Tribunal Upholds CIT(A)'s Decisions on Depreciation, Transfer Pricing, and Guarantees

The Tribunal upheld the CIT(A)'s decisions and dismissed the Revenue's appeals on the disallowance of depreciation and mark-to-market loss, as well as transfer pricing adjustments on performance guarantees and bank/corporate guarantees. For corporate guarantees provided to ICICI Bank, the Tribunal directed a re-computation of the arm's length price at 0.20%, partially allowing the appeal for statistical purposes.

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Issues Involved:

1. Disallowance of depreciation on assets of transmission business.
2. Disallowance of mark-to-market (MTM) loss on foreign exchange.
3. Transfer pricing adjustment on performance guarantees.
4. Transfer pricing adjustment on bank and corporate guarantees provided to Chadian Company for Water and Electricity (CCWE).
5. Transfer pricing adjustment on corporate guarantees provided to ICICI Bank on behalf of KEC USA LLC and Transmission LLC USA.

Issue-wise Detailed Analysis:

1. Disallowance of Depreciation on Assets of Transmission Business:

The assessee claimed depreciation on revalued assets acquired from KEC Infrastructure pursuant to a composite scheme of arrangement sanctioned by the Hon’ble Bombay High Court. The AO disallowed Rs. 18,12,94,916/- of depreciation, arguing that the transaction was a demerger under Section 2(19AA) of the Income Tax Act, and depreciation should be claimed on the WDV of the block of assets, not the revalued amount. The CIT(A) allowed the appeal by following the Tribunal’s orders for earlier years. The Tribunal, following its own order for AY 2010-11, dismissed the Revenue’s appeal, stating that facts were identical to earlier years.

2. Disallowance of Mark-to-Market (MTM) Loss on Foreign Exchange:

The AO disallowed Rs. 5,33,16,399/- of unrealized forex loss, arguing it was neither an accrued nor an actual loss and did not fit the criteria for allowable expenditure under the Act. This amount was added back to the total income and book profits under MAT provisions. The CIT(A) allowed the appeal, following the Tribunal’s order for AY 2009-10. The Tribunal, citing its order for AY 2010-11, dismissed the Revenue’s appeal, noting that facts were identical.

3. Transfer Pricing Adjustment on Performance Guarantees:

The assessee provided performance guarantees for its AEs, which were not considered international transactions in Form 3CEB. The TPO estimated the ALP of the performance guarantee at Rs. 2,05,58,246/- using a 1.04% rate per annum. The CIT(A) ruled that the issuance of guarantee was out of the ambit of Indian Transfer Pricing Regulations as there was no cost element involved. The Tribunal, referencing its decision for AY 2010-11, upheld the CIT(A)’s decision, dismissing the Revenue’s appeal.

4. Transfer Pricing Adjustment on Bank and Corporate Guarantees Provided to CCWE:

The TPO computed an adjustment of Rs. 5,31,59,988/- on corporate guarantees using a yield approach. The CIT(A) held that there was no cost element involved in the transaction of issuance of corporate guarantee, thus no income chargeable to tax. The Tribunal, following its previous decision for AY 2010-11, upheld the CIT(A)’s decision, dismissing the Revenue’s appeal.

5. Transfer Pricing Adjustment on Corporate Guarantees Provided to ICICI Bank on Behalf of KEC USA LLC and Transmission LLC USA:

The AO computed the ALP for corporate guarantees provided to ICICI Bank at Rs. 5,20,54,575/-, using a 1.77% rate. The CIT(A) held that the transaction of issuance of guarantee was out of the ambit of international transaction u/s 92B(1) of the Act. The Tribunal, referencing its decision for AY 2012-13, directed the TPO/AO to re-compute the arm’s length guarantee commission at 0.20%, partly allowing the appeal for statistical purposes.

Conclusion:

The Tribunal consistently followed its previous decisions for earlier assessment years, dismissing the Revenue’s appeals on disallowance of depreciation and MTM loss, and transfer pricing adjustments on performance guarantees and bank/corporate guarantees. For corporate guarantees provided to ICICI Bank, the Tribunal directed a re-computation of the ALP at 0.20%.

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