AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2022 (12) TMI 712
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....pital Work In Progress. (iii) Disallowance of salary expenses for non-deduction of tax at source, and (iv) Disallowance of depreciation on pre-operative expenses. 3. We will first take up IT(TP)A Nos.195/Bang/2021 for adjudication. The brief facts pertaining to this assessee are that the assessee is a private limited company and is the wholly owned subsidiary of Energon Renewable Pte. Ltd (AE). The assessee is principally engaged in the business of generation and sale of power generated from renewable sources of energy. The assessee filed return of income on 30.11.2016 declaring a total income of Rs.1,31,97,470 under the regular provisions of the Act and book profit of Rs.2,68,75,280 u/s. 115JB of the Act. The case was selected for scrutiny under CASS. The assessee had international transactions with its AE and therefore a reference was made to the TPO. During the TP proceedings, the TPO made an adjustment of Rs.6,46,60,083 towards interest on Non-Convertible Debentures (NCD) issued to the AE. The AO passed the draft assessment order incorporating the TP adjustment and also made the following other additions:- a. Disallowance of salary expenses u/s. 40(a)(ia) of the Act -....
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....rate, the DRP held that the CUP method requires strict comparability in terms of products of services. In the instant case, the instrument involved is NCD, whereas the proposed comparable under CUP method is bank loan or loan from third party. The rate of interest charged in the case of debenture is decided by the borrower and the amount is required to be paid at maturity. The debenture is an instrument tradeable in the open market and is a hybrid instrument which could be treated as a debt as well as equity. On the other hand, loan is issued by the bank and periodic payment of principal and interest is required to be made. Hence, the internal CUP method was rejected and the DRP held that arm's length interest rate of NCD is required to be computed in the manner prescribed u/s. 92C of the Act. The assessee took an alternate plea before the DRP stating that according to section 194LD(2) of the Act the maximum allowable rate of interest for a rupee denominated bond of an Indian company cannot exceed SBI base rate on the date of issue plus 500 basis points which works out in assessee's case to 14.85% and therefore no TP adjustment is warranted. The DRP rejected this contention stating....
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....rety. iv. Reliance was placed on the Delhi Tribunal decision in the case of Assotech Moonshine Urban Developers (P.) Ltd. v. DCIT, New Delhi, ITA No. 1749 (DELHI) of 2017, at paragraph 6, where it has upheld benchmarking the interest payment on INR denominated debentures against the prevailing SBI Prime Lending Rate (PLR) + 300 basis points as the appropriate arm's length interest rate. Also SBI+300 basis point was held as ALP in Granite Gate Properties Pvt Ltd, 116 taxmann.com 952 (Delhi Trib.). v. Likewise, it was submitted that the Bangalore ITAT has accepted interest rate benchmarking based on rates linked to SBI Prime Lending Rate as the appropriate benchmarking rate for INR denominated debentures in the case of M/s Praxair India Pvt. Ltd vs ACIT, LTU, in IT(TP)A No.506/Bang/2016 dated 6.12.2021. vi. Reliance is placed on RBI's 'Master Direction - Borrowing and Lending transactions in Indian Rupee between Persons Resident in India and Non-Resident Indians/ Persons of Indian Origin' ("Master Directions") which is placed on record, wherein in para 2.1.2 of the RBI direction, it is stated that the rate of interest shall not be more than the Prime Lending Rate of State Ba....
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....f differences on the price, cost or profits. The working capital requirements and impact depends on various factors such as business cycles, the nature of business activity with its correlation on the general economic trends, the fund and capital position of the company, its marketing strategies, its market share etc.all of which cannot be capture in the year end Receivable and Payable position. Further, the assessee had failed to demonstrate such material differences so as to warrant an adjustment and therefore the DRP upheld the TPO's reasoning. He thus submitted that the assessee's ground may be dismissed. ii. With regard to the objection of the assessee in comparing secured debentures with unsecured debentures by the revenue authorities, the ld. DR submitted that the assessee has not contested debentures issue before the TPO. Also the DRP noted that the assessee in its TP report has also not applied this filter. In view of the above, the Hon'ble DRP did not consider the same as an appropriate filter and rejected the assessee's ground. Hence the decision of the DRP may be upheld. iii. On the assessee's plea to consider the interest rate on loans availed fro....
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....e from the above is that the assessee has issued unsecured non-convertible debentures in INR to its AE that are redeemable after 25 years carrying interest rate of 14.70%. The assessee in the TP study has taken the comparables applying various filters including the transactions having duration equal to or greater than 15 years whereas we notice that this filter is not applied for the comparables selected by the TPO. One of contentions of the ld AR was that the longer the duration of the loan, the interest rate will be directly proportional to the same more so when the loan is unsecured. The TPO has did not consider this filter stating that the same is yielding few comparables (Page 12 of order u/s.92CA) and this reason is upheld by the DRP. In the given case the debentures are unsecured with a repayment period of 25 years and in our considered view duration of the debt / loan is a significant factor in the determination of interest rate given that the debentures are unsecured and the reason quoted by the TPO/DRP for not applying this filter is not right. 12. The TPO has rejected the internal CUP comparison of the assessee with the loans obtained from the financial institutions / b....
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....sits in the national currency of the borrower or the lender would vary and are dependent upon the fiscal policy of the Central bank, mandate of the Government 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), re 1 § AStG). A differentiation between debt-claims or debts in national currency and those in foreign currency is normally no use, because, fo....
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....same currency i.e. US $. Interest rate applicable to loans granted and to be returned in Indian Rupees would not be the relevant comparable. Even in India, interest rates on FCNR accounts maintained in foreign currency and different and dependent upon the currency in question. They are not dependent upon the PLR rate, which is applicable to loans in Indian Rupee. The PLR rate, therefore, would not be applicable and should not be applied for determining the interest rate in the extant case. PLR rates are not applicable to loans to be re-paid in foreign currency. The interest rates vary and are thus dependent on the foreign currency in which the repayment is to be made. The same principle should apply." 8.6.3 In the instant case, admittedly, the CCDs are issued in INR, interest is paid in INR and CCD's are repaid also in INR. Therefore, placing reliance on the judgment of the Hon'ble Delhi High Court in the case of CIT v. Cotton Naturals (I) Pvt. Ltd. (supra), we hold that the TP study of the assessee to justify the interest rate by arriving at average rupee cost and comparing the same with SBI prime lending rate is correct. It is ordered accordingly. 14. In assessee's case the ....
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....the statement that was recorded. The DRP upheld the additions / disallowances made. 17. The key contention of the ld AR was with regard the sworn statement of Mr Subrahmanya since the basis on which the AO made additions is the statement recorded during the course of search u/s.132 of the Act. In this regard the ld. AR submitted that the assessee has been repeatedly asking for the statement recorder from 21/08/2018 and since there was no response received the assessee filed a letter of retraction of statement recorded on 17/09/2018. The assessee filed one more letter on 26/11/2019 and finally the copy of the Statement u/s 132 was provided to the assessee only on 29/11/2019. Hence, the ld AR submitted that the evidence in support of the expense claims could not be provided earlier when the Statement was retracted i.e. 17/09/2018 but was immediately furnished thereafter on 04/12/ 2019 as soon as the Statement copy was made available to the assessee. 18. In the above background, we now consider the issue on merits based on the grounds raised by the assessee. Disallowance/additions towards salary cost 19. During the year under consideration the assessee has paid a total salary cos....
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....iation on the same nor claimed the said amount as an expenditure in the P&L account during the year (page 246 of PB-1 - Clause A.12.(ii) of Schedule BP of the ITR and page 249 of PB I for Depreciation schedule of ITR). It is therefore submitted that there ought not to be any disallowance made as no expense or charge has been claimed by the assessee. 22. The ld. AR also submitted that for the subject AY 2016-17, there ought to be no disallowance made (protective or otherwise) as no expense or charge has been made by the Company. Without prejudice, the AO while making protective disallowance has ignored that section 40(a)(ia) is not applicable on capital expenditure. The provisions of section 40(a)(ia) does not provide for disallowance of depreciation, since it is not an expenditure, but a statutory allowance. Reliance is on the jurisdictional Karnataka HC decision in the case of PCIT vs Tally Solutions (P.) Ltd. [2021] 123 taxmann.com 21 (Karnataka). 23. The ld. DR submitted that the DRP noted that from the perusal of the statement of Shri Subrahmanya Srinivas Sista it is clear that the amount claimed as capitalized have actually not incurred by the assessee. Therefore, this amoun....
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.... reimbursed the salary cost of the employees to VEPRPL. According to the ld AR The salary was paid by VEPRPL to the employees for administrative convenience only on which VEPRPL has deducted appropriate taxes under section 192, wherever applicable. On perusal of materials on record it is clear that the amount paid by the assessee to VEPRPL is only a reimbursement of the salary cost and not to carry out any work as defined in section 194C of the Act or provide any technical / consultancy services to the Assessee as defined under section 194J of the Act. Further there is no element of income in the salary cost reimbursed by the assessee to VEPRPL. We notice that the Karnataka High Court in the case of Kalyani Steels Ltd [2018] 91 taxmann.com 359 (Karnataka) has held that there cannot be a TDS on the reimbursement since there was no 'income' element. The salary cost which is paid by VEPRPL to the employees has already been tax deducted and therefore the amount reimbursed by the assessee is only on a cost to cost basis cannot be subject to TDS under 194C / 194J. In view of the above discussion we hold that the salary cost paid by the assessee to VEPRPL cannot be disallowed u/s.40(a)(ia....
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....pitalized but is accounted as capital work in progress in para 25 of this order. Considering the fact that the preoperative expenses are not capitalized and no depreciation is claimed for the year under consideration we delete the disallowance of depreciation on pre-operative expenses. 32. The common issue in appeals 196 to 198/BANG/2021 is the determination of ALP of the interest on the issue NCDs to the AEs. The details of interest charged by these assessee is tabulated below Name of Entity Date of issue Tenure (in years) Face value (in INR lacs) Rate of interest (Coupon rate) Issue size (in INR cr.) Coupon rate as per TP order Adjustment (Amt in INR) Vena Energy Fatanpur Power Private Limited 06 May 2015 25 50.00 14.85% 500 9.32% 5,52,70,305 Vena Energy MH Wind Power Private Limited 31 December 2014 25 40.00 15.00% 260 10.24% 10,62,43,105 Vena Energy Patan Power Private Limited 24 December 2013 25 50.00 14.85% 500 9.32% 5,11,01,745 33. Considering that the NCDs are issued to the same AE under the same terms as in the appeal ITA No.195/Bang/2021, and in view of our decision given in para 14 of this order we hold that no adjustment is warranted to....