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TMI Blog2024 (6) TMI 317X X X X Extracts X X X X X X X X Extracts X X X X ..... t of such expenditure in relation to exempt income. AO shall determine the amount of expenditure incurred in relation to earning exempt income in accordance with the provisions of section 14A(2) read with Rule 8D. The assessee in the impugned assessment year has worked disallowance u/s 14A following the same methodology as has been accepted by the AO in remand proceedings in AY 2001-02 and AY 2003-04. The said methodology was subsequently approved by the Tribunal in AY 2006-07 and Assessment Year 2007-08. Revenue has not disputed the fact that the manner of determination of suo-motu disallowance u/s.14A by the assessee is in accordance with the method accepted by Revenue in the past. Merely for the reason that Rule 8D was introduced from the impugned assessment year it cannot be said that there is any defect in the manner of computation of disallowance u/s. 14A by the assessee. We find merit in ground No.1 of appeal, hence, the same is allowed. Nature of expenses - expenditure on Shelved Projects - revenue or capital expenditure - HELD THAT:- The assessee has incurred expenditure on various projects/ feasibility reports which were subsequently shelved. The assessee claimed the expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as vanished. Accordingly, ground No.4 of the appeal is allowed. Reduction in allowance of premium on pre payment of debentures and its impact on computation of deduction u/s. 80IA - HELD THAT:- The Co-ordinate Bench while deciding this issue in Assessment Year Assessment Year 2006-07 [ 2019 (12) TMI 819 - ITAT MUMBAI ] we direct the AO accordingly to give life to the issue of allowability of deduction towards premium on prepayment of debentures based on the final outcome of the appeals of the revenue for the Asst Years 2004-05 and 2005-06. Claim of deduction u/s. 80IA - HELD THAT:- It is an undisputed fact that the initial assessment year for the purpose of deduction u/s. 80IA qua Supa Wind Power Project 17 MW Unit is AY 2007-08. The Tribunal has dealt with the issue of assessee s eligibility of claiming deduction u/s. 80IA in AY 2006-07 in detail. The findings on the issue in Assessment Year 2006-07 have been ipso-facto adopted in AY 2007-08. Thus, assessee s claim of deduction u/s. 80IA on Supa Wind Power Project 17 MW Unit was allowed by the Tribunal in AY 2007-08. No material has been placed on record by the Revenue to show that the Department is in appeal against the findings ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng TP adjustments in ground No.11 and 12, respectively. TP adjustment towards Guarentee fees - HELD THAT:- For the purpose of bench marking the guarantee fee towards the loan obtained by the AE from Barclays Bank Plc., the assessee has obtained a letter from SBI quoting the rate charged. The assessee has arrived at a rate of 0.041% using SBI rate as the base and by applying the power trend analysis since according to the assessee the rate of guarantee fee is inversely proportional to the amount of loan. The amount of loan being huge i.e. USD 950 million, the assessee justified the said rate and considered the same to be at arm's length. CUP method requires a high degree of comparability of products and functions, therefore, we see merit in the contention of the TPO. The rate obtained from SBI does not consider the specific aspects such as risk etc. thus, cannot be applied carte blanche. Hence, we are not convinced to accept the basis on which the assessee has bench marked the transaction. At the same time we notice that the TPO has also used general rates obtained from two banks viz., Allahabad bank and SBI and there is no proper reasoning provided by the TPO as to how the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... um. The contention of the assessee is that LIBOR rate existing at the time of borrowing should be considered. The Hon ble Rajasthan High Court in the case of Vaibhav Gems Ltd. ( 2017 (12) TMI 583 - RAJASTHAN HIGH COURT] has held that where assessee has extended loan to its AE, adjustment should be made at average LIBOR rate existing at that time. It is a settled legal position that for the purpose of determination of ALP the rate of interest should be charged in the currency in which loan is borrowed. Thus, we find merit in the submissions of assessee in applying LIBOR in respect of loan advanced from India to the AE. - SHRI VIKAS AWASTHY, JUDICIAL MEMBER MS. PADMAVATHY.S, ACCOUNTANT MEMBER For the Appellant : Shri Nitesh Joshi with Shri Ninad Patade For the Respondent : Shri Manoj Kumar Shri Pravin Salunke ORDER PER VIKAS AWASTHY, JM: 1. This appeal by the assessee is directed against the assessment order dated 30/11/2012 passed u/s. 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961[in short the Act ], for the Assessment Year 2008-09. 2. The assessee is engaged in generation, transmission and distribution of electricity. During the period relevant to assessment year under appea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7-08 enhanced disallowance u/s. 14A of the Act for the reasons similar to the one given in the impugned assessment year. The assessee carried the issue in appeal for the respective Assessment Years before the CIT(A). The CIT(A) allowed relief to the assessee and accepted the method of computation of suo-moto disallowance u/s. 14A of the Act. The Revenue in ITA No.4058/Mum/2012 for Assessment Year 2006-07 and in ITA No.4070/Mum/2012 for Assessment Year 2007-08 assailed the order of First Appellate Authority. The Tribunal vide order dated 29/11/2019 upheld the order of CIT(A) in restricting disallowance computed by the assessee on the same methodology as was adopted in Assessment Year 2001- 02. The ld.Counsel for the assessee further submitted that own funds of the assessee are much more than the investments. It is a well settled legal proposition that where own interest free funds of the assessee are sufficient to cover the investments, no disallowance in respect of interest expenditure is to be made. The ld.Counsel for the assessee vehemently argued that the Assessing Officer has not recorded satisfaction as is mandated u/s. 14A(2) of the Act, rejecting assessee s working of suo-mo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith the correctness of the claim of the assessee in respect of such expenditure in relation to exempt income. The Assessing Officer shall determine the amount of expenditure incurred in relation to earning exempt income in accordance with the provisions of section 14A(2) of the Act read with Rule 8D. The assessee in the impugned assessment year has worked disallowance u/s. 14A of the Act following the same methodology as has been accepted by the Assessing Officer in remand proceedings in Assessment Year 2001-02 and Assessment Year 2003-04. The said methodology was subsequently approved by the Tribunal in Assessment Year 2006-07 and Assessment Year 2007-08. The Revenue has not disputed the fact that the manner of determination of suo-motu disallowance u/s. 14A of the Act by the assessee is in accordance with the method accepted by Revenue in the past. Merely for the reason that Rule 8D was introduced from the impugned assessment year it cannot be said that there is any defect in the manner of computation of disallowance u/s. 14A by the assessee. We find merit in ground No.1 of appeal, hence, the same is allowed. Since, we have allowed assessee s claim u/s. 14A of the Act, on the pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the assessee submitted that the assessee is following mercantile method of accounting. The expenses were crystallized during the year. He further stated that prior period income of Rs. 4.34 crores was also offered to tax in the impugned Assessment Year. The Assessing Officer has accepted the same. The assessee has been consistently following the same method of accounting income and expenditure that has materialized during the year. He further submitted that the issue is covered in favour of the assessee by the decision of Tribunal in appeal by Revenue vide order dated 29/11/2019 for Assessment Year 2006-07 and 2007-08 (supra). 11. The ld. Departmental Representative placed reliance on the directions of the DRP and the assessment order. 12. Both sides heard. We find that in Assessment Year 2006-07 prior period expenses were allowed by the CIT(A) against which the Department was in appeal. The Tribunal held that since entire expenses got crystalized during the year under consideration, the CIT(A) was correct in granting deduction in respect of prior period expenses and thus, decided the issue in favour of assessee. In the impugned assessment year the Revenue has not pointed any di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lity of discount on issue of Euro notes, which has got absolutely nothing to do with the foreign exchange gain which arose in earlier years. Hence, we hold that the ld. AO had grossly erred in disallowing the said sum of Rs. 18,88,103/- towards discount on issue of Euro notes. We find that the action of the assessee is exactly in line with the ratio laid down by the Hon ble Supreme Court in the case of Madras Industrial Investment Corporation reported in 225 ITR 802. Accordingly, ground No.3 raised by the revenue is dismissed. In the impugned assessment order the Assessing Officer has disallowed discount on issue of Euro Notes merely for the reasons that the Department has not accepted the order of CIT(A) on this issue in Assessment Year 2006-07 and has preferred appeal. Since, the Co-ordinate Bench has upheld the findings of the CIT(A) in Assessment Year 2006-07 the substratum for disallowance made by Assessing Officer has vanished. Accordingly, ground No.4 of the appeal is allowed. Ground No.5: Reduction in allowance of premium on pre payment of debentures and its impact on computation of deduction u/s. 80IA of the Act: 16. The ld. Counsel for the assessee submitted that the gene ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which Section 80IA deduction is not claimed and Rs. 6,77,54,167/- represented the pro-rated amount applicable for A.Y.2006-07. We find that the assessee had not apportioned the portion of premium paid on prepayment of debentures towards eligible undertaking eligible for deduction u/s. 80IA of the Act in A.Y. 2004-05. But the ld. AO sought to apportion the same towards the eligible undertaking and sought to reduce the claim of deduction u/s. 80IA of the Act to that extent. 5.2. The action taken by the ld. AO in A.Yrs 2004-05 and 2005-06 on the subject mentioned issue under dispute was challenged by the assessee before this Tribunal , among other issues, and this Tribunal vide its order dated 04/09/2019 had quashed the assessment orders on the ground that the Additional Commissioner who framed the assessment did not possess the valid jurisdiction in as much as notification u/s. 120(4)(b) of the Act was absent in the case. By this process, the claim of deduction of Rs. 40.84 Crores in A.Y.2004-05 would get restored. Accordingly, the adjudication of this issue for the A.Y. 2006-07 would become redundant as assessee had been granted deduction for the full amount in A.Y. 2004-05 itself p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hout prejudice to his primary contention the ld. Departmental Representative referred to the assessment order (Para-7) to contend that the Assessing Officer and the DRP have failed to verify the claim of deduction in the impugned assessment year. Subject to verification of loss being adjusted the issue can be restored to Assessing Officer for verification. 21. We have heard the submissions made by rival sides on this issue. It is an undisputed fact that the initial assessment year for the purpose of deduction u/s. 80IA of the Act qua Supa Wind Power Project 17 MW Unit is Assessment Year 2007-08. The Tribunal has dealt with the issue of assessee s eligibility of claiming deduction u/s. 80IA in Assessment Year 2006-07 in detail. The findings on the issue in Assessment Year 2006-07 have been ipso-facto adopted in Assessment Year 2007-08. Thus, assessee s claim of deduction u/s. 80IA on Supa Wind Power Project 17 MW Unit was allowed by the Tribunal in Assessment Year 2007-08. No material has been placed on record by the Revenue to show that the Department is in appeal against the findings of the Tribunal in Assessment Year 2007-08. Thus, it can be safely construed that that the Departm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act, therefore, he is not pressing this ground of appeal. In view of the statement made by ld. Counsel for the assessee, ground No.8 of appeal is dismissed as not pressed. Ground No.9: Disallowance of addition depreciation Rs. 28,13,41,382/- claimed u/s. 32(1)(iia) of the Act : 26. The ld. Counsel for the assessee submitted that the assessee had claimed additional depreciation u/s. 32(1)(iia) of the Act r.w. Rule 5(1A) on Plant and Machinery. The Assessing Officer disallowed assessee s claim of additional depreciation by following the assessment order for Assessment Year 2006-07. In Assessment Year 2006-07 the assessee carried the issue in appeal before the CIT(A). The CIT(A) vide order dated 20/03/2012 directed the Assessing Officer to verify if, the assessee had exercised the option of claiming depreciation as per Written Down Value (WDV) method or on Straight Line Method (SLM) basis and in case the depreciation is claimed on WDV method, to allow additional depreciation in terms of section 32(1)(iia) of the Act. The Assessing Officer vide order giving effect to the order of CIT(A) dated 13/05/2013 (at page 296 of paper book) allowed assessee s claim of additional depreciation u/s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee fees Up to INR 1 crore 0.50% INR 1 crore to INR 10 crores 0.30% Above INR 10 crores 0.25% On the basis of the above table, the assessee derived rate of 0.041% as guarantee commission. The ld.Counsel for the assessee submitted that the rate of guarantee fee is inversely proportional to the quantum of principle loan amount. Since, the principle amount in the instant case was USD 950 million, the rate of 0.041% was arrived at by applying power trend analysis. Accordingly the assessee charged guarantee commission of Rs. 1,55,69,700/- from its AE and held the same to be within arm's length. 31. The TPO rejected assessee s methodology to determine guarantee commission rate and recomputed the guarantee fee to make a TP adjustment. The TPO used the information of guarantee commission charged by SBI and Allahabad Bank (obtained u/s 133(6) during the course of proceedings of GE Shipping). The TPO applied average rate of 2.075% p. a. and added a mark up of 0.925 % on account of exchange risk, country risk and AE risks to arrive at a rate of 3% as the ALP. The TPO accordingly made adjustment of Rs. 87,18,60,958/-. The DRP deleted the risk mark up added to the average rate applied by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aspects such as risk etc. thus, cannot be applied carte blanche. Hence, we are not convinced to accept the basis on which the assessee has bench marked the transaction. At the same time we notice that the TPO has also used general rates obtained from two banks viz., Allahabad bank and SBI and there is no proper reasoning provided by the TPO as to how the same is applied for benchmarking assessee's transaction. Therefore, in our considered view, the TP adjustment computed by the TPO based on the general rate of guarantee fees charged by banks is not tenable. We notice that the coordinate bench in the case of Strides Shasun Limited vs ACIT in ITA No.124/Mum/2013 dated 02.09.2022., has considered the issue of guarantee fees and accepted 0.50% Corporate Guarantee fee by observing as under: 030. Now the issue is what is the arm s-length price of the corporate guarantee commission to associated enterprises. The coordinate bench on identical facts and circumstances in case of Everest Kanto cylinders [Everest Kento Cylinder Ltd. [IT Appeal No. 7073 (Mum.) of 2012, dated 23-11-2012] ] has held that guarantee commission should be charged @ 0.5% p.a. for providing corporate guarantee for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7.17 bps A) Average Spread in terms of % 0.77 B) Average 12 month LIBOR (1 April 2007 31 March 2008) 4.54% Fixed Interest Rate of Comparable Transactions (A+B) 5.31 The assessee further claimed that the effective interest charged from AEs towards the loan was 4.11%, i.e. higher than the interest paid on FCCB at 3.88% per annum, accordingly, the assessee treated the transaction of lending of loan to its AE to be at arm s length. The TPO, after perusal of the interest schedule as per the agreement entered into by the assessee noticed that the assessee has given a moratorium period of 2 years to AE. As per the terms, the assessee has not received any interest from the AE towards the loan during the year under consideration and therefore for the purpose of ALP the TPO considered the interest receivable for the year under consideration as Nil. The TPO did not accept the submissions of the assessee that weighted average rate i.e. effective rate of interest should be considered for the purpose of benchmarking. For loan extended out of FCCB funding the TPO added a mark-up of 3% to the rate at which, the FCCB is borrowed i.e. 3.88%. Accordingly, the TPO considered the interest rate of 6.88% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of foreign currency borrowing LIBOR rate should be applied. To support this argument he placed reliance on the decision in the case of CIT vs. Vaibhav Gems Ltd., 88 taxmann.com 12 (Raj). 40. Per contra, the ld. Departmental Representative vehemently argued that effective rate cannot be accepted. It is the rate at which loan is advanced on year to year basis that can only be applied. He pointed that for the year under consideration the assessee has not charged any interest, therefore, the TPO has correctly applied Nil rate and has made TP adjustment. He submitted that the assessee has taken loan @ 7.5% to 10.3% to finance the AE. Supporting the order of TPO he further pointed that credit rating of the AE is Nil, hence, the AE is a high risk entity. Therefore, the TPO has rightly added markup of 3%. 41. We have heard the rival parties and perused the materials on record. We notice that out of USD 273 million, which the assessee has lent as loan to the AE, USD 200 million is sourced through FCCB borrowings and USD 73 million is funded from India. The TPO has imputed a TP adjustment by applying 6.88% interest rate on the loan funded through FCCB borrowing by considering the rate at whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the assessment year 2006-07 works out to 2.51 % only. Similarly, with respect to the foreign currency cash loan on spreading the actual interest cost of 1,39,69,8487- over the period of loan and also taking into account the increased borrowings on account of exchange rate fluctuation, the effective rate of interest for assessment year 2006-07 comes to 2.67%. It is sought to be pointed out that the aforesaid effective rates of interest is less than the arm's length rate of interest considered by the TPO in respect of technical knowhow and foreign currency cash loans. Therefore, there was no necessity of making any adjustment in the transaction of payment of interest on account of technical knowhow and foreign currency cash loans in order to bring it to the level of arm's length price. xxxxxxxxxxxxxxxxxxx 21.The aforesaid workings have not been disputed in the course of hearing before us. Be that as it may, the moot point is as to whether it is relevant to consider the stated rate of interest of 12% or the effective date of interest for the purpose of benchmarking the transaction with comparable cases. The terms and conditions of the agreement approved by the RBI in relatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e loan agreements. Moreover, the point being made out by the TPO is on account of sub-rule (4) of rule 10B of the Income Tax Rules, 1962, which is of no relevance in the present context. The aforesaid sub-rule provides that the data to be used in analyzing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into. The said provision has no relevance in the present context, wherein the issue relates to identifying and determining the correct international transaction which is required to be benchmarked under the Transfer Pricing Regulation. Therefore, the plea of the Revenue on this aspect is liable to be rejected. We hold so. 22. At the time of hearing, the Ld. Representative also relied upon the decision of the Ahmedabad Bench of the Tribunal in the case of DC1T vs. Hitachi Home Life Solutions (India) Ltd. vide ITA No.l82/Ahd/2011 Others dated 12.08.2012 wherein the royalty paid by the assessee at 3.75% to the associated enterprise was sought to be benchmarked. The Revenue determined the arm's length rate of payment of royalty @ 3%, while asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of borrowing should be considered. The Hon ble Rajasthan High Court in the case of Vaibhav Gems Ltd. (supra) has held that where assessee has extended loan to its AE, adjustment should be made at average LIBOR rate existing at that time. It is a settled legal position that for the purpose of determination of ALP the rate of interest should be charged in the currency in which loan is borrowed. Thus, we find merit in the submissions of assessee in applying LIBOR in respect of loan advanced from India to the AE. Thus, in light of our above observations, the assessee succeeds on ground No.12. Ground No.13: Erroneous denial of relief granted by DRP: 44. The ld. Counsel for the assessee stated at Bar that he is not pressing ground No.13 of appeal. In view of the statement made by ld. Counsel for the assessee ground No.13 is dismissed as not pressed. Ground No.14: Erroneous application of section 133(6) of the Act for the purpose of comparability in Transfer Pricing: 45. Since we have allowed ground No.11 and 12 of the appeal, ground No.14 of the appeal has become infructuous and the same is dismissed as such. 46. In the result, appeal of the assessee is partly allowed. Order pronounced i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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