Prior-period deduction and INR loan benchmarking turn on TDS compliance and currency-specific transfer pricing comparables.

Prior-period expenditure was treated as deductible in the year tax was deducted and deposited under the proviso to section 40(a)(ia), even though the expense had not been claimed in the year of accrual; the disallowance was therefore deleted. For transfer pricing, interest on an INR-denominated external commercial borrowing had to be benchmarked against the Indian Prime Lending Rate because the relevant comparable is the market rate for the currency of repayment; LIBOR was rejected as the proper benchmark, so the adjustment was deleted. The commentary states that both substantive additions failed and the assessee obtained complete relief.

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Issues: (i) Whether prior-period expenditure was deductible in the year in which tax was deducted and deposited, despite not having been claimed in the year of accrual; (ii) whether the arm's length interest rate on an INR-denominated external commercial borrowing had to be benchmarked with Indian Prime Lending Rate or with LIBOR.

Issue (i): Whether prior-period expenditure was deductible in the year in which tax was deducted and deposited, despite not having been claimed in the year of accrual.

Analysis: The proviso to section 40(a)(ia) permits deduction in the year in which the tax deducted at source is deposited. The allowability of expenditure is determined by the Act and not merely by the year in which it is entered in the books. Non-debiting of the expense in the earlier year does not defeat the statutory allowance once the TDS condition is satisfied.

Conclusion: The issue was decided in favour of the assessee and the disallowance was deleted.

Issue (ii): Whether the arm's length interest rate on an INR-denominated external commercial borrowing had to be benchmarked with Indian Prime Lending Rate or with LIBOR.

Analysis: For transfer pricing, the relevant comparable is the market rate applicable to the currency in which the loan is to be repaid. Since the borrowing was denominated in Indian currency, the Indian Prime Lending Rate was the proper benchmark and LIBOR was not the correct comparable. On that basis, no excess adjustment survived and the alternative contention regarding the statutory range also became academic.

Conclusion: The issue was decided in favour of the assessee and the transfer pricing adjustment was deleted.

Final Conclusion: The appeal succeeded on the substantive additions, resulting in complete relief to the assessee.

Ratio Decidendi: Deduction under section 40(a)(ia) is allowable in the year tax is deducted and deposited, regardless of whether the expense was claimed in the earlier year, and transfer pricing interest on a loan must be benchmarked with the rate relevant to the currency of repayment.

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