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TMI Blog2018 (2) TMI 2059X X X X Extracts X X X X X X X X Extracts X X X X ..... ant by Sh. Nageshwar Rao, Sr. Adv Sh. Parth, Adv Respondent by Sh. Sanjay I Bara, CIT DR ORDER PER SUCHITRA KAMBLE, JM This appeal has been filed by the assessee against the order dated 22/12/2014 passed by Assessing Officer u/s 143(3) read with Section 144 of the Income Tax Act. 2. The assessee company filed its revised return of income on 30.11.2011 declaring total income of ₹ 59,22,60,532. Since the assessee company had undertaken international transactions with its associated enterprises, a reference was made by the Assessing Officer (AO) to the Transfer Pricing Officer, New Delhi, under section 92CA(1). Vide order dated 31.03.2010, the Transfer Pricing Officer (TPO) proposed an addition of ₹ 47,26,39,889 and the AO vide his draft assessment order proposed to assess the taxpayer at an income of ₹ 1,08,38,06,550. Aggrieved by the above action of the AO, the assessee filed the grounds of objection before the DRP. The DRP 3. The Ld. AR submitted that as related to depreciation on fixed assets the same is covered by the assessee s own order for Assessment Year 2009-10 being ITA No. 2333/Del/2014 dated 22/12/2016. The Tribunal held as un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .43 crore, against the transacted value of ₹ 33.50 crore. Thereafter, ITA No.l453/Del/2014 26 rectification application was filed u/s 154 of the Act which was disposed of by the AO vide his order dated 27.03.2014 reducing the income with 'Cost of old fixed assets by ₹ 12.20 crore and adding depreciation of ₹ 3.72 crore. Another rectification application was filed, which was also disposed of by the AO vide his order dated 26.9.2014, reducing the total income to ₹ 25.48 crore from ₹ 40.74 crore. The assessee is aggrieved against the addition made on account of this international transaction. 15.2. We have heard the rival submissions and perused the relevant material on record. It is noticed that the assessee purchased certain fixed assets from its AE with the declared value of ₹ 33.50 crore. In our considered opinion the rightly reported Purchase of fixed assets with the transacted value as an international transaction, since the same is covered within the definition given in sub-section (1) of section 92B, which provides that international transaction means a transaction between two or more associated enterprises, either or both of who ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d assets is a capital transaction, this, in itself, does not affect the total income of the assessee. It is only the off- ITA No.1453/Del/2014 29 shoot of such transaction in the capital field, being depreciation allowance on such ALP of the transaction, which affects the total income. To illustrate, if a fixed asset is purchased by an enterprise from its AE for a sum of ₹ 100 and rate of depreciation on such asset is 10%, then the will charge depreciation amounting to ₹ 10 in its account. If the ALP of such transaction is determined at ₹ 80, then the difference of ₹ 20 cannot be considered as income. Rather, the amount of depreciation will be restricted to ₹ 8 instead of ₹ 10, thereby increasing the total income by ₹ 2. When we advert to the facts of the extant case, it is found that the TPO has rightly held to the effect that it is the amount of depreciation on the purchase of such fixed assets, which will be considered for making addition and not the difference between the transacted value and the ALP determined at Nil. 15.5. Ordinarily an international transaction of purchase of fixed assets by an assessee engaged in a manufacturi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee is getting mark-up of 13% the amount of deprecation at ₹ 10 in our above hypothetical example will fetch remuneration of ₹ 11.30. If the amount of depreciation is reduced to Nil, the amount of income to ITA No.1453/Del/2014 32 that extent will also be Nil, because the mark-up can be applied only if there is depreciation cost to the assessee. In other words, the transactions of depreciation on one hand and the resultant revenue on the other, go hand in hand. In such a case, where the income is directly based on the costs incurred including depreciation, then these two transactions become closely linked' transactions, eligible for processing under the TP provisions on a combined basis. It is illogical to compute the ALP of the transaction of purchase of fixed assets and consequently reduce or nullify the amount of depreciation allowance de hors the consideration of international transaction of the revenue from AE, which is equal to depreciation as claimed with mark-up. Both the transactions of claim of depreciation allowance and revenue of depreciation with mark-up have to be seen jointly. The TPO in the present case has simply reduced the amount of deprecation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... will also result in under realization of revenue for IT enabled service by ₹ 120 (i.e. recovery of cost of ₹ 100 plus profit mark up of ₹ 20). In effect thus, the taxability in the hands of the assessee, in such a situation, will go up by ₹ 100 as an ALP adjustment, but then income of the assessee, from IT enabled service revenue, will also stand reduced by I.T.A. No. 1085/Del/2016 Assessment year: 2011-12 Page 6 of 7 ₹ 120. Section 92(3) is quite clear and categorical in this regard. It states that (t)he provisions of this section shall not apply in a case where the computation of income under sub-section (1)has the effect of reducing the income chargeable to tax or increasing the loss, as the case may be, computed on the basis of entries made in the books of account in respect of the previous year in which the international transaction was entered into . Section 92(1), in turn, states that (a)ny income arising from an international transaction shall be computed having regard to the arm's length price . What follows is thus that when, as a result of computation of income on the basis of arm s length price, the income of the assessee is lowered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sis as it is evident from the agreement as per clause 4 of the said agreement and fee payable under this agreement, detailed at page No. 311 of the paper book in para 1 as the profit is measured as margin between Revenue on the total cost incurred for providing the same (including an appropriate allocation of in-direct cost) a reasonable profit is determined with reference similar companies engaged in similar activities and is currently 10%. . This compensation model of business of the assessee has not been disputed by the Id. TPO. In this regard it is pointed out that the assessee had purchased from its AEs assets worth ₹ 8,00,04,512/-. The Id. TPO required the assessee to furnish WDV of these assets in the books of the account of the AE making it clear that failure to furnish such details would lead to determination of the arm s length value of the Transaction at NIL'. The submission of the assessee remained that the Impact of the transaction on the tax payers profit and loss account is through depreciation charged on these assets. Considering that the tax payer is remunerated for depreciation and other costs incurred in provisions of TRS services on a cost plus basi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Administrations. Paras 3.48 3.49 under Chapter III para A.6.1 of the said Guidelines titled Different types of comparability adjustments spoke of the need to eliminate differences that may arise from different accounting practices between controlled and uncontrolled transactions. In particular, it was noted under para 3.49 that a significantly different level of relative working capital between the controlled and uncontrolled parties may result in further investigation of the comparability characteristics of the potential comparable. Mr. Singh submitted that the ITAT erred in disagreeing with the TPO, who had characterised the outstanding receivables as an international transaction by itself which required benchmarking. 10. The Court is unable to agree with the above submissions. The inclusion in the Explanation to Section 92B of the Act of the expression receivables does not mean that de hors the context every item of receivables appearing in the accounts of an entity, which may have dealings with foreign AEs would automatically be characterised as an international transaction. There may be a delay in collection of monies for supplies made, even beyond the agreed l ..... X X X X Extracts X X X X X X X X Extracts X X X X
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