2016 (6) TMI 1370 - AT - Income Tax

Disallowance u/s 40(a)(ia) - amounts otherwise be allowable as a business expenditure - revenue s submission is that since assessee did not make the entry in the P L A/c in the year in which the liability actually accrued therefore the assessee s claim is to be denied - HELD THAT - We are not inclined to accept this proposition advanced by revenue for the simple reason that the real income of an assessee is to be determined as per the provisions of the Income-tax Act and not on the basis of entries made in the books of account. As per the proviso of section 40(a)(ia) admittedly the deduction is allowable in regard to an expenditure only in the year in which the TDS amount has been deposited. There is no dispute on this count. Further even if an assessee had not debited these expenses in the P L A/c of earlier year that cannot be the basis for denying deduction which is otherwise admissible to assessee. We further find that section 40(a)(ia) does not mandate for any disallowance in earlier year for proviso to section 40(a)(ia) to come into operation. We find that the assessee s claim is fully covered in the case of SMC Construction 2010 (1) TMI 10 - HIGH COURT OF DELHI as held the amounts which may otherwise be allowable as a business expenditure as per the provisions of sections 30 to 38 and which is chargeable to tax in the hands of the recipient would not be allowed 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. - Decided against revenue TP Adjustment - international transaction of payment of interest on external commercial borrowings of Rs. 3, 32, 11, 250/- - interest had been paid to BT plc. @ 9.72% - HELD THAT - Admittedly the external commercial borrowings made by assessee are denominated in the Indian currency. Therefore for bench marking the interest rate paid by assessee @ 9.72% the prevailing PLR in India was to be applied and not the 6 months GPB LIBOR in view of the decision of Cotton Naturals (I) (P) Ltd. 2015 (3) TMI 1031 - DELHI HIGH COURT . Since the interest paid by assessee is much less than as per PLR therefore no adjustment is called for. In the result this ground is allowed.

Summary

Issues Involved:
1. Disallowance of deduction for prior-period expenditure under Section 40(a)(ia).
2. Re-determination of the arm's length price (ALP) for the international transaction pertaining to payment of interest on External Commercial Borrowings (ECB).
3. Incorrect benchmarking of the international transaction using the Great Britain Pound (GBP) London inter-bank offer rate (LIBOR).
4. Failure to grant the benefit of +/- 5% range as per proviso to Section 92C(2).
5. Initiation of penalty proceedings under Section 271(1)(c).
6. Restriction of credit for withholding taxes deducted by customers.

Issue-wise Detailed Analysis:

1. Disallowance of Deduction for Prior-Period Expenditure:
The assessee claimed prior period expenses of Rs. 33,23,29,562/-, which included expenses such as rates and taxes, repair and maintenance, and communication expenses. The Assessing Officer (AO) disallowed these expenses under Section 37 since they pertained to a previous financial year but were claimed under Section 40(a)(ia) due to TDS being deducted and deposited in the current year. The AO's contention was that Section 40 is for disallowance and not for allowing deductions. The Dispute Resolution Panel (DRP) upheld the AO's decision, stating that the expenses should have been disallowed in the previous year. However, the Tribunal found that the real income should be determined as per the Income-tax Act and not based on book entries. Following the Delhi High Court decision in CIT Vs. SMC Construction India, the Tribunal allowed the deduction, emphasizing that Section 40(a)(ia) does not mandate disallowance in the previous year for the proviso to come into operation.

2. Re-determination of ALP for Interest on ECB:
The assessee paid interest on ECB at 9.72%, benchmarked against the Prime Lending Rate (PLR) in India. The Transfer Pricing Officer (TPO) re-determined the ALP using the 6-month GBP LIBOR rate plus a 200 basis points premium, resulting in an interest rate of 7.14%. The TPO disallowed the excess interest payment of Rs. 57,37,292/-. The assessee argued that since the loan was rupee-denominated, the interest rate should be benchmarked against the PLR in India. The Tribunal referred to the Delhi High Court decision in CIT Vs. Cotton Naturals (I) (P) Ltd., which held that the interest rate should be based on the currency in which the loan is denominated. Since the loan was in Indian Rupees, the Tribunal accepted the assessee's benchmarking using the PLR and allowed the deduction.

3. Incorrect Benchmarking Using GBP LIBOR:
The TPO used the 6-month GBP LIBOR rate for benchmarking, which the assessee contested. The Tribunal agreed with the assessee, citing the Delhi High Court decision in Cotton Naturals, which supports benchmarking based on the currency of the loan. The Tribunal found that the interest rate paid by the assessee was lower than the PLR, making the TPO's adjustment unwarranted.

4. Failure to Grant +/- 5% Range Benefit:
The TPO did not grant the benefit of the +/- 5% range as per the proviso to Section 92C(2). The Tribunal's decision to accept the PLR for benchmarking inherently addressed this issue, as the interest rate paid by the assessee fell within the acceptable range when benchmarked against the PLR.

5. Initiation of Penalty Proceedings:
The assessee contested the initiation of penalty proceedings under Section 271(1)(c) for alleged concealment or furnishing of inaccurate particulars of income. The Tribunal did not specifically address this issue in the judgment, but the allowance of the assessee's claims on substantive grounds implies that the basis for penalty may not hold.

6. Restriction of Credit for Withholding Taxes:
The Tribunal did not specifically address the issue of restricting the credit for withholding taxes deducted by customers. The primary focus was on the substantive issues of disallowance and ALP determination.

Conclusion:
The Tribunal allowed the assessee's appeal, granting deductions for prior-period expenses under Section 40(a)(ia) and accepting the PLR for benchmarking the interest on ECB, thus rejecting the TPO's adjustments based on GBP LIBOR. The decision underscores the importance of aligning tax assessments with the actual economic substance and statutory provisions rather than rigid adherence to book entries or inappropriate comparables.