2018 (8) TMI 2105 - AT - Income Tax

TP adjustment with respect to interest on delayed payments from the AE - receivables outstanding beyond the agreed period - Assessee argued non-charging of interest in respect of extended credit period cannot be held as an international transaction provided the assessee was giving similar treatment to both AEs and non AEs - HELD THAT - As decided in Kusum Health Care Pvt. Ltd 2017 (4) TMI 1254 - DELHI HIGH COURT delay in collection of monies even beyond the agreed period will have to be investigated on a case to case basis. It has also been laid down that the TPO will have to make a proper enquiry to discern a pattern which could indicate that the arrangement reflects an international transaction intended to benefit the AE in some way. It has also been held that where the assessee has already factored in the impact of receivables on the working capital, any further adjustment only on the basis of outstanding receivables would distort the picture. This aspect will have to be necessarily re-examined by the AO/TPO before any such adjustment is made. It has also been submitted by the Ld. AR that the impact of the outstanding receivables has been factored in the working capital adjustment. This aspect also requires verification. We restore this issue to the file of the AO/TPO for the purpose of re-examining and re-considering the issue in light of the ratio of the judgment of the Hon ble Delhi High Court in the case of Principal CIT vs. Kusum Health Care Pvt. Ltd (supra) and pass a speaking order as per law after giving proper opportunity to the assessee. Disallowance of depreciation - assessee must use the asset for the purposes of business - HELD THAT - The issue is squarely covered in favour of the assessee by the judgment of the Hon ble Apex Court in the case of ICDS Ltd. 2013 (1) TMI 344 - SUPREME COURT held that as long as the asset is utilized for the purpose of business of the assessee, the requirement of section 32 will stand satisfied, notwithstanding nonusage of the asset itself by the assessee - it considered the phrase 'use for the purpose of business' in the case of liquidators of Pursa Ltd. 954 (2) TMI 1 - SUPREME COURT The Hon ble Apex Court pointed out that the critical words which are essentially constituent for the purpose of considering the claim of the assessee was machinery or plant used for the purposes of business, profession or vocation . The words used for the purposes of business obviously means used for the purpose of enabling the owner to carry on the business and earn profits in the business. We find no reason to interfere with the findings of the Ld. CIT (A) on the issue and dismiss the grounds raised by the Department.

Summary

Issues Involved:
1. Transfer pricing adjustment for interest on delayed payments from Associated Enterprises (AE).
2. Disallowance of depreciation on plant and machinery not used by the assessee company.

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment for Interest on Delayed Payments from AE:

The assessee, engaged in trading personal care products, filed returns declaring losses and nil income for assessment years 2008-09, 2009-10, and 2010-11. The Assessing Officer (AO) made transfer pricing adjustments for non-charging of interest on delayed payments from AE. For the year 2008-09, the adjustment was Rs. 2,25,50,540/-, for 2009-10 it was Rs. 1,58,33,490/-, and for 2010-11 it was Rs. 1,59,24,926/-. The assessee contended that the transactions were at arm’s length and that the interest on overdue receivables should not be treated as a separate international transaction. They argued that the receivables were already factored into the working capital adjustments and cited various judicial precedents supporting their stance. The ITAT referred to the Delhi High Court judgment in Principal CIT vs. Kusum Health Care Pvt. Ltd., which emphasized that each case must be investigated individually to determine if the delayed receivables constitute an international transaction. The ITAT directed the AO/TPO to re-examine the issue, considering the impact of receivables on working capital and whether the arrangement benefits the AE.

2. Disallowance of Depreciation on Plant and Machinery:

For the assessment year 2010-11, the AO disallowed Rs. 5,31,53,415/- as depreciation on plant and machinery, claiming they were not used by the assessee but by M/s Rialto Enterprises Pvt. Ltd. The Commissioner of Income Tax (Appeals) [CIT (A)] allowed the depreciation, stating that the machinery was used for the business of the assessee, even if not directly by them. The ITAT upheld the CIT (A)'s decision, relying on the Supreme Court judgment in ICDS Ltd. vs. CIT, which clarified that assets need not be used by the assessee themselves but must be used for the business purpose. The ITAT confirmed that the assessee met the conditions under Section 32 of the Income Tax Act, 1961, as the machinery was owned and used for business purposes, even though it was operated by another entity under an agreement.

Final Judgment:

The ITAT allowed the assessee's appeals for statistical purposes, directing a re-examination of the transfer pricing adjustments by the AO/TPO. The department's appeal regarding the disallowance of depreciation was dismissed, affirming the CIT (A)'s decision to allow the depreciation claim. The order was pronounced on 23rd August 2018.