ITAT allows 60% depreciation on wireless ports, accepts turnover-based SEZ expense allocation, orders LIBOR benchmarking for delayed receivables

The ITAT Delhi ruled on multiple issues involving a taxpayer's transfer pricing and expense allocation matters. Regarding interest on delayed receivables from associated enterprises, the tribunal held that such interest constitutes a separate international transaction requiring benchmarking, directing computation using LIBOR plus markup after setting off receivables cleared within 30 days. For wireless ports capitalization, the tribunal allowed 60% depreciation treating them as computer peripherals rather than the AO's 15% rate. On SEZ/non-SEZ expense allocation, the tribunal accepted the assessee's turnover-based allocation method, noting separate books were maintained and audited. The tribunal partially allowed the appeal, affirming some adjustments while modifying others based on proper allocation principles and transfer pricing regulations.

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Issues Involved:

1. Interest on receivables
2. Capitalization of wireless ports
3. Allocation of expenses between SEZ and non-SEZ units
4. Increase in Capital Reserve
5. Employee compensation

Summary:

Interest on Receivables:

The Tribunal examined whether interest on delayed receivables constitutes an international transaction. The AO/TPO analyzed the pattern over multiple years and concluded that there was an arrangement benefiting the AE. The Tribunal referred to various judgments, including CIT Vs. EKL Appliances and Kusum Healthcare Pvt. Ltd., and concluded that interest on delayed receivables cannot be subsumed in the working capital adjustment. The Tribunal directed the AO to compute the adjustment considering the directions of the DRP and to set off receivables cleared by the AEs in less than 30 days or received in advance. The LIBOR rate with a 200 basis points mark-up was deemed appropriate for benchmarking. The appeal on this ground was partly allowed.

Capitalization of Wireless Ports:

The Tribunal allowed the appeal regarding the capitalization of indoor wireless ports, directing that they should be treated as computer peripherals and depreciation at the rate of 60% should be allowed.

Allocation of Expenses between SEZ and Non-SEZ Units:

The Tribunal found that the AO's reallocation of expenses between SEZ and taxable units was not justified. The assessee maintained separate books of accounts, which were audited and certified. The Tribunal emphasized that actual expenditure directly related to a particular unit cannot be allocated to another unit. The appeal on this ground was allowed, and the Tribunal directed that the expenses should not be reallocated.

Increase in Capital Reserve:

The Tribunal upheld the AO's decision that the reimbursement received from the parent company for employee compensation should be treated as revenue receipt, not a capital receipt. However, the Tribunal agreed to restrict the addition to the amount of corresponding salary expenditure allowed as a deduction for the current year (INR 11,04,38,263). The balance amount (INR 26,78,37,118) was not taxed since it was disallowed as prior period expenditure. The appeal on this ground was partly allowed.

Employee Compensation:

The Tribunal upheld the AO's disallowance of INR 26,78,37,118 as prior period expenditure, as the liability crystallized during the subject year. The Tribunal noted that the payment was governed by the provisions of section 43B of the Income Tax Act, which provides for deduction of bonus on a payment basis. The appeal on this ground was partly allowed.

Conclusion:

The Tribunal provided a detailed analysis for each issue, partially allowing the appeals on interest on receivables, increase in capital reserve, and employee compensation, while fully allowing the appeal on the capitalization of wireless ports and allocation of expenses between SEZ and non-SEZ units.

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