Tribunal rules in favor of renewable energy company in transfer pricing case

The Tribunal ruled in favor of the assessee, a private limited company in the renewable energy sector, in a case involving transfer pricing adjustments on interest payments for Non-Convertible Debentures. The Tribunal rejected the Tax Authorities' adjustments, deleting the transfer pricing adjustment and disallowances of depreciation on capitalized salary and pre-operative expenses, as well as salary expenses for non-deduction of tax at source. The appeals were allowed in favor of the assessee.

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Issues Involved:
1. Transfer Pricing adjustment towards interest on issue of Non-Convertible Debentures (NCD).
2. Addition made protectively towards depreciation against the amount capitalized as Capital Work In Progress.
3. Disallowance of salary expenses for non-deduction of tax at source.
4. Disallowance of depreciation on pre-operative expenses.

Detailed Analysis:

1. Transfer Pricing Adjustment towards Interest on Issue of Non-Convertible Debentures (NCD):
The assessee, a private limited company engaged in renewable energy, made a payment towards interest on NCDs issued to its AE at 14.70%. The TPO rejected the assessee's CUP method and applied different filters, resulting in a median rate of 9.32%, leading to a TP adjustment of Rs. 6,46,60,082. The DRP upheld the TPO's adjustments, rejecting the internal CUP method and regulatory rate. The Tribunal, however, found the TPO's rejection of the duration filter inappropriate, considering the unsecured nature and 25-year tenure of the debentures. The Tribunal agreed with the assessee's benchmarking of the interest rate against the SBI Prime Lending Rate plus 300 basis points, deeming the interest rate within the arm's length range. Consequently, the TP adjustment was deleted.

2. Addition Made Protectively towards Depreciation against the Amount Capitalized as Capital Work In Progress:
The AO disallowed the depreciation on the capitalized salary expenses and pre-operative expenses based on a statement made during a search, which was later retracted. The Tribunal noted that the amounts were accounted as capital work-in-progress and not capitalized, hence no depreciation was claimed. The Tribunal found the disallowance of depreciation untenable as no charge of depreciation was made during the year. Therefore, both substantive and protective disallowances of depreciation were deleted.

3. Disallowance of Salary Expenses for Non-Deduction of Tax at Source:
The AO disallowed 30% of the salary expenses debited to the P&L account under section 40(a)(ia) for non-deduction of tax. The Tribunal found that the salary costs were reimbursed on a cost-to-cost basis without any mark-up, and taxes were already deducted by the sister concern. The Tribunal held that the reimbursement of salary costs does not attract TDS under sections 194C or 194J, as there was no element of income in the reimbursement. Therefore, the disallowance under section 40(a)(ia) was deleted.

4. Disallowance of Depreciation on Pre-Operative Expenses:
The AO disallowed 1/5th of the pre-operative expenses capitalized by the assessee. The DRP, doubting the genuineness of the expenses based on a retracted statement, restricted the disallowance to the depreciation calculated at 7.69%. The Tribunal, considering that the expenses were accounted as capital work-in-progress and no depreciation was claimed, deleted the disallowance of depreciation on pre-operative expenses.

Conclusion:
The Tribunal deleted the TP adjustment towards interest on NCDs, disallowance of depreciation on capitalized salary and pre-operative expenses, and the disallowance of salary expenses for non-deduction of tax at source. The appeals were allowed in favor of the assessee.

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