BT India Pvt. Ltd., New Delhi V. DCIT, New Delhi

ITA 566/DEL/2015

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 3269 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-02-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I1
• Next Hearing Date: 19-07-2017
• Assessment Year: 2010-2011
• Appeal Filed On: 29-01-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SANJAY I BARA
• Keywords: Depreciation; Transfer pricing; Principle of natural justice; International transaction; Additional evidence; Question of law; Revised return
• Section: 143(3); 92B; 144; 154

Judgement Text

1 ITA NO. 566/DEL/2015 IN THE INCOME TAX APPELLA TE TRIBUNAL DELHI BENCH: I-1 NEW DELHI BEFORE SHRI R. S. SYAL, VICE PRESIDENT AND MS SUCHITRA KAMBLE, JUDI CIAL MEMBER I.T.A .NO. 566/DEL/20 15 (A.Y 2010-11) BT INDIA PVT. LTD. 11 TH FLOOR, EROS CORPORATE TOWER, NEHRU PLACE NEW DELHI AABCC4785E (APPELLANT) VS DCIT CIRCLE-3(1) NEW DELHI (RESPONDENT) APPELLANT 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) R EAD 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 RS.59,22,60,532. SINCE TH E ASSESSEE COMPANY HAD UNDERTAKEN INTERNATIONAL TRANSACTIONS WITH ITS ASSO CIATED ENTERPRISES, A REFERENCE WAS MADE BY THE ASSESSING OFFICER (AO) TO THE TRANSFER PRICING OFFICER, NEW DELHI, UNDER SECTION 92CA(1). VIDE ORD ER DATED 31.03.2010, THE TRANSFER PRICING OFFICER (TPO) PROPOSED AN ADDITION OF RS.47,26,39,889 AND THE AO VIDE HIS DRAFT ASSESSMENT ORDER PROPOSED TO ASSE SS THE TAXPAYER AT AN DATE OF HEARING 28.11.2017 DATE OF PRONOUNCEMENT 26.02.2018 2 ITA NO. 566/DEL/2015 INCOME OF RS.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 DEPRECIA TION ON FIXED ASSETS THE SAME IS COVERED BY THE ASSESSEES OWN ORDER FOR ASS ESSMENT YEAR 2009-10 BEING ITA NO. 2333/DEL/2014 DATED 22/12/2016. THE TRIBUNAL HELD AS UNDER:- 3.4. HAVING GONE THROUGH THE ORDERS OF THE AUTHORI TIES BELOW, WE FIND THAT THE COMMON ISSUE INVOLVED IN THE CROSS APPEALS BEFORE US RELATED TO TRANSFER PRICING ADJUSTMENT ON INTERNATIONAL TRANSACTION OF PURCHASE OF FIXED ASSETS. THE SUBMIS SION OF THE ID. AR REMAINED THAT THE ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSE IN THE ABOVE-CITED DECISIONS OF DELHI B ENCH OF THE TRIBUNAL IN THE CASES OF CIENA INDIA PVT. LTD. (SUP RA) AND MERCER CONSULTING INDIA PVT. LTD. (SUPRA). HAVING G ONE THROUGH THESE DECISIONS, WE FIND THAT THE TRIBUNAL HAS DEAL T WITH AN IDENTICAL ISSUE IN THE CASE OF CIENA INDIA PVT. LTD . (SUPRA) VIDE PARA NOS. 15.1 TO 15.6 WHICH ARE BEING REPRODUCED HEREUNDER FOR A READY REFERENCE: 15.1. GROUND NOS. 5 AND 8 ARE IN RESPECT OF INTERN ATIONAL TRANSACTION OF 'PURCHASE OF CAPITAL GOODS. THE FACTUAL MATRIX APROPOS THIS ISSUE IS THAT THE ASSESSEE REPORTED AN INTERNATIONAL TRANSAC TION OF PURCHASE OF LIXED ASSETS WITH TRANSACTED VALUE OF RS.33,50,51, 611/-. THE TPO REQUIRED THE ASSESSEE TO SUBMIT BOOK VALUE OF THE G OODS SO IMPORTED IN THE BOOKS OF AE ALONG WITH THE DETAILS OF COSTING M ETHODOLOGY APPLIED. ITA NO. 1453/DEL/2014 25 THE ASSESSEE WAS ALSO CALL ED UPON TO FILE COPY OF INVOICES ALONG WITH THE MARKET PRICE OF THE SAME OR SIMILAR GOODS AT THE TIME OF PURCHASE. THE ASSESSEE SUBMITT ED VIDE ITS REPLY DATED 3.1.2013 THAT IT OPERATES ON A COST PLUS BASI S WHEREIN IT RECHARGES ALL ITS OPERATING COSTS INCLUDING DEPRECI ATION TO ITS AE ALONG WITH A MARK UP. HOWEVER, THE SPECIFIC INFORMATION C ALLED FOR BY THE TPO, WAS NOT SUBMITTED. IN THE ABSENCE OF SUCH DETA ILS, THE TPO COMPUTED THE ALP OF THIS INTERNATIONAL TRANSACTION AT NIL. AS REGARDS THE ADJUSTMENT U/S 92CA, THE TPO REQUIRED THE AO T O CALC ULATE PROPER DEPRECIATION O N FIXED ASSETS AS PER THE PROVISIONS OF THE ACT. THE DRP DIRECTED THE ASSESSEE TO SUBMIT ITEM-WISE PARTICULA RS FOR THE CLAIM 3 ITA NO. 566/DEL/2015 MADE BY IT WITH ALL THE DOCUMENTS/EVIDENCE/PROOF SH OWING THE VALUE OF ASSETS AS APPEARING IN THE AES BOOKS TO THE SATISF ACTION OF THE TPO. IN CASE OF FAILURE ON THE PART OF THE ASSESSEE TO COMP LY WITH THE ABOVE DIRECTIONS, THE DRP DIRECTED THAT THE ALP OF THE RE LEVANT ASSETS BE TAKEN AS NIL. THE ASSESSEE SUBMITTED CERTAIN DETAIL S ON SAMPLE BASIS BEFORE THE TPO. THE AO, IN THE FINAL ORDER, MADE AN ADDITION OF RS.32.07 CRORE BY DETERMINING THE ALP OF THIS TRANS ACTION AT RS.1.43 CRORE, AGAINST THE TRANSACTED VALUE OF RS.33.50 CRO RE. THEREAFTER, ITA NO.L453/DEL/2014 26 RECTIFICATION APPLICATION WAS F ILED 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 RS. 12.20 CRORE AND ADDING DEPRECIATION OF RS.3.72 CRORE. ANOTHER R ECTIFICATION APPLICATION WAS FILED, WHICH WAS ALSO DISPOSED OF B Y THE AO VIDE HIS ORDER DATED 26.9.2014, REDUCING THE TOTAL INCOME TO RS.25.48 CRORE FROM RS.40.74 CRORE. THE ASSESSEE IS AGGRIEVED AGAI NST THE ADDITION MADE ON ACCOUNT OF THIS INTERNATIONAL TRANSACTION. 15.2. WE HAVE HEARD THE RIVAL SUBMISSIONS AND P ERUSED THE RELEVANT MATERIAL ON RECORD. IT IS NOTICED THAT THE ASSESSEE PURCHASED CERTAIN FIXED ASSETS FROM ITS AE WITH THE DECLARED VALUE OF RS.33.50 CRORE. IN OUR CONSIDERED OPINION THE RIGHTLY REPORTED PURCHASE OF FIXED ASSETS WITH THE TRANSACTED VALUE AS AN INTERNATIONAL TRANSACTION, SINCE THE S AME IS COVERED WITHIN THE DEFINITION GIVEN IN SUB-SECTION (1) OF S ECTION 92B, WHICH PROVIDES THAT 'INTERNATIONAL TRANSACTION' MEANS A T RANSACTION BETWEEN TWO OR MORE ASSOCIATED ENTERPRISES, EITHER OR BOTH OF WHOM ARE NON- RESIDENTS, IN THE NATURE OF PURCHASE, SALE OR LEASE OF TANGIBLE OR ITA NO.L453/DEL/2014 27INTANGIBLE PROPERTY, OR SE CTION 92(1) STIPULATES THAT: ANY INCOME ARISING FROM AN INTERN ATIONAL TRANSACTION SHALL BE COMPUTED HAVING REGARD TO THE ARM'S LENGTH PRICE. THE MANNER OF COMPUTATION OF ARM'S LENGTH PRICE IS SET OUT IN SECTION 92C. SUB- SECTION (1) PROVIDES THAT THE ARM'S LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSACTION SHALL BE DETERMINED BY AN Y OF THE METHODS GIVEN IN THE PROVISION, BEING THE MOST APPROPRIATE METHOD, HAVING REGARD TO THE NATURE OF TRANSACTION OR CLASS OF TRA NSACTION ETC. AMONGST OTHERS, THERE IS COMPARABLE UNCONTROLLED PRICE (CUP ) METHOD AND TNMM. THE PRIMARY ONUS OF PROVING THAT THE INTERNAT IONAL TRANSACTION IS AT ALP, IS ALWAYS ON THE ASSESSEE. 15.3. REVERTING TO THE FACTS OF THE INSTANT CASE, W E FIND THAT THE ASSESSEE APPLIED TNMM AS THE MOST APPROPRIATE METHO D FOR SHOWING 4 ITA NO. 566/DEL/2015 THAT THIS INTERNATIONAL TRANSACTION WAS AT ALP. THE TPO HELD THAT THE CORRECT METHOD TO BE APPLIED WAS CUP AND AS SUCH TH E ASSESSEE WAS CALLED UPON TO GIVE UNCONTROLLED COMPARABLE INSTANC ES OF THE PURCHASE OF SIMILAR ASSETS, WHICH THE ASSESSEE FAILED TO DO. THIS LED THE TPO TO TREAT THE ALP OF THIS INTERNATIONAL TRANSACTION AT. NIL. NORMALLY, IF THE ITA NO.L453/DEL/2014 28 THE ASSESSEE FAILS TO GIVE ANY COMPARABLE INSTANCE, THEN IT BECOMES THE DUTY OF THE TPO TO SEARCH SOME COMPARABLE UNCONTROLLED INSTANCES AT HIS OWN AND AC CORDINGLY DETERMINE THE ALP OF THE INTERNATIONAL TRANSACTION. IN OUR VIEW, BOTH THE ASSESSEE AS WELL THE TPO WENT WRONG BY NOT DOING WH AT WAS REQUIRED TO BE DONE BY THEM. 15.4 ONCE THE ALP OF AN INTERNATIONAL TRANSACTION O F PURCHASE OF FIXED ASSETS IS DETERMINED, THEN THE DIFFERENCE BET WEEN THE TRANSACTED VALUE AND THE ALP DOES NOT DIRECTLY LEAD TO THE TRA NSFER PRICING ADJUSTMENT. AT THIS JUNCTURE, IT IS PERTINENT TO NO TE THE LANGUAGE OF SECTION 92(1) WHICH PROVIDES THAT ANY INCOME ARISIN G FROM AN INTERNATIONAL TRANSACTION SHALL BE COMPUTED HAVING REGARD TO THE ARM'S LENGTH PRICE. IT DOES NOT SAY THAT THE TOTAL INCOME IS TO BE COMPUTED IN ACCORDANCE WITH THE ALP. IT IS RIGHTLY SO BECAUSE T HE INTERNATIONAL TRANSACTIONS WHICH HAVE NO DIRECT BEARING ON THE TO TAL INCOME, CANNOT GIVE RISE TO ADDITION ON ACCOUNT OF DIFFERENCE BETW EEN THEIR TRANSACTED VALUE AND ALP. SINCE THE TRANSACTION OF PURCHASE OF FIXED ASSETS IS A CAPITAL TRANSACTION, THIS, IN ITSELF, DOES NOT AFFE CT THE TOTAL INCOME OF THE ASSESSEE. IT IS ONLY THE OFF- ITA NO.L453/DEL/2014 29 SHOOT OF SUCH TRANSACTION IN THE CAPITAL FIELD, BEING DEPRECIATIO N ALLOWANCE ON SUCH ALP OF THE TRANSACTION, WHICH AFFECTS THE TOTAL INC OME. TO ILLUSTRATE, IF A FIXED ASSET IS PURCHASED BY AN ENTERPRISE FROM ITS AE FOR A SUM OF RS.100 AND RATE OF DEPRECIATION ON SUCH ASSET IS 10 %, THEN THE WILL CHARGE DEPRECIATION AMOUNTING TO RS.10 IN ITS ACCOU NT. IF THE ALP OF SUCH TRANSACTION IS DETERMINED AT RS. 80, THEN THE DIFFERENCE OF RS.20 CANNOT BE CONSIDERED AS INCOME. RATHER, THE AMOUNT OF DEPRECIATION WILL BE RESTRICTED TO RS.8 INSTEAD OF RS.10, THEREB Y INCREASING THE TOTAL INCOME BY RS. 2. WHEN WE ADVERT TO THE FACTS OF THE EXTANT CASE, IT IS FOUND THAT THE TPO HAS RIGHTLY HELD TO THE EFFECT T HAT IT IS THE AMOUNT OF DEPRECIATION ON THE PURCHASE OF SUCH FIXED ASSETS, WHICH WILL BE CONSIDERED FOR MAKING ADDITION AND NOT THE DIFFEREN CE BETWEEN THE TRANSACTED VALUE AND THE ALP DETERMINED AT NIL. 15.5. ORDINARILY AN INTERNATIONAL TRANSACTION OF PU RCHASE OF FIXED 5 ITA NO. 566/DEL/2015 ASSETS BY AN ASSESSEE ENGAGED IN A MANUFACTURING OR TRADING BUSINESS IS REQUIRED TO BE DETERMINED ON CUP METHOD, WHICH I S USUALLY THE MOST APPROPRIATE METHOD IN SUCH CIRCUMSTANCES. THE TNMM ON ENTITY LEVEL ITA NO. 1453/DEL/2014 30 CANNOT BE APPLIED, BECAUSE THE TRANSACTION OF PURCHASE OF FIXED ASSETS CAN HAVE NO RELATION WI TH THE TRANSACTION OF PURCHASE OF RAW MATERIAL FROM AE OR SALES OF GOODS TO AES. RULE 10A OF THE IT RULES, DEFINES 'TRANSACTION AS INCLUDING 'A NUMBER OF CLOSELY LINKED TRANSACTIONS. THE HONBLE DELHI HIGH COURT IN ITS JUDGMENT OF MARCH, 2015 IN SONY ERICSSON MOBILE COMMUNICATIONS INDIA PVT. LTD. HAS HELD THAT THE RELATED TRANSACTIONS SHOULD BE CO NSIDERED JOINTLY FOR DETERMINING THEIR ALP. HOWEVER, IN ORDER TO CONSIDE R MORE THAN ONE INTERNATIONAL TRANSACTION AS ONE, IT IS SINE QUA NO N THAT SUCH TRANSACTIONS MUST BE CLOSELY AND NOT REMOTELY LINKE D. EVERY TRANSACTION DONE BY AN ENTERPRISE IS SOMEHOW OR THE OTHER LINKED WITH THE CARRYING ON OF THE BUSINESS. BUT IN ORDER TO BE ELIGIBLE FOR PROCESSING TWO OR MORE TRANSACTIONS JOINTLY FOR DETERMINING THEIR ALP, IT IS ESSENTIAL THAT THEY SHOULD BE CLOSELY LINKED. IF TWO TRANSACTIONS ARE N OT CLOSELY LINKED, THEN THEY CANNOT BE CONSIDERED JOINTLY. CONSIDERING THE ABOVE CASE OF A MANUFACTURER OR A TRADER, IT CANNOT BE HELD THAT TH E TRANSACTION OF PURCHASE OF FIXED ASSETS IS CLOSELY LINKED WITH THE PURCHASE OF RAW MATERIAL OR SALE OF FINISHED GOODS ETC. IN ITA NO.L 453/DEL/2014 31 SUCH A SCENARIO, IT BECOMES IMPORTANT TO EXAMINE THE TRA NSACTION OF PURCHASE OF FIXED ASSETS INDEPENDENT OF OTHER TRANSACTIONS. 15.6. HOWEVER, THE ABOVE RULE OF SCRUTINIZING INTER NATIONAL TRANSACTION OF PURCHASE OF FIXED ASSET AS INDEPENDE NT OF ALL OTHER TRANSACTIONS IS NOT UNIVERSAL. IT HAS ITS OWN EXCEP TIONS AS WELL. THE INSTANT CASE IS A GLARING EXAMPLE OF EXCEPTION TO T HE ABOVE RULE. IT IS SO FOR THE REASON THAT THE ASSESSEE IS GETTING REMUNER ATION FROM ITS AE AT COSTS INCURRED PLUS A PARTICULAR MARK-UP. THE COST BASE INCLUDES NOT ONLY DIRECT BUT ALL THE INDIRECT COSTS. THE AMOUNT OF DEPRECIATION ALLOWANCE ON FIXED ASSETS, INCLUDING THOSE PURCHASE D FROM AE, IS ALSO COMPENSATED WITH THE SAME MARK-UP. THUS WE CAN SAY THAT DEPRECIATION ALLOWANCE AND REMUNERATION TO THE ASSE SSEE ON SUCH DEPRECIATION ARE INSEPARABLE TRANSACTIONS. THE INCO ME IN THE SHAPE OF REMUNERATION TO THIS EXTENT DIRECTLY DEPENDS UPON T HE AMOUNT OF DEPRECATION ALLOWANCE. WHEN THE ASSESSEE IS GETTING MARK-UP OF 13% THE AMOUNT OF DEPRECATION AT RS.10 IN OUR ABOVE HYP OTHETICAL EXAMPLE WILL FETCH REMUNERATION OF RS. 11.30. IF THE AMOUN T OF DEPRECIATION IS REDUCED TO NIL, THE AMOUNT OF INCOME TO ITA NO.L453 /DEL/2014 32 THAT 6 ITA NO. 566/DEL/2015 EXTENT WILL ALSO BE NIL, BECAUSE THE MARK-UP CAN BE APPLIED ONLY IF THERE IS DEPRECIATION COST TO THE ASSESSEE. IN OTHER WORD S, 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 D IRECTLY BASED ON THE COSTS INCURRED INCLUDING DEPRECIATION, THEN THESE T WO 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 CONSEQU ENTLY REDUCE OR NULLIFY THE AMOUNT OF DEPRECIATION ALLOWANCE DE HOR S THE CONSIDERATION OF INTERNATIONAL TRANSACTION OF THE REVENUE FROM AE , WHICH IS EQUAL TO DEPRECIATION AS CLAIMED WITH MARK-UP. BOTH THE TRAN SACTIONS 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 ALLOWANCE TO NIL WITHOUT SIMULTANEOUSLY CONSIDERING THE REVENUE SIDE OF THIS TRANSACTION. I F WE CONSIDER THESE CLOSELY LINKED TRANSACTIONS OF DEDUCTION FOR DEPREC IATION ALLOWANCE AND REVENUE DUE TO DEPRECIATION IN UNISON, THE POSITION WHICH FOLLOWS IS THAT NO FURTHER ADDITION CAN BE MADE ON ACCOUNT OF TRANS FER PRICING ITA NO. 1453/DEL/2014 33 ADJUSTMENT DUE TO ONE-SIDED CONSID ERATION OF DEPRECIATION ALLOWANCE AT NIL. RATHER, THE DETERMIN ATION OF ALP OF THE INTERNATIONAL TRANSACTION OF PURCHASE OF FIXED ASSE TS, IN THE FACTS AND CIRCUMSTANCES OF THE INSTANT CASE, IS TAX NEUTRAL. AS SUCH, WE ORDER FOR THE DELETION OF ADDITION MADE BY DISALLOWING OR RED UCING THE AMOUNT OF DEPRECIATION ON THE ASSETS PURCHASED FROM AE. THIS GROUND IS ALLOWED. 3.5. AGAIN AN IDENTICAL ISSUE HAS BEEN DEALT WITH B Y THE TRIBUNAL IN THE CASE OF MERCER CONSULTING INDIA PVT. LTD. (SUPRA), THE RELEVANT PARA NO. 5 THEREOF IS BEING REPRODUCED BELOW:- 5. AS A COROLLARY TO THE ALP OF THE INTRA GROUP S ERVICES RECEIVED BY THE ASSESSEE BEING TREATED AS NIL, THE PRICE PAI D FOR THESE INTRA GROUP SERVICES IS REQUIRED TO BE TAKEN OUT FROM THE COMPUTATION OF REMUNERATION RECEIVABLE IN RESPECT OF IT ENABLED SE RVICES RENDERED BY THE ASSESSEE. THIS IS SO FOR THE REASON THAT THE PRICING OF IT ENABLED SERVICES IS ON THE COST PLUS 20% BASIS, WHI CH HAS BEEN UPHELD TO BE AT ARMS LENGTH PRICE BY THE DRP, AND, THEREFORE, ANYTHING REMOVED FROM THE COST WILL ALSO HAVE TO BE REMOVED FROM THE COMPUTATION OF AMOUNT RECEIVABLE FOR THE IT ENA BLED SERVICES RENDERED BY THE ASSESSEE. OF COURSE, AS FAR AS TPO IS CONCERNED, THE ACTION AT THAT LEVEL WAS, FROM THIS PERSPECTIVE , COULD HAVE BEEN 7 ITA NO. 566/DEL/2015 JUSTIFIABLE INASMUCH AS THE ALP MARGIN WAS TAKEN AT 29.53%, AS AGAINST 20% TAKEN BY THE ASSESSEE, AND, THEREFORE E VEN AFTER REMOVING SOMETHING FROM THE COST BASE, DUE TO INCRE ASE IN THE MARK-UP RATE, ALP OF THE SERVICES RENDERED COULD ST ILL BE' HIGHER VIS-A-VIS THE AMOUNT CHARGEABLE AFTER INCLUDING LER VIBES IN THE COST BASE. ONCE DRP DELETES THE ADJUSTMENT IN THE MARK-U P RATE ON COST PLUS BASIS, SUCH A POSSIBILITY CEASES TO EXIST. THE REFORE, IN THE PRESENT CIRCUMSTANCES, ANY ALP ADJUSTMENT IN THE CONSIDERAT ION FOR INTRA GROUP SERVICE, WHICH IS INCLUDIBLE IN THE COST BASE, PAID BY THE ASSESSEE WILL ACTUALLY RESULT IN EROSION OF TAX BASE, THE REDUCTI ON IN ALP OF CONSIDERATION FOR SUCH INTRA GROUP SERVICES BY RS 1 00 WILL ALSO RESULT IN UNDER REALIZATION OF REVENUE FOR IT ENABLED SERVICE BY RS 120 (I.E. RECOVERY OF COST OF RS 100 PLUS PROFIT MARK UP OF R S 20). IN EFFECT THUS, THE TAXABILITY IN THE HANDS OF THE ASSESSEE, IN SUC H A SITUATION, WILL GO UP BY RS 100 AS AN ALP ADJUSTMENT, BUT THEN INCOME OF THE ASSESSEE, FROM IT ENABLED SERVICE REVENUE, WILL ALSO STAND RE DUCED BY I.T.A. NO. 1085/DEL/2016 ASSESSMENT YEAR: 2011-12 PAGE 6 OF 7 RS 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 CAS E 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 INTERNATI ONAL 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 ARMS LENGTH PRICE, THE INCOME OF THE ASSESSEE IS LOWERED OR THE LOSS IS INCREASED, T HE PROVISIONS OF COMPUTATION OF INCOME ON THE BASIS OF ARMS LENGTH PRICE DO NOT COME INTO PLAY. VIEWED IN THIS PERSPECTIVE, WHEN WE EXAMINE THE FACTS OF THE PRESENT CASE, WE FIND THAT THE DETERMINATION OF ALP OF THE INTRA GROUP SERVICE AT NIL VALUE DOES LOWER THE PROFITS OF THE ASSESSEE INASMUCH AS THE REVENUE OF THE ASSESSEE FROM THE IT ENABLED SER VICES WILL REDUCE CORRESPONDINGLY, AND INFACT 20% MORE THAN THE ADJUS TMENT- AS A RESULT OF LOSS OF MARK UP AS WELL. THE ALP ADJUSTMENT OF R S 8,40,95,610 BY THE REVENUE AUTHORITIES IS, THEREFORE, ESSENTIALLY REQUIRED TO BE COUPLED WITH REDUCTION OF 10,09,14,732. THAT WOULD ERODE OU R TAX BASE, RATHER THAN AUGMENTING IT. THE COMPUTATION OF INCOME FROM INTERNATIONAL TRANSACTIONS ON THE BASIS OF ARMS LENGTH PRICE, IN THE GIVEN SITUATION, WOULD RESULT IN LOWERING THE INCOME OF THE ASSESSEE VIS-A-VIS THE INCOME 8 ITA NO. 566/DEL/2015 COMPUTED ON THE BASIS OF ENTRIES MADE IN THE BOOKS OF ACCOUNTS IN RESPECT OF THE PREVIOUS YEAR IN WHICH THE TRANSACTI ONS WERE ENTERED INTO. IN THE LIGHT OF THIS FACTUAL POSITION COUPLE D WITH THE RELIEF GRANTED BY THE DRP ON THE ALP ADJUSTMENT IN THE MARKUP RATE OF THE COST PLUS BASIS BILLING TO THE AE IN RESPECT OF REVENUES FOR THE IT ENABLED SERVICES, AND IN THE LIGHT OF THE PROVISIONS OF SECTION 92(3) , THE TRANSFER PRICING PROVISIONS CANNOT BE INVOKED IN RESPECT OF INTRA GR OUP SERVICES, WHICH ADMITTEDLY FORM PART OF THE COST BASE OF THE ASSESS EE, AVAILED BY THE ASSESSEE. THIS IS A CASE IN WHICH TRANSFER PRICING PROVISIONS CANNOT BE APPLIED BECAUSE THE APPLICATION OF ALP ADJUSTMENT W ILL INDEED RESULT IN EROSION OF INDIAN TAX BASE- AS VISUALIZED BY THE SC HEME OF SECTION 92(3) INASMUCH FOR EVERY RUPEE OF ALP ADJUSTMENT IN INTR A GROUP SERVICE, THE REVENUE OF THE ASSESSEE, ON THE BASIS OF APPLICATIO N OF ARMS LENGTH PRICE, WILL STAND LT.A. NO. 1085/DEL/2016 ASSESSMEN T YEAR: 2011.- 12 PAGE 7 OF 7 REDUCED BY ONE AND ONE FIFTH TIMES OF T HE ALP ADJUSTMENT. SECTION 92(3) DOES NOT PERMIT COMPUTATION OF INCOME ON THE BASIS OF ARMS LENGTH PRICE IN SUCH A SITUATION; AS A MATTER OF FACT, IT PROHIBITS APPLICATION OF ARMS LENGTH PRINCIPLE IN SUCH A SIT UATION. THE PLEA OF THE ASSESSEE, AS SPECIFICALLY TAKEN UP IN GROUND NO. 5 (G), IS THUS INDEED WELL TAKEN AND MERITS OUR ACCEPTANCE. 3.6. IN THE PRESENT CASE AS WELL THE BUSINESS MODEL OF THE ASSESSEE IS COMPENSATION ON COST + MARK UP BASIS AS IT IS EVIDE NT FROM THE AGREEMENT AS PER CLAUSE 4 OF THE SAID AGREEMENT AND FEE PAYAB LE UNDER THIS AGREEMENT, DETAILED AT PAGE NO. 311 OF THE PAPER BO OK IN PARA 1 AS THE PROFIT IS MEASURED AS MARGIN BETWEEN REVENUE ON THE TOTAL COST INCURRED FOR PROVIDING THE SAME (INCLUDING AN APPROPRIATE AL LOCATION OF IN-DIRECT COST) A REASONABLE PROFIT IS DETERMINED WITH REFERENCE S IMILAR COMPANIES ENGAGED IN SIMILAR ACTIVITIES AND IS CURRENTLY 10%. . THIS COMPENSATION MODEL OF BUSINESS OF THE ASSESSEE HAS NOT BEEN DISP UTED BY THE ID. TPO. IN THIS REGARD IT IS POINTED OUT THAT THE ASSESSEE HAD PURCHASED FROM ITS AES ASSETS WORTH RS.8,00,04,512/-. THE ID. TPO REQU IRED THE ASSESSEE TO FURNISH WDV OF THESE ASSETS IN THE BOOKS OF THE ACC OUNT OF THE AE MAKING IT CLEAR THAT FAILURE TO FURNISH SUCH DETAILS WOULD LEAD TO DETERMINATION OF THE ARMS LENGTH VALUE OF THE TRANSACTION AT NIL'. THE SUBMISSION OF THE ASSESSEE REMAINED THAT THE IMPACT OF THE TRANSACTIO N ON THE TAX PAYERS PROFIT AND LOSS ACCOUNT IS THROUGH DEPRECIATION CHA RGED ON THESE ASSETS. CONSIDERING THAT THE TAX PAYER IS REMUNERAT ED FOR DEPRECIATION AND OTHER COSTS INCURRED IN PROVISIONS OF TRS SERVI CES ON A COST PLUS BASIS, THE ABOVE TRANSACTION PERTAINING TO PURCHASE OF FIX ED ASSETS WAS TREATED 9 ITA NO. 566/DEL/2015 AS CLOSELY LINKED TO THE TRANSACTION PERTAINING T O PROVISION OF TRS SERVICES. HENCE, THE SAME WAS NOT EVALUATED SEPARAT ELY FROM A TRANSFER PRICING PROSPECTIVE AND WAS CONSIDERED TO BE A PART OF THE PROVISION OF TRS SERVICE TRANSACTION OF BT INDIA BY ADOPTING A COMBI NED TRANSACTION APPROACH FOR THE PURPOSE OF DETERMINING THE ARMS L ENGTH PRICE. THE RULES ALSO CLARIFY THAT A TRANSACTION INCLUDES A NUMBER OF CLOSELY LINKED TRANSACTIONS. ACCORDINGLY, THE PURCHASE OF FIXED AS SETS TRANSACTION HAD BEEN CLUBBED WITH THE PROVISION OF TR SERVICES AND DOES NOT REQUIRE A SEPARATE ARMS LENGTH ANALYSIS. THE ID. TPO DID NOT AGREE AND ENHANCED THE. INCOME OF THE TAXPAYER BY RS.8,00,04,512/-. TH E ID. DRP AFTER CONSIDERING THE OBJECTIONS OF THE ASSESSEE HAS GIVE N PARTIAL RELIEF. IN COMPLIANCE THE EFFECT OF THE DIRECTION OF THE ID. D RP HAS BEEN GIVEN BY LIMITING THE TP ADJUSTMENT ON ACCOUNT OF PURCHASE O F FIXED ASSETS TO DEPRECIATION DEBITED TO PROFIT AND LOSS ACCOUNT. AS A RESULT, RS. 1,10,42,986/- HAS BEEN ADDED TO THE RETURNED INCOME . 3.7. SINCE THE ISSUE RAISED IN THE PRESENT CASE IS .COVERED BY THE ABOVE- CITED -DECISIONS UNDER ALMOST SIMILAR SET OF FACTS, HENCE RESPECTFULLY FOLLOWING THE SAME, WE ORDER FOR DELETION OF ADDITI ON MADE BY DISALLOWING OR REDUCING THE AMOUNT OF DEPRECIATION ON THE ASSET S PURCHASED FROM AE. 4. IN RESULT, APPEAL PREFERRED BY THE ASSESSEE IS ALL OWED AND THAT OF THE REVENUE IS DISMISSED. THUS, THE ISSUE OF DEPRECIATION ON FIXED ASSETS THE SAME IS COVERED BY THE ASSESSEES OWN ORDER FOR ASSESSMENT YEAR 2009-10 BE ING ITA NO. 2333/DEL/2014 DATED 22/12/2016. 5. AS RELATED TO RECEIVABLES, THE LD. AR RELIED UPO N THE ORDER OF KUSUM HEALTH CARE OF THE HONBLE DELHI HIGH COURT (ITA NO . 765/2016 DATED 25/4/2017 HELD AS UNDER:- 9. MR. RAGHVENDRA SINGH, LEARNED COUNSEL APPEARING FOR THE REVENUE SUBMITTED THAT THE ITAT OVERLOOKED THE FACT THAT TH E EXPRESSION INTERNATIONAL TRANSACTION AS DEFINED IN EXPLANATION (I)(C) TO SE CTION 92B OF THE ACT INCLUDED PAYMENTS OR DEFERRED PAYMENT OR RECEIVABLE OR ANY OTHER DEBT ARISING DURING THE COURSE OF BUSINESS, AND THEREFORE, THE OUTSTANDING RECEIVABLES COULD BY THEMSELVES CONSTITUTE AN INTERNATIONAL TRA NSACTION. HE FURTHER REFERRED TO THE OCED TRANSFER PRICING GUIDELINES FO R MULTINATIONAL ENTERPRISES 10 ITA NO. 566/DEL/2015 AND TAX ADMINISTRATIONS. PARAS 3.48 & 3.49 UNDER CH APTER III PARA A.6.1 OF THE SAID GUIDELINES TITLED DIFFERENT TYPES OF COMP ARABILITY ADJUSTMENTS SPOKE OF THE NEED TO ELIMINATE DIFFERENCES THAT MAY ARISE FROM DIFFERENT ACCOUNTING PRACTICES BETWEEN CONTROLLED AND UNCONTR OLLED TRANSACTIONS. IN PARTICULAR, IT WAS NOTED UNDER PARA 3.49 THAT A SI GNIFICANTLY DIFFERENT LEVEL OF RELATIVE WORKING CAPITAL BETWEEN THE CONTROLLED AND UNCONTROLLED PARTIES MAY RESULT IN FURTHER INVESTIGATION OF THE COMPARABILIT Y 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 SUB MISSIONS. 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 ACCOUN TS OF AN ENTITY, WHICH MAY HAVE DEALINGS WITH FOREIGN AES WOULD AUTO MATICALLY BE CHARACTERISED AS AN INTERNATIONAL TRANSACTION. THER E MAY BE A DELAY IN COLLECTION OF MONIES FOR SUPPLIES MADE, EV EN BEYOND THE AGREED LIMIT, DUE TO A VARIETY OF FACTORS WHICH WIL L HAVE TO BE INVESTIGATED ON A CASE TO CASE BASIS. IMPORTANTLY, THE IMPACT THIS WOULD HAVE ON THE WORKING CAPITAL OF THE ASSESSEE W ILL HAVE TO BE STUDIED. IN OTHER WORDS, THERE HAS TO BE A PROPER I NQUIRY BY THE TPO BY ANALYSING THE STATISTICS OVER A PERIOD OF TI ME TO DISCERN A PATTERN WHICH WOULD INDICATE THAT VIS-A-VIS THE REC EIVABLES FOR THE SUPPLIES MADE TO AN AE, THE ARRANGEMENT REFLECTS AN INTERNATIONAL TRANSACTION INTENDED TO BENEFIT THE AE IN SOME WAY. 11. THE COURT FINDS THAT THE ENTIRE FOCUS OF THE A O WAS ON JUST ONE AY AND THE FIGURE OF RECEIVABLES IN RELATION TO THA T AY CAN HARDLY REFLECT A PATTERN THAT WOULD JUSTIFY A TPO CONCLUDING THAT TH E FIGURE OF RECEIVABLES BEYOND 180 DAYS CONSTITUTES AN INTERNATIONAL TRANSA CTION BY ITSELF. WITH THE ASSESSEE HAVING ALREADY FACTORED IN THE IMPACT OF THE RECEIVABLES ON THE WORKING CAPITAL AND THEREBY ON ITS PRICING/PROF ITABILITY VIS-A-VIS THAT OF ITS COMPARABLES, ANY FURTHER ADJUSTMENT ONLY ON THE BASIS OF THE OUTSTANDING RECEIVABLES WOULD HAVE DISTORTED THE PI CTURE AND RE- CHARACTERISED THE TRANSACTION. THIS WAS CLEARLY IMP ERMISSIBLE IN LAW AS EXPLAINED BY THIS COURT IN CIT V. EKL APPLIANCES LTD. (2012) 345ITR 241 (DELHI). 12. CONSEQUENTLY, THE COURT IS UNABLE TO FIND ANY ERROR IN THE 11 ITA NO. 566/DEL/2015 IMPUGNED ORDER OF THE ITAT GIVING RISE TO ANY SUBST ANTIAL QUESTION OF LAW FOR DETERMINATION. THE APPEAL IS, ACCORDINGLY, DISM ISSED. 6. THE LD. AR FURTHER SUBMITTED THAT THERE WAS AN A DDITIONAL EVIDENCE APPLICATION FILED BY THE ASSESSEE ON 28 TH AUGUST 2017 IN RESPECT OF SALARY OF EMPLOYEE DISALLOWANCE OF TDS AND DISALLOWANCE OF SA LES PROMOTION EXPENSES WHICH NEEDS TO BE GO BACK TO THE ASSESSING OFFICER. 7. THE LD. DR RELIED UPON THE ORDER OF THE TPO & DR P AS WELL AS ASSESSING OFFICER. 8. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE M ATERIAL AVAILABLE ON RECORD. AS RELATES TO THE DEPRECIATION ON FIXED ASS ETS THE SAME IS COVERED BY THE ASSESSEES OWN ORDER FOR ASSESSMENT YEAR 2009-10 BE ING ITA NO. 2333/DEL/2014 DATED 22/12/2016. AS RELATES TO THE I SSUE OF RECEIVABLES, THE SAME IS ALSO COVERED IN FAVOUR OF THE ASSESSEE BY T HE DECISION OF THE HONBLE DELHI HIGH COURT IN CASE OF KUSUM HEALTH CARE. AS R ELATES TO ISSUE IN RESPECT OF SALARY OF EMPLOYEE AND DISALLOWANCE OF TDS AND S ALES PROMOTION EXPENSES THE SAME NEED TO BE VERIFIED BY THE ASSESSING OFFIC ER AS THERE IS ADDITIONAL EVIDENCE FILED BY THE ASSESSEE AT THIS STAGE. THE S AID ADDITIONAL EVIDENCE NEEDS TO BE TAKEN INTO ACCOUNT WHILE MAKING OBSERVATION B Y THE ASSESSING OFFICER. THEREFORE, THIS ISSUE IS REMANDED BACK TO THE FILE OF THE ASSESSING OFFICER. NEEDLESS TO SAY, THE ASSESSEE BE GIVEN THE OPPORTUN ITY OF HEARING BY FOLLOWING PRINCIPLES OF NATURAL JUSTICE. 9. IN RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSE. ORDER PRONOUNCED IN THE OPEN COURT ON 26 TH FEBRUARY, 2018 . SD/- SD/- (R. S. SYAL) (SUCHITRA KAMBLE) VICE PRESIDENT JUDI CIAL MEMBER DATED: 26/02/2018 R. NAHEED * 12 ITA NO. 566/DEL/2015 COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI DATE 1. DRAFT DICTATED ON 28/11/2017 PS 2. DRAFT PLACED BEFORE AUTHOR 29/11/2017 PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER .2018 JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS PS/PS 6. KEPT FOR PRONOUNCEMENT ON 2 6 . 0 2 . 2 0 1 8 PS 7. FILE SENT TO THE BENCH CLERK 2 6 . 0 2 . 2 0 1 8 PS 8. DATE ON WHICH FILE GOES TO THE AR 9. DATE ON WHICH FILE GOES TO THE HEAD CLERK. 10. DATE OF DISPATCH OF ORDER. 13 ITA NO. 566/DEL/2015