DHR Holding India Pvt. Ltd., New Delhi V. Addl.CIT, Special Range-3, New Delhi

ITA 6750/DEL/2018

• Counselvise Citation: [2022] 105 COUNSELVISE.COM (IT) 9886 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 2 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-01-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: I1
• Assessment Year: 2014-2015
• Appeal Filed On: 23-10-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SURENDER PAL
• Keywords: Depreciation; Transfer pricing; International transaction
• Section: 92B; 144C

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI BENCH: ‘I-1’ NEW DELHI BEFORE SHRI G.S. PANNU, HON’BLE PRESIDENT AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA No.6750/Del/2018 Assessment Year: 2014-15 DHR Holding India Pvt. Ltd., Unit No. 325 to 328, DLF Towers, Shivaji Marg, New Delhi Vs. Addl. CIT, Special Range-3, New Delhi PAN :AACCD6672N (Appellant) (Respondent) ORDER PER SAKTIJIT DEY, JM: Captioned appeal filed by the assessee is against the final assessment order dated 08.10.2018 passed under Section 143(3)/read with section 144C of the Income-Tax Act, 1961 (in short ‘the Act’) for the assessment year 2014-15, in pursuance to the directions of the Dispute Resolution Panel (DRP). Appellant by Sh. Ajit Jain, CA Ms. Suchita Kanodia, AR Respondent by Sh. Surender Pal, CIT(DR) Date of hearing 22.12.2021 Date of pronouncement 20.01.2022 2 ITA No.6750/Del/2018 (DHR Holding India Pvt. Ltd.) 2. Ground no. 1, being of general nature, does not require specific adjudication. 3. In ground no. 2, the assessee has challenged adjustment of Rs.77,04,297 made to the international transaction relating to purchase of medical equipments. 4. Briefly the facts are, the assessee, a resident company, is incorporated in the year 2007 and is engaged in the business of trading in various medical equipments and other products. During the previous year relevant to the assessment year under dispute, the assessee entered into international transaction with its overseas Associated Enterprise (AE) of providing business support services and marketing support services. In course of its business of trading, the assessee had imported medical equipments for resale to third parties. The medical equipments and consumables traded by the assessee are, basically, blood gas analysers and consumables. As per the business model adopted by the assessee, it buys analysers and sales them to third parties, i.e., hospitals, medical institutions etc. and books the revenue in the trading segment. However, in some instances, when the customer is not willing to buy the equipment, they are leased to the customer and installed at their premises and the 3 ITA No.6750/Del/2018 (DHR Holding India Pvt. Ltd.) consumables required by the customer in using the equipment is provided by the assessee. The cost of the leased medical equipment imported from the AE is capitalized in the books of account of the assessee and its related operating cost, such as, depreciation is charged to the profit and loss account of the trading segment. 5. After calling for and examining the details relating to import of medical equipments, the Transfer Pricing Officer (TPO) issued a show-cause notice to the assessee to explain the difference between the import of medical equipment for resale and the import of medical equipment capitalized in the books. He also called upon the assessee to explain, whether any mark-up has been charged by the AEs on the imported medical equipments. In response to the show-cause notice, assessee furnished a detailed reply submitting that the imported medical equipments which are capitalized in the books of account were leased to customers. Lease rental charged from the customer is on a per test basis which includes deprecation cost and cost of consumables. The TPO, however, was not convinced with the submissions of the assessee. Referring to various judicial precedents, the TPO observed, the assessee failed to provide the required documents 4 ITA No.6750/Del/2018 (DHR Holding India Pvt. Ltd.) as per Rule 10D. Accordingly, he determines the ALP of imported medical equipments at nil. While doing so, he proposed adjustment to the extent of depreciation claimed by the assessee on the capitalized imported equipment. While framing the draft assessment order, the Assessing Officer, in conformity with the order passed by the TPO, treated the depreciation claimed of Rs.77,04,297/- as a transfer pricing adjustment and added back to the income of the assessee. The adjustment so made was also upheld by the DRP. 6. Before us, learned counsel for the assessee submitted, the issue is squarely covered by the decision of the Tribunal in assessee’s own case for the assessment year 2012-13. In this context, he drew our attention to the relevant observations of the Tribunal in order passed in ITA No. 953/Del/2017, dated 27.08.2021. 7. Learned Departmental Representative, though, fairly agreed that the issue is covered by the decision of the Tribunal, however, he dutifully relied upon the observations of TPO and learned DRP. 8. Having considered rival submissions and perused the materials on record, we find that identical dispute arising in assessee’s own case in assessment year 2012-13 came up for 5 ITA No.6750/Del/2018 (DHR Holding India Pvt. Ltd.) consideration before the Tribunal. While deciding the issue in the order referred to above, the Tribunal has held as under: “28. Facts on record show that the assessee is also engaged in the business of trading of medical equipment i.e. blood gas analysers and consumables. We find that the assessee Appellant follows a unique business model wherein the assessee buys analysers and sells them to third parties i.e. hospitals, medical institutions etc, books the revenue under the trading segment. On the other hand, if the customer is not willing to buy the analysers, such instruments were installed at the customer’s premises and the consumables required by the customer in using these instruments were provided by the assessee. We find that the cost of such analysers imported from the AEs, were capitalized in the books of accounts of the assessee and its related operating cost, i.e. depreciation, has been charged to the profit and loss account while computing the profitability of the trading segment. We find that the assessee has used TNMM analysis to bench mark arm’s length nature of international transaction of purchase of medical equipment. 29. We find that the TPO has accepted the purchase price of such analysers for the trading segment as arm’s length, but surprisingly, determined the arm’s length price of purchase of fixed assets at Nil. The Assessing Officer, while framing the final assessment order, even went ahead one step further and disallowed the claim of depreciation considering the arm’s length price determined by the TPO as NIL. 30. The documents referred to by the Id. counsel for the assessee during the course of arguments were considered from which we find that the import of goods was substantiated by furnishing the custom documentation which includes sample invoices along with corresponding bill of entries. Interestingly, we find that the custom’s duty paid and cost of transportation were considered as the arm’s length price by the lower authorities for computing the allowable j/whereas the cost of equipment has been taken at NIL. 31. In our considered opinion, equipment would not have been - /imported at NIL price even in an independent scenario. Moreover, we do not find that the TPO has applied any method to benchmark the said transaction, which action of the TPO is in violation of Rule 10B of the Income Tax Rules. We find that while treating the purchase of capital goods as NIL, the TPO failed to provide any comparable data which would have suggested that the arm’s length price for the purchase of capital goods can be NIL. In our understanding, no third party would have sold such goods free of 6 ITA No.6750/Del/2018 (DHR Holding India Pvt. Ltd.) cost. In our considered opinion, arm’s length price could be lower or higher but cannot be NIL, as the goods have been imported. 32. Incidentally, the same products purchased from the same AE, for the same price, in the same year, cannot be held to be at arm’s length for trading goods and not at arm’s length for capitalised goods at the same time and in the same breath. Considering the facts of the case in totality, we direct the Assessing Officer to allow the claim of depreciation on the purchase of fixed sub grounds is, accordingly, allowed.” 9. There being no material difference in factual position in the impugned assessment year, respectfully following the decision of the Coordinate Bench in assessee’s own case, as referred to above, we delete the adjustment of Rs. 77,04,297/-. Ground is allowed. 10. In ground no. 3 with its sub-grounds, the assessee has challenged the adjustment of Rs.2,47,088/- towards interest on outstanding receivables. 11. Briefly the facts are, in course of transfer pricing proceeding, the TPO noticed that there is considerable delay in realization of invoices raised on the AE. Therefore, he called upon the assessee to explain, as to why the outstanding receivables should not be treated as unsecured loan to the AE and interest should not be charged. Though, the assessee objected to the proposed action of the TPO by submitting that the delay in outstanding receivables cannot be treated as international transaction and no interest can 7 ITA No.6750/Del/2018 (DHR Holding India Pvt. Ltd.) be charged by treating it as unsecured loan, however, the TPO was unconvinced. He held that after amendment to section 92B by Finance Act, 2012 w.e.f. 01.04.2002, the delay in outstanding receivables would fall within the definition of international transaction. Having held so, the TPO proceeded to compute interest on receivables remaining outstanding beyond the period of 30 days by applying SBI prime lending rate (PLR) of 14.50%. Accordingly, he suggested an adjustment of Rs.13,57,841/-. When the issue was disputed before learned DRP, though, they upheld the decision of the TPO by treating the delay in outstanding receivables as international transaction requiring computation of interest, however, they did not agree with the rate of interest applied by the TPO. Accordingly, the DRP directed the TPO to re-compute interest on outstanding receivables by applying the rate of six months LIBOR plus 400 bps, wherever the loan is to be repaid in US Dollar. Further, the DRP directed the TPO to apply credit period of 60 days, if no such period is mentioned in the agreement/invoice. 12. Before us, reiterating the stand taken before the Departmental Authorities, learned counsel for the assessee submitted, outstanding receivables from AE cannot be an 8 ITA No.6750/Del/2018 (DHR Holding India Pvt. Ltd.) international transaction. He submitted, when the principal transaction with the AE has been considered to be at arm’s length after allowing working capital adjustment, it subsumes the outstanding receivables. Hence, no separate adjustment is to be made. Further, he submitted, as a matter of principle, the assessee has not charged any interest on outstanding receivables, either from AE or non-AE. Further, he submitted, the assessee had significant payables to AEs, on which no interest has been paid. In support of his contention, learned counsel relied upon the decision of the Hon’ble Delhi High Court in the case of PCIT Vs. Kusum Healthcare Private Ltd., ITA 765/2016, order dated 25.04.2017 (High Court, Delhi). 13. Learned Departmental Representative strongly relied upon the observations of the TPO and learned DRP. 14. We have considered rival submissions, perused the material on record and have also applied our mind to the decisions relied upon. On perusal of facts on record, particularly the order of the TPO, it appears that there is delay in receivables from the AE and in some instances, the delay is substantial. Though, we are conscious of the fact that in case of Kusum Healthcare Pvt. Ltd. (supra), Hon’ble jurisdictional High Court has held that delay in 9 ITA No.6750/Del/2018 (DHR Holding India Pvt. Ltd.) outstanding receivables, ipso facto, cannot be treated as international transaction without considering the context in which such delay has appeared, however, the Hon’ble High Court has not said that under no circumstances it can be treated as an international transaction. Therefore, the reason for delay in receiving outstanding invoices has to be looked into. Further, it has been submitted before us that as a matter of principle, the assessee has not charged interest on outstanding receivables, either from AE or non AE. This fact has not been factually examined, either by the TPO or learned DRP. It has to be ascertained, what is the average delay in case of AE and non AE transactions. Similarly, assessee’s contention that on outstanding payables to the AE no interest has been charged, requires to be considered and, in case, there are outstanding payables, it has to be set off against outstanding receivables and interest has to be charged on net receivables. As regards, the contention of the assessee that working capital adjustment subsumes outstanding receivables, in our view, this may be correct in so far as receivables remaining outstanding at the end of the year. However, the invoices raised and realized during the year, but, beyond the credit period cannot get subsumed in the working 10 ITA No.6750/Del/2018 (DHR Holding India Pvt. Ltd.) capital adjustment. Since, all these factors have not been considered by the Departmental Authorities, we are inclined to restore this issue to the Assessing Officer for fresh adjudication, keeping in view our observations hereinabove. 15. As far as the rate of interest is concerned, it is open to the assessee to furnish material before the Assessing Officer to demonstrate that the rate of interest, if any, chargeable on the outstanding receivables, would be less than, what has been determined by learned DRP. 16. In ground no. 4, the assessee has challenged mark-up of 5% on recovery of expenses from AE resulting in addition of Rs. 36,83,982/- 17. Briefly the facts are, in course of transfer pricing proceeding, the TPO noticed that the assessee had incurred expenses pertaining to reimbursement for training, foreign traveling/accommodation expenses, clearing and forwarding charges etc. After calling for and verifying the necessary details, he was of the view that the assessee had incurred such expenses in its normal course of business, hence, must form part of the case of providing services, even though the payments were made to third parties. Thus, he observed, there is no reason why the 11 ITA No.6750/Del/2018 (DHR Holding India Pvt. Ltd.) assessee should incur such cost for the AE. Thereafter, referring to certain judicial precedents, the TPO held that the assessee should have charged mark-up of 5% on recovery of such expenses incurred on behalf of the AE. Accordingly, he proposed adjustment of Rs. 36,83,982/-. While deciding the issue, learned DRP upheld the decision of the TPO. 18. We have heard the parties and perused the material on record. 19. Learned counsel for the assessee has contended before us that the addition has been made by the TPO on purely adhoc basis. He submitted, the assessee has incurred certain cost on behalf of the AE which were reimbursed by the AE. He submitted, invoices on such cost are raised on back to back basis and can be easily co-related. He submitted, certain expenditure was also incurred by the AE on behalf of the assessee which were reimbursed on cost to cost basis without any mark-up. Therefore, there is no justifiable reason to charge mark-up only on the recovery of expenses. 20. Learned Departmental Representative strongly relied upon the observations of the TPO and learned DRP. 12 ITA No.6750/Del/2018 (DHR Holding India Pvt. Ltd.) 21. Having considered rival submissions and perused the materials available on record, we find that certain expenses incurred by the assessee on behalf of the AE have been reimbursed on cost to cost basis. Similarly, certain expenses incurred by the AE on behalf of the assessee, have also been reimbursed on cost to cost basis. Learned counsel for the assessee has demonstrated before us that invoices towards the cost incurred have been raised on back to back basis on the AE. Thus, in our view, there is no need to charge any mark-up on such reimbursement of expenses, more so, when the AE is not charging any mark-up on the cost incurred by it on behalf of the assessee. In view of the aforesaid, we delete the adjustment of Rs.36,83,982/-. Ground is allowed. 21. In ground no. 5, the assessee has challenged non-grant of set-off of brought forward unabsorbed depreciation against the addition made to the total income on account of transfer pricing adjustment. 22. Before us, it is a common point between the parties that a direction needs to be issued to the Assessing Officer to grant consequential relief to the assessee depending upon the decision to be taken in the preceding assessment years. In view of the 13 ITA No.6750/Del/2018 (DHR Holding India Pvt. Ltd.) aforesaid, we direct the Assessing Officer to grant set-off of brought forward unabsorbed depreciation after the issue is crystallized in the preceding assessment years. This ground is allowed for statistical purposes. 23. Ground no. 6 is not pressed, hence, dismissed. 24. Ground no. 7, being premature at this stage, is dismissed. 25. In the result, the appeal is partly allowed. Order pronounced in the open court on 20 th January, 2022 Sd/- Sd/- (G.S. PANNU) (SAKTIJIT DEY) PRESIDENT JUDICIAL MEMBER Dated: 20 th January, 2022. RK/- Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi