TaxTMI 
TaxTMI 
2016 (6) TMI 1370
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....Addition on a/c of Arm/s Length Price u/s 92CA(3) Rs. 57,37,292/- Capitalization of training and recruitment expenses NIL Disallowance of prior period expenses Rs. 2,67,50,061/- Total Income Rs. 38,12,60,404/- 3. Being aggrieved, the assessee is in appeal before us and has taken following grounds of appeal: "The Appellant respectfully submits that on the facts and circumstances of the case and in law, while passing the assessment order under section 143(3) read with section 144C of the Income Tax Act, 1961 (,the Act'), the Dispute Resolution Panel (,DRP') and the Deputy Commissioner of Income Tax, Circle 3( 1), New Delhi [hereinafter referred to as 'the learned Assessing Officer' ('learned AO')] have erred in: 1. Disallowing deduction for prior-period expenditure of INR 26,750,061 (being expenditure liable to tax deduction at source under Chapter XVIIB of the Act) during AY 2008-09 by incorrectly appreciating the provisions of Section 40(a)(ia) of the Act. 1.1 The Hon'ble DRP and the learned AO ought to have allowed the deduction for prior period expenditure of INR 26,750,061 under the first ....
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.... Communication exp. (2266541) 5. The AO observed that since the expenses pertained to FY 2006-07 (AY: 2007-08), therefore, the same were clearly disallowable and the assessee also disallowed these expenses u/s 37. However, in the computation of income assessee claimed deduction u/s 40(a)(ia) on the ground that during the year TDS was deducted and, therefore, the expenses were allowable as per proviso to section 40(a)(ia). He, therefore, in order to verify the assessee's claim required the assessee to furnish the necessary details along with the allowability of the same. The assessee filed following reply: "Expenditure of INR 26,750061 pertains to FY 2006-07. Details of the said expenditure have been enclosed as Annexure 4. Ordinarily the said expenditure is deductible in the hands of BT India in FY 2006-07, provided appropriate taxes have been withheld on the same, in accordance with the provisions of section 40(a)(i)/ section 40(a)(ia) of the Act. Given that no taxes have been withheld at source on these payments on or before the due date of filing the tax return for FY 2006-07. However, as per the provisions of section 40(a)(i)/ section 40(a....
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....se of CIT Vs. SMC Construction India is contained in which it has been held that in regard to the fees paid to foreign entity for rendering technical services, which is amenable to TDS provision, the deduction is allowable in the year in which tax is paid. 10. Ld. DR submitted that expenses should be debited in the year in which it accrued. He submitted that basic principle of accounting cannot be given a go bye on the basis of allowability/ disallowability of expenses on the basis of provisions of the Act. He pointed out that since assessee had not debited these expenses in AY 2007-08, therefore, merely by taking recourse to section 40(a)(ia), deduction cannot be allowed. He submitted that prerequisite of disallowance in previous year has not been fulfilled. He further pointed out that AO has not examined the genuineness of these payments because these were prior period expenses. He pointed out that an anomalous situation will be created if this amount is allowed. 11. We have considered rival submissions and perused the record of the case. It is well settled law that entries made in the books of account are not decisive regarding allowability/ disallowability of expenditure.....
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....owed .as a deduction unless requisite amount of tax has been deducted on the' said amount. Thus, mere passing a debit entry in the books of account, of these expenses would not be sufficient for claiming the deduction in the present account in the concerned year then also deduction would not be admissible unless tax has been paid on such amount. The proviso to section 40(a)(i) makes it clear that if tax has been deducted in the subsequent year and paid then deduction would be allowed in that year. Therefore, we are of the opinion that the learned first appellate authority has rightly deleted the disallowance. We do not find any merit in this appeal of the Revenue. It is dismissed." 13. Respectfully following the decision of Hon'ble Delhi High Court, this ground is allowed. 14. Brief facts apropos ground nos. 2 to 4 are that the assessee had, inter alia, entered into international transaction of payment of interest on external commercial borrowings of Rs. 3,32,11,250/-. The interest had been paid to BT plc. @ 9.72%. The outstanding balance as on 31.3.2008 was Rs. 341,505,490/-. The assessee had bench marked the interest against the PLR prevailing in India during that perio....
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....er annum will be disallowed. This works out to an amount of Rs. 5,737,292. This amount will be reduced from the interest pay out made by the assessee." 17. Before ld. DRP the assessee had, inter alia, submitted as under: "At the time of preparation of Transfer Pricing documentation (copy enclosed as item 6 of Paper Book I), the assessee had computed the ALP in accordance with the provisions of the Act read with the Rules. For the purpose of establishing the ALP of its impugned transactions with its associated enterprises ('AE'), based on the provisions of Rule 10C, the Comparable Uncontrolled Price ('CUP') method was selected as the most appropriate method to determine the arm's length nature of rate of interest paid by the assessee. The CUP method was selected because public information from authentic sources on same/ similar uncontrolled transactions was available. In order to benchmark this transaction the assessee used, the Prime Lending Rate ('PLR') interest rate taken from Reserve Bank of India ('RBI') [web: http://www.rbi.org.in]. The PLR of RBI prevailing during FY 2007-08 was available and thus has been used as a CUP for the ....
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....essee's case. In this regard he has filed a copy of ld DRP's order for AY 2009-10 wherein in para 7.1.3 ld. DRP has held as under: "7.1.3 This Panel has carefully considered the submissions of the taxpayer and the reasoning given by TPO in his order and holds: 1. Currency in which the loan is denominated is a key determinant in identifying the relevant interest rate for benchmarking. 2. Since the taxpayer is based in India a d ECB is denominated in INR as provided on Page 148 of Paper book, an appropriate uncontrolled price would be the interest rate uncontrolled lenders would have charged the taxpayer for the loan in India. This would definitely have been the interest rate chargeable in Indian market on rupee loan. For this purpose, the PLR of RBI is appropriate comparable. 3. During the course of proceedings before this Panel the taxpayer has submitted letter dated 09.12.2013 the contents of which are as under: "This is in reference to the captioned proceedings. In this regard, we wish to furnish the following information for your kind consideration: 1. Details regarding External Commerdal Borrowing- The assessee has entered i....
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....t and several other parameters. Interest rates payable on currency specific loans/ deposits are significantly universal and globally applicable. The currency in which the loan is to be repaid normally determines the rate of return on the money lent, i.e. the rate of Interest. Klaus Vogel on Double Taxation Conventions (Third Edition) under Article 11 in paragraph 115 states as under:- "The existing differences in the levels of interest rates do not depend on any place but rather on the currency concerned. The rate of interest on a US $ loan is the same in New York as in Frankfurt-at least within the framework of free capital markets (subject to the arbitrage). In regard to the question as to whether the level of interest rates in the lender's State or that in the borrower's is decisive, therefore, primarily depends on the currency agreed upon (BFH BSt.B 1. II 725 (1994), reo I § AStG). A differentiation between debt-claims or debts in national currency and those in foreign currency is normally no use, because, for instance, a US $ loan advanced by a US lender is to him a debt-claim in national currency whereas to a German borrower it is a foreign currency debt....