (CUP) and use of internal comparables - remand for fresh determination of arm's length price - benchmarking of interest on fixed deposits against third party bank rate cards - disallowance under Section 14A read with Rule 8D - requirement of AO's recorded satisfaction - allowability of depreciation - classification of computer peripherals as integral to computersTransfer pricing - arm's length pricing of interest on international transactions - application of comparable uncontrolled price (CUP) and use of internal comparables - remand for fresh determination of arm's length price - Transfer pricing adjustment in respect of interest paid on short term working capital loan remanded for fresh determination. - HELD THAT: - The Tribunal found that the Appellant had relied on third party loan transactions (identified by SCB India with its customers) to compute an average interest rate, but those transactions did not constitute internal CUPs involving the assessee as a tested party. The Appellant also pleaded commercial factors (market rates, liquidity, tenure) as relevant, but supporting details and economic information concerning the identified comparables were not on record. Given the absence of necessary contemporaneous market/transactional detail and that the transactions relied upon were not internal to the tested party, the Tribunal was constrained to remit the question of arm's length interest rate and any consequent transfer pricing adjustment to the Assessing Officer/TPO for fresh determination in accordance with law and on the basis of appropriate comparables and supporting material. [Paras 13]Issue remanded to the Assessing Officer/TPO for fresh determination of arm's length rate of interest and any transfer pricing adjustment.Benchmarking of interest on fixed deposits against third party bank rate cards - transfer pricing adjustment - comparability of bank rate cards and temporal applicability - Transfer pricing adjustment in respect of interest received on fixed deposits limited as per DRP directions and the Assessing Officer's order sustained. - HELD THAT: - The TPO had benchmarked the assessee's deposit rates with a nationalised bank's (PNB) rate card and proposed an adjustment. The DRP noted that the PNB rate card relied upon was effective only after 01/03/2009 and accordingly restricted the adjustment to the period to which that rate card applied, reducing the proposed adjustment. The Appellant's contention that a nationalised bank's rate card could not be applied to a private company was not supported by evidence on record. On this basis the Tribunal declined to interfere with the assessment as directed by the DRP. [Paras 15, 16]Assessment Officer's adjustment limited as per DRP directions; appeal on this ground dismissed.Disallowance under Section 14A read with Rule 8D - requirement of AO's recorded satisfaction - application of Rule 8D formula only after AO records dissatisfaction with assessee's claim - Addition under Section 14A read with Rule 8D deleted for want of recorded satisfaction by the Assessing Officer. - HELD THAT: - The Tribunal applied settled law that invocation of Rule 8D to compute disallowance under Section 14A is permissible only after the Assessing Officer records satisfaction that the assessee's claim regarding expenditures related to exempt income cannot be accepted on the basis of accounts placed before him. The assessment order did not record such satisfaction nor did it refer to accounting records, interest cost or administrative expenses to justify the disallowance. Reliance on the Supreme Court precedents (as discussed) supported deletion of the addition made under Rule 8D(2)(iii). Accordingly, the disallowance was deleted. [Paras 19, 22]Addition of INR 9,00,000 under Section 14A read with Rule 8D deleted.Allowability of depreciation - classification of computer peripherals as integral to computers - precedential application - Tribunal/High Court authorities on depreciation rates - Restriction of depreciation on computer peripherals to 15% disallowed; depreciation allowable at 60%. - HELD THAT: - The Tribunal noted that the identical issue for an earlier assessment year had been decided in favour of the assessee by the Tribunal, following authorities holding that computer peripherals and accessories are integral to computer systems and attract the higher depreciation rate applicable to computers. On that basis the Tribunal concluded the assessee is entitled to depreciation at 60% and deleted the disallowance made by the Assessing Officer. [Paras 26, 27]Disallowance of depreciation deleted; depreciation allowable at 60%.Final Conclusion: The appeal is partly allowed: Ground No.1 remanded to the Assessing Officer/TPO for fresh determination of arm's length interest and consequential adjustment; Ground No.2 dismissed; Grounds No.3 and No.4 allowed with deletions of the respective additions. Issues Involved:1. Transfer Pricing adjustment related to Interest paid on Working Capital loan.2. Transfer Pricing adjustment related to Interest received on fixed deposits.3. Disallowance under Section 14A of the Act read with Rule 8D.4. Depreciation on Computer peripherals restricted to 15% as against 60%.Summary:Ground No. 1: Transfer Pricing adjustment related to Interest paid to Standard Chartered Bank-India (SCB-India) on Working Capital loan obtained - Rs. 21,75,000The Appellant contested the transfer pricing adjustment of INR 21,75,000/- for interest paid on a working capital loan from SCB India at 14.75%. The Appellant benchmarked this rate using internal comparables, but the TPO rejected these comparables and selected a transaction with Indian Farmers Fertilizers Co-op Limited (IFFCO) at 14% as the closest comparable. The Tribunal remanded the issue back to the Assessing Officer/TPO for fresh determination of the arm's length rate of interest, noting the lack of detailed economic/commercial factors provided by the Appellant. Ground No. 1 was allowed for statistical purposes.Ground No. 2: Transfer pricing adjustment related to Interest received from SCB-India on fixed deposits placed - Rs. 8,150The TPO initially made a transfer pricing adjustment of INR 52,548/- using the Punjab National Bank (PNB) interest rate card. The DRP reduced this adjustment to INR 8,150/-. The Appellant argued against using the PNB rate card, but the Tribunal found no supporting evidence for the Appellant's contention and upheld the DRP's decision. Ground No. 2 was dismissed.Ground No. 3: Disallowance under Section 14A of the Act read with Rule 8D - Rs. 900,000The Appellant challenged the disallowance of INR 9,00,000/- under Section 14A read with Rule 8D(2)(iii), arguing that no expenditure was incurred for earning exempt income. The Tribunal found that the Assessing Officer failed to record satisfaction before making the disallowance, as required by the Supreme Court judgments in Maxopp Investment Ltd. vs. CIT and Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT. Consequently, the disallowance of INR 9,00,000/- was deleted. Ground No. 3 was allowed.Ground No. 4: Depreciation on Computer peripherals restricted to 15% as against 60%- Rs. 10,42,446The Appellant claimed depreciation at 60% for computer peripherals, which the Assessing Officer restricted to 15%. The Tribunal referred to its previous decision for the Assessment Year 2007-08, which allowed 60% depreciation on computer peripherals, and thus, deleted the disallowance of INR 10,42,446/-. Ground No. 4 was allowed.Conclusion:The appeal was partly allowed with Grounds No. 1 and 4 allowed, Ground No. 2 dismissed, and Ground No. 3 allowed, resulting in the deletion of certain disallowances and remanding issues for fresh consideration. The order was pronounced on 23.06.2023.