2021 (5) TMI 816 - AT - Income Tax

Disallowance on depreciation claimed on assets of transmission business - slump sale of demerger - AO was of the view that the transaction was nothing but a demerger u/s 2(19AA) of the Act , hence the assessee was entitled to claim depreciation on the WDV of the block of assets and not on the inflated value arrived after revaluation - HELD THAT - As decided in own case 2019 (9) TMI 437 - ITAT MUMBAI AO failed to explicate as to how the transfer would fall within the meaning of demerger as given under section 2(19AA) and as how all the condition specified under section 2(19AA) of the Act were satisfied. Revenue has not disputed the findings of the first appellate authority that the transfer in question is a case of slump sale and not a case of demerger. The valuation has also not been disputed. Under these circumstances, for the reasons noted in the assessee's appeal, we have to necessarily uphold the order of the first appellate authority and dismiss ground of the revenue. Disallowance of mark-to-market loss - assessee had debited a sum on account of foreign exchange gain/loss in the Profit Loss account for the year under consideration - AO was of the view that unrealized forex loss was neither an accrued loss nor an actual loss and it does not fit into any of the criteria prescribed for allowability of an expenditure or loss as per the provisions of the Act - HELD THAT - As decided in own case 2019 (9) TMI 437 - ITAT MUMBAI Loss claimed by the assessee on account of fluctuation in the rate of foreign exchange as on the date of balance-sheet is allowable as expenditure under section 37(1). Appellant has been actually providing for such MTM losses in its Books of Account in accordance with the applicable Accounting Standards and accordingly, even for this reason, the deduction would be allowable to the Appellant while computing its taxable income.Appellant prays that the MTM losses arising on account of forward contracts entered into by the Appellant be considered as an accrued loss to the Appellant and thereby allowed as deduction while computing the taxable income. Addition of performance guarantees for its AEs - HELD THAT - As decided in own case 2019 (9) TMI 437 - ITAT MUMBAI when internal comparable uncontrolled price is available that should be considered as the most direct and reliable way to apply the arm s length principle. In any case, there is absolutely no loss to the assessee and no bearing on the profits or losses as the entire cost of 0.93% has been duly recovered by the assessee from its AE. Hence, the action of the CIT(A) in holding no further adjustment to ALP is required in respect of the subject mentioned guarantee commission transaction and consequently directing the deletion of addition confirmed. Bank guarantee and corporate guarantee provided to Chadian Company for Water and Electricity (CCWE) - HELD THAT - This guarantee was required by CCWE, who had given contract to the AE, before giving any advance to the AE. In effect, this bank guarantee was issued to CCWE for securing the advance payment from CCWE by the AE. It was the contentions of the assessee before the TPO that bank had charged 0.93% as the guarantee commission and there was no formal guarantee agreement entered in this regard ; that the credit rating issued by CARE is A and credit rating of the AE was not done; no benchmarking was done by the assessee as executing guarantee in favour of a bank on behalf of the AE was not an international transaction. Also the assessee explained to the TPO that the corporate bond rates for United Arab Emirates (UAE) were not available; however, the rate of interest on borrowings made in the country in which the AE is situated is quite low in comparison with bond rate prevailing in India; therefore, Indian Corporate Bond Rates should not be applied for benchmarking ; the bank had charged the assessee 0.93% for issuing this bank guarantee to CCWE on behalf of its AE for securing the advance payment for executing contract. Thus the submission of the assessee is that this guarantee fee of 0.93% has been duly recovered by it from its AE and hence, there is no impact and profit or loss of the assessee. As decided in own case 2019 (9) TMI 437 - ITAT MUMBAI the findings given hereinabove in respect of performance guarantee to CCWE by us would hold good for this bank guarantee also. Accordingly, we hold that the finding of the ld. CIT(A) and consequently deletion of adjustment on account of bank guarantee. Corporate guarantee provided to ICICI Bank on behalf of KEC USA LLC and Transmission LLC USA - HELD THAT - As relying on own case 2020 (9) TMI 1101 - ITAT MUMBAI direct the TPO/AO to re-compute the arm s length of the guarantee commission @ 0.20%.

Summary

Issues Involved:

1. Disallowance of depreciation on assets of transmission business.
2. Disallowance of mark-to-market (MTM) loss on foreign exchange.
3. Transfer pricing adjustment on performance guarantees.
4. Transfer pricing adjustment on bank and corporate guarantees provided to Chadian Company for Water and Electricity (CCWE).
5. Transfer pricing adjustment on corporate guarantees provided to ICICI Bank on behalf of KEC USA LLC and Transmission LLC USA.

Issue-wise Detailed Analysis:

1. Disallowance of Depreciation on Assets of Transmission Business:

The assessee claimed depreciation on revalued assets acquired from KEC Infrastructure pursuant to a composite scheme of arrangement sanctioned by the Hon’ble Bombay High Court. The AO disallowed ?18,12,94,916/- of depreciation, arguing that the transaction was a demerger under Section 2(19AA) of the Income Tax Act, and depreciation should be claimed on the WDV of the block of assets, not the revalued amount. The CIT(A) allowed the appeal by following the Tribunal’s orders for earlier years. The Tribunal, following its own order for AY 2010-11, dismissed the Revenue’s appeal, stating that facts were identical to earlier years.

2. Disallowance of Mark-to-Market (MTM) Loss on Foreign Exchange:

The AO disallowed ?5,33,16,399/- of unrealized forex loss, arguing it was neither an accrued nor an actual loss and did not fit the criteria for allowable expenditure under the Act. This amount was added back to the total income and book profits under MAT provisions. The CIT(A) allowed the appeal, following the Tribunal’s order for AY 2009-10. The Tribunal, citing its order for AY 2010-11, dismissed the Revenue’s appeal, noting that facts were identical.

3. Transfer Pricing Adjustment on Performance Guarantees:

The assessee provided performance guarantees for its AEs, which were not considered international transactions in Form 3CEB. The TPO estimated the ALP of the performance guarantee at ?2,05,58,246/- using a 1.04% rate per annum. The CIT(A) ruled that the issuance of guarantee was out of the ambit of Indian Transfer Pricing Regulations as there was no cost element involved. The Tribunal, referencing its decision for AY 2010-11, upheld the CIT(A)’s decision, dismissing the Revenue’s appeal.

4. Transfer Pricing Adjustment on Bank and Corporate Guarantees Provided to CCWE:

The TPO computed an adjustment of ?5,31,59,988/- on corporate guarantees using a yield approach. The CIT(A) held that there was no cost element involved in the transaction of issuance of corporate guarantee, thus no income chargeable to tax. The Tribunal, following its previous decision for AY 2010-11, upheld the CIT(A)’s decision, dismissing the Revenue’s appeal.

5. Transfer Pricing Adjustment on Corporate Guarantees Provided to ICICI Bank on Behalf of KEC USA LLC and Transmission LLC USA:

The AO computed the ALP for corporate guarantees provided to ICICI Bank at ?5,20,54,575/-, using a 1.77% rate. The CIT(A) held that the transaction of issuance of guarantee was out of the ambit of international transaction u/s 92B(1) of the Act. The Tribunal, referencing its decision for AY 2012-13, directed the TPO/AO to re-compute the arm’s length guarantee commission at 0.20%, partly allowing the appeal for statistical purposes.

Conclusion:

The Tribunal consistently followed its previous decisions for earlier assessment years, dismissing the Revenue’s appeals on disallowance of depreciation and MTM loss, and transfer pricing adjustments on performance guarantees and bank/corporate guarantees. For corporate guarantees provided to ICICI Bank, the Tribunal directed a re-computation of the ALP at 0.20%.