2019 (6) TMI 660 - AT - Income Tax

Disallowance of depreciation on equipment leased under financial lease arrangement - assessee was asked to produce copies of agreements and that the assessee had only produced a few of them - HELD THAT - We set aside the issue to the file of the AO for fresh adjudication in accordance with law. The assessee is directed to produce copies of those agreements which the AO may call for. The AO shall examine these agreements and if the terms conditions mentioned in these agreements are similar to the terms and conditions mentioned in the agreements considered by in the case of ICDS Ltd. 2013 (1) TMI 344 - SUPREME COURT and if there are no material variations in the contracts, then depreciation has to be granted to the assessee as claimed. TP adjustment - payments made for administrative support services - HELD THAT - Admittedly, this issue is covered in favour of the assessee by an order of the Tribunal in the assessee s own case for the AY 2008-09, AY 2009-10 and AY 2010-11 2014 (12) TMI 890 - ITAT BANGALORE where this very same issue was examined. The Tribunal has set aside the matter to the file of the TPO with certain directions. Consistent with the view taken therein, we restore the matter to the file of the TPO for fresh adjudication in accordance with the law. Determination of ALP of international transactions for Purchase of equipment for financial lease from AE - MAM selection - HELD THAT - We find strength in the argument of the assessee that the purchase price of the equipment cannot be determined based on ROCE adopting TNMM as the MAM. This does not appear to be a correct method. CUP is a more direct method and when internal CUP is available for determination of ALP, it would be the most direct method and this, in our view, has to be adopted as the MAM. As submitted cost of imported equipment is the basis on which the assessee determines the rate of return to be charged from the ultimate customer and that if the price of the purchase is inflated, then the rate of return would also be high. Only adjustments that could be made is on account of depreciation on these assets, as this is the only item of expenditure that affects the profit loss account. We would not express any view on this argument. We set aside the matter to the file of the AO for fresh adjudication in accordance with the law. The AO shall, without being influenced with the methodology adopted by the assessee in its TP study, independently decide as to what is the MAM for determination of ALP for the international transaction of purchase of equipment for financial lease from AE. - set aside the matter to the file of AO for fresh adjudication in accordance with the law.

Summary

Issues Involved:
1. Allowability of the claim for depreciation on assets given on financial lease.
2. Transfer Pricing (TP) adjustment on "Provision of management services" for AY 2011-12.
3. Determination of arm's length price (ALP) and validity of the consequent TP adjustment for the international transaction of "Purchase of equipment for financial lease from Associate Enterprise (AE)" for AY 2013-14.

Issue-wise Detailed Analysis:

1. Allowability of the Claim for Depreciation on Assets Given on Financial Lease:
The assessee, a Non-Banking Financial Company (NBFC), claimed depreciation on assets provided under financial lease arrangements. The Assessing Officer (AO) did not follow the binding judgment of the Supreme Court in the case of ICDS Ltd. v. CIT, instead relying on an unrelated judgment. The Tribunal reversed the AO's findings, emphasizing adherence to the Supreme Court's decision in ICDS Ltd. The Tribunal directed the AO to re-examine the financial lease agreements to ensure they align with the terms considered by the Supreme Court. The issue was remanded to the AO for fresh adjudication, with instructions for the assessee to produce the necessary agreements.

2. TP Adjustment on "Provision of Management Services" for AY 2011-12:
For the assessment year 2011-12, the issue of TP adjustment concerning payments for administrative support services was addressed. The Tribunal noted that this issue had been previously examined and decided in favor of the assessee for earlier assessment years (2008-09, 2009-10, and 2010-11). Consistent with past decisions, the Tribunal restored the matter to the file of the Transfer Pricing Officer (TPO) for fresh adjudication, following directions from earlier orders.

3. Determination of ALP and Validity of TP Adjustment for "Purchase of Equipment for Financial Lease from AE" for AY 2013-14:
The assessee used the Transactional Net Margin Method (TNMM) with Return on Capital Employed (ROCE) as the Profit Level Indicator (PLI) to determine the ALP for equipment purchased from its AE. The TPO rejected this method, citing defects such as the use of outdated financial data and inappropriate comparables. The TPO's findings were upheld by the Dispute Resolution Panel (DRP).

The assessee argued that the Comparable Uncontrolled Price (CUP) method should be the Most Appropriate Method (MAM) for determining the ALP of the equipment, as it directly relates to the transaction. The Tribunal agreed that the TNMM with ROCE at the entity level was not suitable for determining the purchase price of the equipment. The Tribunal emphasized that adjustments should be restricted to the quantum of international transactions with the AE and remanded the matter to the AO for fresh adjudication. The AO was instructed to independently determine the MAM for the international transaction and consider all arguments presented by the assessee.

Conclusion:
Both appeals were allowed for statistical purposes, with directions for fresh adjudications by the AO. The Tribunal emphasized adherence to the Supreme Court's decision in ICDS Ltd. for depreciation claims and directed a re-evaluation of the TP adjustments using the appropriate methods.