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2022 (12) TMI 712 - AT - Income TaxTP adjustment towards interest on issue of NCD Non-Convertible Debentures (NCD) - HELD THAT - In assessee s case the NCDs are issued in INR and the interest is also paid in INR and considering the ratio laid in M/s Praxair India Pvt. Ltd 2021 (12) TMI 1167 - ITAT BANGALORE and the Master Directions issued by RBI, we are in agreement with the contention of the ld AR that the interest rate by the assessee is justified when benchmarked with the SBI Prime Lending Rate on the date of issue debenture. We therefore hold that the interest charged by the assessee on the unsecured non-convertible debentures issued to the AE is within arm s length and TP adjustment stands deleted. Protective and substantive disallowance of depreciation - HELD THAT - With regard to the protective and the substantive disallowance made by the AO, on perusal of financial statements of the assessee we notice that the impugned amounts have not been capitalized and is accounted a capital work in progress for the year under consideration. We therefore agree with the contention of ld AR that when there is no capitalization of the impugned payment and any depreciation claim towards the same, the disallowance of depreciation is not tenable. Since there is no charge of depreciation during the year. AO has made the disallowance without examining the details submitted by the assessee in this regard and has done the disallowance merely based on the statement of Mr.Subramanya which according to ld AR is subsequently retracted. In the light of these discussions we delete the protective and substantive disallowance of depreciation. Disallowance of salary cost debited to the P L account u/s.40(a)(ia) - 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 in the case of Kalyani Steels Ltd 2018 (5) TMI 152 - KARNATAKA HIGH COURT 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). Disallowance of depreciation on pre-operative expenses - HELD THAT - We have considered the issue of disallowance of depreciation where the amount is not capitalized 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.
Issues Involved:
1. Transfer Pricing adjustment towards interest on issue of Non-Convertible Debentures (NCD). 2. Addition made protectively towards depreciation against the amount capitalized as Capital Work In Progress. 3. Disallowance of salary expenses for non-deduction of tax at source. 4. Disallowance of depreciation on pre-operative expenses. Detailed Analysis: 1. Transfer Pricing Adjustment towards Interest on Issue of Non-Convertible Debentures (NCD): The assessee, a private limited company engaged in renewable energy, made a payment towards interest on NCDs issued to its AE at 14.70%. The TPO rejected the assessee's CUP method and applied different filters, resulting in a median rate of 9.32%, leading to a TP adjustment of Rs. 6,46,60,082. The DRP upheld the TPO's adjustments, rejecting the internal CUP method and regulatory rate. The Tribunal, however, found the TPO's rejection of the duration filter inappropriate, considering the unsecured nature and 25-year tenure of the debentures. The Tribunal agreed with the assessee's benchmarking of the interest rate against the SBI Prime Lending Rate plus 300 basis points, deeming the interest rate within the arm's length range. Consequently, the TP adjustment was deleted. 2. Addition Made Protectively towards Depreciation against the Amount Capitalized as Capital Work In Progress: The AO disallowed the depreciation on the capitalized salary expenses and pre-operative expenses based on a statement made during a search, which was later retracted. The Tribunal noted that the amounts were accounted as capital work-in-progress and not capitalized, hence no depreciation was claimed. The Tribunal found the disallowance of depreciation untenable as no charge of depreciation was made during the year. Therefore, both substantive and protective disallowances of depreciation were deleted. 3. Disallowance of Salary Expenses for Non-Deduction of Tax at Source: The AO disallowed 30% of the salary expenses debited to the P&L account under section 40(a)(ia) for non-deduction of tax. The Tribunal found that the salary costs were reimbursed on a cost-to-cost basis without any mark-up, and taxes were already deducted by the sister concern. The Tribunal held that the reimbursement of salary costs does not attract TDS under sections 194C or 194J, as there was no element of income in the reimbursement. Therefore, the disallowance under section 40(a)(ia) was deleted. 4. Disallowance of Depreciation on Pre-Operative Expenses: The AO disallowed 1/5th of the pre-operative expenses capitalized by the assessee. The DRP, doubting the genuineness of the expenses based on a retracted statement, restricted the disallowance to the depreciation calculated at 7.69%. The Tribunal, considering that the expenses were accounted as capital work-in-progress and no depreciation was claimed, deleted the disallowance of depreciation on pre-operative expenses. Conclusion: The Tribunal deleted the TP adjustment towards interest on NCDs, disallowance of depreciation on capitalized salary and pre-operative expenses, and the disallowance of salary expenses for non-deduction of tax at source. The appeals were allowed in favor of the assessee.
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