Section 94B cannot benchmark interest under the other method; capitalised interest and TDS credit needed separate treatment.

Section 94B cannot be used as an arm's length benchmarking mechanism under Rule 10AB, because it is a disallowance provision confined to interest expenditure claimed as deductible in computing business income. Interest capitalised to work-in-progress and not claimed as a deduction in the relevant year falls outside its scope for that year, so the adjustment was unsustainable. The assessment order also failed because it did not conform to the DRP's binding direction to avoid double disallowance where the assessee had already made a voluntary disallowance. Short grant of TDS credit required record verification and allowance of the correct credit.

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Issues: (i) Whether interest on non-convertible debentures could be benchmarked under the other method by importing the restriction under section 94B, and whether the disallowance could cover interest capitalised to work-in-progress and not claimed as deduction in the year; (ii) whether the Assessing Officer's final order was valid when it did not conform to the Dispute Resolution Panel's direction to avoid double disallowance; (iii) whether short grant of TDS credit required verification and allowance.

Issue (i): Whether interest on non-convertible debentures could be benchmarked under the other method by importing the restriction under section 94B, and whether the disallowance could cover interest capitalised to work-in-progress and not claimed as deduction in the year.

Analysis: The other method under Rule 10AB requires comparison with prices charged or paid, or that would have been charged or paid, in uncontrolled transactions between non-associated enterprises under similar circumstances. The restriction under section 94B is a disallowance provision governing interest expenditure deductible in computing income under the head profits and gains of business or profession, and it does not supply a benchmarking mechanism for arm's length pricing. Interest that was capitalised to work-in-progress and not claimed as a deduction in the relevant year was outside the scope of section 94B for that year, because the provision operates on interest expense claimed as deductible expenditure. The adjustment was therefore not sustainable.

Conclusion: The disallowance based on section 94B as an arm's length adjustment was deleted, and the assessee succeeded on this issue.

Issue (ii): Whether the Assessing Officer's final order was valid when it did not conform to the Dispute Resolution Panel's direction to avoid double disallowance.

Analysis: The Dispute Resolution Panel had directed that effect be given to the disallowance under section 94B while avoiding double disallowance of the amount already disallowed by the assessee. The final assessment order nevertheless made the full adjustment proposed by the Transfer Pricing Officer without giving effect to the voluntary disallowance already made. The final order was therefore not in conformity with the binding direction and could not be sustained to that extent.

Conclusion: The assessment order failed for non-compliance with the Dispute Resolution Panel's binding direction, and the assessee succeeded on this issue as well.

Issue (iii): Whether short grant of TDS credit required verification and allowance.

Analysis: The claim of TDS credit required verification from the records and consequential allowance of the correct credit, if found due.

Conclusion: The matter was remitted for verification of records and grant of appropriate credit, resulting in relief to the assessee for statistical purposes.

Final Conclusion: The addition arising from the interest adjustment was deleted, the TDS credit issue was sent for verification, and the appeal was allowed.

Ratio Decidendi: Section 94B can be applied only to interest expenditure claimed as deductible in computing business income, and it cannot be used as a basis to benchmark an international transaction under the other method; additionally, the Assessing Officer must pass the final assessment order in conformity with binding directions issued by the Dispute Resolution Panel.

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