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TMI Blog2023 (3) TMI 1300X X X X Extracts X X X X X X X X Extracts X X X X ..... on 92CA(1) to TPO to determine the arm s length price of the international transactions entered into - HELD THAT:- Since the funds are borrowed in USD and advanced in USD the learned CIT(A) came to the conclusion that the question of currency and exchange risks is minimal and therefore, only risk that needs to be factored in was the lending risks by the assessee to its AE. Accordingly, CIT(A) computed the arm s length rate of interest on loan granted to AE at 8.375% i.e. rate of FCCB borrowings of 7.375% + markup of 1% for other lending rates. Since it is undisputed that advance was made by the assessee to its AE out of the funds generated from FCCB, therefore, we are of the considered view that the learned CIT(A) was right in considering the FCCB compound rate of 7.375% as the base rate. Since the funds have been borrowed in USD and also advanced in USD, the currency and exchange risks are minimised and the only risk to be considered is the lending risk for determining the markup. The learned CIT(A) considered 1% markup as an appropriate markup in the above circumstances. No infirmity in the impugned order in treating 7.375% plus markup of 1% as the arm s length rate of inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he tax authorities. 3. On the facts and circumstances of the case and in law, the Learned CIT(A) erred in holding the AO's decision of charging a markup of 3% as not reasonable without giving any justifiable reason before arriving at this mark up of 1% instead of 3% as decided by the TPO in his order, with proper justification of the same given therein. The appellant craves to leave, add, amend and / or to alter any of the ground of appeal, if need be. 4. The issue arising in grounds No. 1 and 2, raised in Revenue s appeal, is pertaining to the deletion of disallowance of depreciation on editing equipment. 5. The brief facts of the case as emanating from the record are: The assessee is engaged in the business of postproduction of films, editing graphics, scanning and recording etc., and shooting equipment rental. For the year under consideration, the assessee filed its return of income on 14/10/2010 declaring a total income of Rs. 18,20,45,521 under normal provisions of the Act. During the assessment proceedings upon perusal of details filed by the assessee, it was observed that the assessee has claimed depreciation on computer-based plant and machinery at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n and delete the addition of Rs 3,15,95,793/- made in this year. These grounds are accordingly, allowed. 2.4 The assessee's disputed claim for depreciation of Rs 4,02,35,696/-u/s, 32 of the IT Act 1951, read with Rule 5 of the IT. Rules, 1962 and the Appendix-1 falls in two categories, depreciation rate of 60% first on opening written down value of editing equipment classified as computer based equipments and second one on additions to editing equipments classified as computer based equipments. As regards, the claim for depreciation on opening Written Down Value of computer based editing and recording equipments @ 60% under item 5 of part A-III (5) of New Appendix-1 of Rs 5,36,47,595 for AY 2010-11 concerned, it falls outside the purview of this order since the issue/ issues were part and parcel of the addition made to fixed assets during earlier assessment years from AY 2004-05 to AY 2009-10 and are pending adjudication and/or have already been adjudicated by my predecessors and hence question of adjudication the allowability of depreciation at the rate of 60% under item part A-III(5) of new Appendix I to Rule 5 of IT Rules, 1962 read with section 32 of the IT Act 1961 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... items of plant and machinery that these are classifiable as computers within the general meaning of it as well as under the IT Act, 1961 and Information Technology Act, 2008. It may be mentioned here that there are different uses for different items which are generally classifiable as 'computers. For example a hard disc or compact disc or pen drive can be used for data storage and Data Storage can consist of typed pages or sound recordings, of video recordings or pictures, however, the item is classifiable as computer hardware and if it is a coded program in any of the computer languages, it remains and is classifiable as computer software . Uses for the computer hard ware or computer software may be different and may form part of the accessory/accessories, however, these items of plant and machinery are clearly classifiable as computer hardware and computer software only within the general meaning of the term computers as per the IT Act, 1961 unless a specific definition for an item of plant and machinery is given under the IT Act, 1961 and I.T. Rules, 1962. In nutshell, the items of additions of Rs. 97,56,566/- for AY 2010-11 are classifiable as computers within ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the rate of 60%, whereas in respect to other two categories depreciation has been claimed at the rate of 25%. We find that the relevant assets are either computer or computer software as certified by charter engineer vide his report dated 12-11-2014 certifying these assets as computers. We find that this issue is also covered by Tribunal decision in ITA No. 6203/Mum./2014 for AY 2005-06, although the issue was on reopening but Tribunal has given a finding on merits also in Para 6 and the relevant portion of the Para 6 reads as under:- In the present case, apart from the fact that we observe no lapse on the part of the assessee to disclose fully and truly all the material facts necessary for the computation of its income, and neither has any been pointed to us, the claim has been subject to verification by the A.O. in the original proceedings. Further, though there is no discussion by him in the assessment order, he can only be considered as conscious and alive to this claim as the assessee had clearly bifurcated the editing equipments into two components, i.e., recorder based/others and computer based, claiming depreciation at the general and the enhanced rate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no infirmity in the impugned order passed by the learned CIT(A) on this issue. As a result, grounds No.1 and 2 raised in Revenue s appeal are dismissed. 9. The issue arising in ground No. 3, raised in Revenue s appeal, is pertaining to transfer pricing adjustment. 10. The brief facts of the case as emanating from the record are: The AO made a reference under section 92CA(1) of the Act to the Transfer Pricing Officer ( TPO‟) to determine the arm s length price of the international transactions entered into by the assessee during the year under consideration. During the transfer pricing assessment proceedings, it was observed that the assessee had advanced Rs. 23 crore to Prime Focus London PLC (its AE) on 31/03/2009. Accordingly, the assessee was asked as to why this share application money should not be treated as deemed loan and notional interest should not be charged. In its response, the assessee submitted that this amount was shown under loans and advances but in fact, this was paid as share application money to its AE. Due to certain business and commercial decisions considered by the management, the same amount could not be converted into share capital in the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,000 to its AE-PFPUK out of foreign currency convertible bonds (FCCB) funds of USD 5,50,00,000 raised in UK at the compound rate of 7.375% during December, 2007 as share application moneys, however the shares could not be allotted to the assessee and hence it remained in the books of the assessee as share application moneys. However, it also appears from the records that assessee has subsequently treated this amount of USD 45,00,000 as loan to its AE-PFPUK and charged interest at the LIBOR rate of interest from its AE from AY 2012-13 onwards. Thus it is crystal clear that the amount of advance of USD 45,00,000 which came out of the borrowed funds of USD 55,00,0000 was nothing but a loan camouflaged as share application money right from the beginning to escape the rigors of transfer pricing regulations under section 92C to 92CA of the IT Act, 1961. Thus it is clearly established beyond doubt and also by statements of the assessee and its subsequent actions that the amount of USD 45,00,000 advanced to its AE-PFPUK was a loan and interest was chargeable thereon right from the beginning. Only question now remains is what should be the rate of interest that should be charged on the loan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed at the rate of 7.35% in London markets and since the funds were borrowed in US Dollars and advanced in US Dollars, the question of currency and exchange risks were minimized and only risk to be factored in was the lending risks by the assessee to its AE-PFPUK. Therefore it is fair. reasonable and appropriate if rate of interest of 8.375%, that is, rate of FCCB borrowings of 7.375% plus 1% for other lending risks, is adopted for the purposes of charging interest on the US Dollars of 45,00,000 advanced to its subsidiary for the period of subsistence of the loan during the previous year relevant to AY 2010-11 In nutshell, the assessee's appeal is partly allowed on Ground Nos. 5 to 7. Being aggrieved with the reduction in markup percentage, the Revenue is in appeal before us. 11. Having considered the submissions of the learned DR and perused the material available on record, we find that the assessee raised an amount of USD 5,50,00,000 in the UK via FCCB in December 2007 at a compound rate of 7.375%. Out of this fund, the assessee advanced an amount of Rs. 23 crores (equivalent to USD 45,00,000) as share application money to its UK-based AE. However, the shares could no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1% markup as an appropriate markup in the above circumstances. In view of the above, we find no infirmity in the impugned order in treating 7.375% plus markup of 1% as the arm s length rate of interest in respect of loan advanced by the assessee to its AE. Accordingly, ground No. 3 raised in Revenue s appeal is dismissed. 12. In the result, the appeal by the Revenue is dismissed. ITAs No. 4936 and 4952/Mum./2017 Revenue and Assessee s appeal A.Y 2011-12 13. In its appeal, the Revenue has raised the following grounds: 1. On the facts and circumstances of the case and in law, the Learned CIT(A) erred in allowing the assessee's claim for depreciation on the additions to plant and machinery made during the year totaling to Rs. 14,77,35,013/ without appreciating the fact that the AO was completely justified in disallowing the assessee's claim u/s the spirit of Section 32 of the Income Tax Act, 1961? 2. On the facts and circumstances of the case and lon law, the Learned CIT(A) erred in allowing assessee's claim for depreciation @ 60% in respect of Opening Written Down Value as on 01.04.2010 to the extent of directions given by CIT(A), Mumba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arged interest at the rate of 7.4% per annum. The assessee was asked to show cause as to why weighted cost of borrowed capital +3% should not be charged on loan transaction instead of 7.4% as charged by the assessee. In response thereto, the assessee submitted that it has advanced loans of USD 10.75 million during the concern year, and out of the above, loan amounting to USD 7.75 million is given out of the bank account maintained by the assessee in foreign currency in the UK. The balance loan of USD 3 million is funded out of the proceeds from the issuance of equity shares by the company under the private placement. The assessee further submitted that it has raised FCCB of USD 55 million for the purpose of making strategic acquisitions/investment outside India and as such the FCCB proceeds were kept in a bank account maintained in foreign currency (i.e. USD) outside India. Therefore the aforesaid share application money amounting to USD 4.6 million and loans amounting to USD 7.75 million have been given out of the aforesaid ofshore bank account maintained in foreign currency. The assessee further submitted that there is no conversion risk as the assessee has used FCCB proceeds whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lending risks. In respect of the loan transaction of USD 7.75 million to its AE, the learned CIT(A) held that the assessee is not correct in contesting that the rate of interest charged by it at 7.4% is adequate for the reason that there has to be some markup to be added to arrive at the ALP in a transaction between the assessee and the AE. The learned CIT(A) further held that the TPO s decision of charging markup of 3% is also not reasonable. Accordingly, the learned CIT(A) considered the arm s length interest at 8.51% (i.e. 7.51% +1%). As regards the loan transaction of USD 3 million granted to the AE, the learned CIT(A) directed to consider arm s length interest of 9.05% (i.e. 8.05% +1%). Being aggrieved with the reduction in arm s length rate of interest, the Revenue is in appeal before us. On the other hand, the assessee is aggrieved against treating the transaction of share application money as a loan to the AE. 21. Having considered the submissions of the learned DR and perused the material available on record, we find that the learned CIT(A) noted the fact that the assessee had advanced a sum of USD 45,00,000 as share application money to its UK-based AE out of FCCB fun ..... X X X X Extracts X X X X X X X X Extracts X X X X
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