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2019 (11) TMI 800 - AT - Income TaxTP Adjustment - CIT(A) in directing the AO/TPO to work out the ALP of interest by applying only LIBOR instead of LIBOR credit spread on account of the risk profile of the borrower - HELD THAT - ALP rate of interest in case of loans advanced to Associate Enterprises would be determined on the basis of rate of interest being charged in the country where the loan is received / consumed. Similar is the ratio of several other judgments rendered by various benches of Tribunal which have already been enumerated in the impugned order. Therefore, the conclusion to the extent that the loan to AE was to be benchmarked on the basis of LIBOR would not require any interference on our part. Now the only question that survives for our consideration is the determination of ALP rate keeping in view the facts and circumstances of the case. FAA has confirmed the determination of ALP on the basis of LIBOR only without any spread-over. However, the said rate, in our opinion, represent interbank rates which are applicable in case of entities having highest credit rating. The same is also fortified by the fact that the assessee, itself, has assigned a rating of Baa1 / BBB to its AE while benchmarking the transactions. The said rating represents lower medium investment grade rating. Therefore, the determination of ALP merely on the basis of LIBOR, in our considered opinion, would not be justified. During the course of proceedings before Ld. TPO, the assessee had arrived at mean spread of 243.83 basis points over LIBOR which is evident from page nos. 5-6 of Ld. TPO s order. The computation of the same has nowhere been disputed by the revenue. Applying LIBOR spread-over, ALP interest has been worked out to be ₹ 1,64,13,241/-. We are of the considered opinion that this spread over as computed by the assessee was undisputed, quite fair and reasonable and the same was to be accepted. Accordingly, we confirm the ALP rate of LIBOR 2.4383% as computed by the assessee in the alternative submissions made before Ld. TPO. The impugned order stand modified to that extent. The Ld. TPO / Ld. AO is directed to recompute the income of the assessee in terms of our direction. Disallowance u/s 14A - HELD THAT - The undisputed position, as in AY 2011-12, that emerges is the fact that no exempt income has been earned by the assessee during the year under consideration. Facts being pari-materia the same, our observations and conclusions as given for AY 2011-12 in revenue s appeal, shall mutatis-mutandis apply to this year also. Accordingly, the additional disallowance of ₹ 1033.95 Lacs as made by Ld. AO in the final assessment order while computing income under normal provisions stand deleted. Also, the adjustment of ₹ 1047.22 Lacs as made by Ld. AO, while computing Book Profits u/s 115JB. Deduction u/s 80-IA - HELD THAT - We hold that the assessee was entitled to claim deduction u/s 80-IA with respect to unit SBU-II. Accordingly, we direct lower authorities to grant the same to the assessee and recompute its income, as per law. Ground Nos. 3 to 5 stands allowed. Short credit of TDS - HELD THAT - Keeping in view the same, it would suffice on our part to issue directions to Ld. AO to verify the TDS credit claim of the assessee and grant the due credit, as per law. This ground stand allowed for statistical purposes. Recovery of Expenses - HELD THAT - The undisputed fact that emerges are that the said expenditure was incurred by the assessee in earlier AY 2011-12 and the payment was made to third party consultants / experts. No payment was made directly to its AE. The said transactions were already benchmarked in AY 2011-12 using CUP method. It is also evident from the order of learned TPO for AY 2011-12 that no adjustment has been proposed against this expenditure in that year. The transactions reported in year under consideration is mere reversal of those book entries. Another fact is that even though the assessee has not benchmarked the same during the year, learned TPO has also not benchmarked the same using any of the prescribed methods. Domain of learned TPO was limited to determination of ALP of the international transactions and it was not for learned TPO to decide whether the expenditure was eligible for deduction or not. So far as the directions of learned DRP, invoking the provisions of Section 37(1) is concerned, it is evident from perusal of final assessment order that the said provisions have not been invoked by learned AO while making the disallowances. This being so, the action of lower authorities in making the said adjustment, could not be upheld.
Issues Involved:
1. Determination of Arm’s Length Price (ALP) for interest on loans to Associated Enterprises (AEs). 2. Disallowance under Section 14A of the Income Tax Act. 3. Allowance of depreciation on capital expenditure. 4. Deduction under Section 80-IA for power generating units. 5. Transfer Pricing Adjustments on reimbursement of expenses. 6. Short credit of TDS. Detailed Analysis: 1. Determination of Arm’s Length Price (ALP) for Interest on Loans to Associated Enterprises (AEs): The revenue contested the CIT(A)'s direction to apply only LIBOR instead of LIBOR + credit spread for determining the ALP of interest on loans to AEs. The assessee advanced intra-group unsecured loans to its AE, charging interest based on LIBOR. The TPO rejected the assessee's methodology, applying a higher rate based on Indian benchmarks. The CIT(A) accepted LIBOR as the appropriate benchmark, referencing subsequent years where the TPO also used LIBOR + spread. The Tribunal upheld the use of LIBOR + 2.4383% spread as computed by the assessee, directing the TPO/AO to recompute the income accordingly. 2. Disallowance under Section 14A of the Income Tax Act: The AO disallowed ?76.78 Crores under Section 14A, applying Rule 8D, despite the assessee's claim of no exempt income. The CIT(A) deleted this disallowance, noting no exempt income was earned, and the investments were made to promote business interests. The Tribunal upheld this, referencing consistent judicial pronouncements and previous Tribunal decisions in the assessee’s favor. The adjustment of this disallowance while computing Book Profits under Section 115JB was also deleted. 3. Allowance of Depreciation on Capital Expenditure: The AO disallowed depreciation on capital expenditure incurred in earlier years, relying on previous assessments where the expenses were disallowed. The CIT(A) allowed the depreciation, following earlier Tribunal decisions in the assessee's favor. The Tribunal upheld this, finding no change in material facts. 4. Deduction under Section 80-IA for Power Generating Units: The AO denied deduction under Section 80-IA for SBU-II, citing the merger of JSWEVL with the assessee after 31/03/2007. The CIT(A) upheld this, referencing Circular No. 3/2008. The Tribunal found that at the time of merger, the power plants were under construction, and the assessee bore substantial investment and risk. The deduction was claimed for the first time in AY 2010-11 and allowed after scrutiny. The Tribunal directed the lower authorities to grant the deduction, following the principle of consistency. 5. Transfer Pricing Adjustments on Reimbursement of Expenses: The AO/TPO made a TP adjustment of ?341.26 Lacs, treating the reversal of entries for expenses incurred on behalf of AE as non-business expenditure. The Tribunal noted that the expenses were incurred in AY 2011-12, benchmarked using CUP method, and no adjustment was made then. The Tribunal held that the TPO's domain was limited to determining the ALP, not the eligibility of the expenditure under Section 37(1). The adjustment was deleted. 6. Short Credit of TDS: The assessee claimed short credit of TDS for ?5.34 Lacs. The Tribunal directed the AO to verify and grant the due credit as per law. Conclusion: Both appeals were partly allowed, with directions for the AO/TPO to recompute the income and grant deductions/credits as per the Tribunal's findings.
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