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TMI Blog2022 (12) TMI 712X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 Rs.14,13,595. b. Disallowance of depreciation of capitalized salary expenses Rs.36,82,829. c. Disallowance of pre-operative expenses Rs.24,58,440. 4. Against the draft assessment order, the assessee filed objections before the DRP, which confirmed the TP adjustments and also the disallowances listed in (i) (ii) above. With regard to pre-operative expenses, the DRP reduced the amount of disallowance to Rs.9,45,270. In pursuance of the directions of the DRP, the AO passed the final assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Section 194LD(2) of the Act does not provide any guidelines for determination of ALP interest rate in the case of NCD. Aggrieved, the assessee is in appeal before the Tribunal. 8. Before us, the ld. AR made detailed written submissions which are as follows. i. While arriving at the ALP of the transaction entered by the assessee, the DRP/TPO failed to consider the interest rate on loans availed from Banks and third party financial institution which constitute internal CUP after appropri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Bank of India plus 300 basis points. Although the said regulations have been issued in the context of borrowings from NRI/PIO, it was submitted that the same carry substantial persuasive value. Details of SBI PLR rates and Assessee s rate SBI PLR [A] Allowable basis points as per RBI master guidelines [B] Net rate [A+B] Assessee s rate of interest 14.45%* ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 from Banks and third party financial institution which constitute an internal CUP after making appropriate adjustments for the difference in the debenture instruments, the ld. DR submitted that the CUP method requires strict comparability in terms of product or services. In the instant case, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 / banks for the reason that in the case of debentures interest rate is decided by the borrower whereas in the case of bank loans the interest rate is decided by the lender and that the repayment of debenture is on maturity and in the case of bank loan repayment is periodical. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... niversal 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, for instance, a US $ loan advanced by a US lender is to him a debt-claim in national currency whereas to a German borrower it is a foreign currency debt (the situation being different, however, when an agreement in a third currency is involved). Moreover, a difference in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 (supra), and the Master Directions issued by RBI, we are in agreement with the contention of the ld AR that the interest rate by the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uring 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 cost Rs.2,92,64,181 VEPRPL as a reimbursement. Out of this a sum of Rs.2,45,52,196 was capitalized and the balance of Rs.47,11,985 was debited to the P L account. In addition to the submissions made with regard to the retraction of statement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 amount is not liable for capitalization and depreciation claimed on the same is required to be disallowed. In view of the above, the Hon'ble DRP upheld the additions made by the AO. 24. Further the ld. DR submitted that the DRP n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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). Disallowance of depreciation on pre-operative expenses 27. The assessee had incurred a sum of Rs.1,22,92,200 towards preoperative expenses and had capitalized the entire amount. The AO disallowed 1/5th of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ideration 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 D ..... 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