TaxTMI 
TaxTMI 
2016 (10) TMI 1415
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....AO suffers from jurisdictional error as the Ld. AO did not record any reasons in the draft assessment order based on which he reached the conclusion that it was "expedient and necessary" to refer the matter to the Ld. Transfer Pricing Officer ("TPO") for computation of the arm's length price, as is required under section 92CA(1) of the Income Tax Act, 1961 ("Act"). 3. That on the facts and circumstances of the case and in law, the Ld. AO and Ld. TPO have erred in re-determining the arm's length price ("ALP") of international transactions. 4. That on the facts and circumstances of the case and in law, the Ld. Assessing Officer / Ld. TPO and Ld. DRP erred in enhancing the income of the appellant by Rs. 8,94,969 relating to payment on External Commercial Borrowings ("ECB") undertaken by the appellant by holding that the interest on borrowings paid by the appellant (@LIBOR + 3%) to its Associated Enterprise ("AE") is in excess of the limit prescribed by the RBI (i.e. LIBOR + 2%) and in doing so have grossly erred in: 4.1. ignoring that the interest paid to the AE is as per the rate agreed at the time of taking the loan in 2003 and the rate of int....
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.... 7.4. in relying upon the ruling of the Mumbai Special Bench in the case of Times Guaranty which was delivered in a different context pertaining to set-off of unabsorbed depreciation against other heads of income and not ill respect of carry forward of absorbed depreciation. 8. That the Ld. AO erred-in disallowing the unabsorbed depreciation of Rs. 1,11,19,76,984/- in the assessment for the captioned year as the appellant had only carried forward the above amount and had not even claimed the set-off against the taxable income. 9 The Ld. AO has erred on the facts and the circumstances of the case and in law in arbitrarily initiating a penalty proceedings U/S 271(1)(c) against the appellant for furnishing inaccurate particulars of income against each of the additions made by him, without appreciating the fact that even the essential pre-requisites of levy of penalty do not exist in the instant set of facts. 3. The appellant is a company incorporated under the provisions of the Companies Act, 1956 and is, inter-alia, engaged in the business of manufacture and sale of automotive tyres, tubes, flaps, etc. The assessee company is a wholly owned subsidiary ....
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.... by the RBI from time to time. Therefore, according to the assessee payment of interest at the ECB loans @ LIBOR +3% was justified. The Revenue, however, takes a position that while bench marking any international transaction in terms of the Indian Transfer Pricing Regulations, the data to be used is for the year in which the tested transaction has taken place and in this view of the matter the prevailing rate of interest in the year under consideration would be relevant. On the above controversy, it was a common point between the parties that similar issue had come up before the Tribunal in the assessee's own case for assessment year 2006-07 in ITA No. 143/PN/2010 dated 28/04/2014, whereby the stand of the assessee has been upheld. In this context, the operative part of the order of the Tribunal dated 28/11/2014 reads as under:- "23. The other issue remaining is with respect to an adjustment made on account of ECB raised by the assessee. In this context, we have already noted the relevant facts. Assessee raised ECB loan of USD 90,00,000 for financing it's working capital requirements vide an agreement dated 12.09.2003. The said loan was raised by the assessee in term....
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....its borrowing to provide ECB to the assessee was LIBOR plus 4% or alternate basis rate +3%. But keeping in mind, the RBI restrictions associated enterprise charged only LIBOR plus 3% from the assessee company. Ld. Representative submitted that this internal benchmark available with the assessee has been disregarded by the TPO. 25. In our considered opinion, the aforesaid comparable uncontrolled transactions i.e. the transaction between the associated enterprise and M/s J.P. Morgan Chase Bank provides a direct benchmark for the purposes of determining the arm's length price of payment of interest in respect of ECB loans. While applying CUP method, in our view, it is appropriate that the amount charged in an controlled transaction is examined with the amount charged in an uncontrolled transaction. In the present case, the aforesaid transaction brought out by the assessee qualifies the said tests. On this aspect, a gainful reference can also be made to the discussion of the Third Member Bench of the Tribunal in the case of Technimount ICB Pvt. Ltd. vs. ACIT (ITA No. 4608 & 5085/Mum/2010 dated 17.07.2012) wherein the context of the clause (i) of rule 10B(e) of the Rul....
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....trolled transactions of third parties. The underlying object behind computing ALP of an international transaction is to find out the profits which such enterprise would have earned if the transaction had been with some third party instead of related party. When the data is available showing profit margin of that enterprise itself from a third party, it is always safe and advisable to have recourse to such internal comparable case. The reason is patent that the various factors having bearing on the quality of output, assets employed, input cost etc. continue to remain by and large same in case of an internal comparable. The effect of difference due to such inherent factors on comparison made with the third parties, gets neutralized when comparison is made with internal comparable. Ex consequent, it follows that an internal comparable uncontrolled transaction is more noteworthy vis-a-vis its counterpart, i.e., external comparable." 26. In view of the aforesaid, in our view, since the rate of interest paid by the assessee to its associated enterprise in respect of ECB loan is lower than the rate of interest paid by the associated enterprise to M/s J.P. Morgan Chase bank, the ....
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....aintained under the Companies Act, 1956 of Rs. 5,82,37,212/- was considered as an impaired loss and debited to the P&L Account. However, in the income tax return for assessment year 2002-03, such loss of Rs. 5,82,37,212/- was added back and the depreciation claimed in the return of income included depreciation on the WDV of such assets also. The Assessing Officer disallowed the depreciation on such assets in the assessment for assessment year 2002-03. As a consequence, the depreciation claimed on the WDV of such assets relevant to the instant assessment year was also denied by the Assessing Officer in the impugned assessment, which amounted to Rs. 5,48,900/-. 8.1 On this aspect, it was a common point between the parties that in assessment year 2002-03, the Tribunal vide its order in ITA No. 1879/PN/2012 & Others dated 15/9/2014 has allowed the claim of the assessee. The relevant discussion in the order of the Tribunal dated 15/09/2014 (supra) is as under:- 16. We have carefully considered the rival submissions. As the discussion in the earlier paragraphs would show, the controversy revolves around assessee's claim for depreciation on block of assets ....
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.... Once the various assets are clubbed together and become block asset within the meaning of Section 2(11) of the Act, for the purpose of deprecation it is one asset. Every time, a new asset is acquired, it is to be thrown into the common hotchpotch, i.e., block asset on meeting the requirement of depreciation allowable at the same rate. The value of the block asset increases and the depreciation is to be given on the aforesaid value, which is to be treated as written down value. Individual assets lose their identity from that very moment it becomes inseparable part of block asset insofar as calculation of depreciation is concerned. Fusion of various assets into the block asset gets disturbed only when eventuality contained in clause (iii) of Section 32 takes place, viz., when a particular asset is sold, discarded or destroyed in the previous year (other than the previous year in which first brought in use). Even in that event, the amount by which the moneys payable in respect of that particular building, machinery, etc. together with the amount of scrap value is to be deducted from total written down value of the 'block asset'. 32. Once we understand and appreciate ....
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....achinery were impaired and not being put to use. It has been explained before us that the production of two-three wheeler tyres was abandoned by the assessee and hence the non-use of such machinery. Nevertheless, the assets in question are forming part of block of assets and there is no requirement of law, as discussed in the earlier paragraphs to ensure that each of the item of assets comprised in the 'block of asset' is put to use in order to claim depreciation. Therefore, considering the above discussion, in our view, the CIT (A) made no mistake in allowing assessee's claim for depreciation in relation to part of the machinery relating to the manufacture of two-three wheeler tyres. 20. Before parting, we may also refer to the decisions of the Hon'ble Bombay High Court in the case of Dinesh Kumar Gulabchand Agrawal vs. CIT, 267 ITR 788 and the Hon'ble Karnataka High Court in the case of DCIT vs. Yelama Daseppa Hospital, 290 ITR 253 which were relied upon by the Assessing Officer to deny the claim of the assessee. The CIT (A) has distinguished the above decisions and we do not find any infirmity in such stand of the CIT(A). In so far as the aforesaid decisions are concern....
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....N/2013 dated 27/02/2015 had considered an identical issue and relying on the judgment of the Hon'ble High Court (supra), the stand of the assessee has been upheld. In this context, the relevant discussion by the Hon'ble Gujarat High Court in the case of General Motors India Pvt. Ltd.(supra) reads as under:- "30. The last question which arises for consideration is that whether the unabsorbed depreciation pertaining to the assessment year 1997-98 could be allowed to be carried forward and set off after a period of eight years or it would be governed by section 32 as amended by the Finance Act, 2001 ? The reason given by the Assessing Officer under section 147 is that section 32(2) of the Act was amended by the Finance (No. 2) Act of 1996, with effect from the assessment year 1997-98 and the unabsorbed depreciation for the assessment year 1997-98 could be carried forward up to the maximum period of eight years from the year in which it was first computed. According to the Assessing Officer, eight years expired in the assessment year 2005-06 and only till then, the assessee was eligible to claim unabsorbed depreciation of the assessment year 1997-98 for being carried forward a....
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....ssessable for that assessment year; (iii) if the unabsorbed depreciation allowance cannot be wholly set off under clause (i) and clause (ii), the amount of allowance not so set off shall be carried forward to the following assessment year, and- (a) it shall be set off against the profits and gains, if any, of any business or profession carried on by him and assessable for that assessment year; (b) if the unabsorbed depreciation allowance cannot be wholly so setoff, the amount of unabsorbed depreciation allowance not so set off shall be carried forward to the following assessment year not being more than eight assessment years immediately succeeding the assessment year for which the aforesaid allowance was first computed: Provided that the time limit of eight assessment years specified in subclause (b) shall not apply in case of a company for the assessment year beginning with the assessment year relevant to the previous year in which the said company has become a sick industrial company under sub-section (1) of section 17 of the Sick Industrial Company (Special Provisions) Act, 1985 (1 of 1986), and ending with the assessment year relevant to the....
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....r section 32 shall be mandatory. 30.3 Under the existing provisions, no deduction for depreciation is allowed on any motor car manufactured outside India unless it is used (i) in the business of running it on hire for tourists, or (ii) outside in the assessee's business or profession in another country. 30.4 The Act has allowed depreciation allowance on all imported motor cars acquired on or after 1st April, 2001. 30.5 These amendments will take effect from the 1st April, 2002, and will, accordingly, apply in relation to the assessment year 2002-03 and subsequent years." 37. The Central Board of Direct Taxes Circular clarifies the intent of the amendment that it is for enabling the industry to conserve sufficient funds to replace plant and machinery and accordingly the amendment dispenses with the restriction of eight years for carry forward and set off of unabsorbed depreciation. The amendment is applicable from the assessment year 2002-03 and subsequent years. This means that any unabsorbed depreciation available to an assessee on the 1st day of April, 2002 (the assessment year 2002-03), will be dealt with in accordance with the provisions ....
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.... the next succeeding year. Where there is current depreciation for such succeeding year the unabsorbed depreciation is added to the current depreciation for such succeeding year and is deemed as part thereof. If, however, there is no current depreciation for such succeeding year, the unabsorbed depreciation becomes the depreciation allowance for such succeeding year. We are of the considered opinion that any unabsorbed depreciation available to an assessee on the 1st day of April, 2002 (the assessment year 2002-03), will be dealt with in accordance with the provisions of section 32(2) as amended by the Finance Act, 2001. And once Circular No. 14 of 2001 clarified that the restriction of eight years for carry forward and set off of unabsorbed depreciation had been dispensed with, the unabsorbed depreciation from the assessment year 1997-98 up to the assessment year 2001-02 got carried forward to the assessment year 2002-03 and became part thereof, it came to be governed by the provisions of section 32(2) as amended by the Finance Act, 2001, and were available for carry forward and set off against the profits and gains of subsequent years, without any limit whatsoever. ....