ACIT, CIRCLE-5(1), HYDERABAD vs. MATRIX POWER WIND PRIVATE LIMITED, HYDERABAD

आदेश / O R D E R PER MANJUNATHA.G, AM:

This appeal filed by the Revenue is directed against the order of the

Commissioner of Income Tax (Appeals)-10, Hyderabad, dated

19.08.2025, and pertains to assessment year 2021-22.

1.1 On the facts and in the circumstances of the case and in law, the Learned CIT(A) erred in deleting the disallowance of Rs.8,04,95,000/- made towards Employee Benefit Expenses without appreciating that the assessee failed to substantiate the genuineness and business expediency of the expenditure as required under section 37(1) of the Income-tax Act, 1961. 1.2 The CIT(A) erred both in law and on facts The CIT(A) erred both in law and on facts by adjudicating the issue based on submissions made by the appellant during appellate proceedings with additional evidences about the employee benefit expenses which were not produced before the AO and was not remanded under Rule 46A of Income Tax Rules, 1962 for verification, thereby violating the mandatory provisions of Rule 46A. 1.3 The CIT(A) erred in misapplying judicial precedents that may restrict examination of reasonableness but do not bar verification of genuineness and ignoring that the onus lies on the appellant to substantiate the claims u/s.37 by sufficient evidences. 1.4 The CIT(A) further erred in ignoring the abnormal increase in such expenses despite a decline in business revenue, thereby overlooking possible inflation of expenses. The order of the CIT(A) is therefore perverse and unsustainable both on facts and in law."

2.1 Whether on the facts and circumstances of the case and in law, the CIT(A) is justified in rejecting the benchmarking analysis carried out by the TPO.

2.2 Whether on the facts and circumstances of the case and in law, the CIT(A) is justified in directing to apply Prime Lending Rate (PLR) as arms length rate of interest without appreciating the fact that PLR has been replaced with Marginal Cost of Funds based Lending Rate (MCLR) and later with External Benchmark-based Lending Rates (EBLR) and thus, for the year under consideration application of EBLR is more appropriate.

the business of generation of electricity through wind resources and the

company is currently operating 15MW wind powerplant in the state of

Karnataka. The assessee company filed its return of income for AY 2021-

22 on 10.03.2022 declaring current year loss of Rs.4,79,98,746/- and

total income at Rs.NIL. The case was selected for scrutiny and during the

course of assessement proceedings, a reference u/s.92CA(1) of the

Income Tax Act, 1961 was made to the Transfer Pricing Officer (TPO) for :: 3 :: determination of Arm’s Length Price in relation to the international

transaction entered into with its Associated Enterprise (AE). The Ld. TPO

has passed order u/s.92CA(3) of the Act on 20.09.2023 and made ALP

adjustment of Rs.13,02,752/- in respect of interest payment on Non-

Convertible Debentures (NCDs) to its AE, Greenko Dutch B.V. The Ld.TPO

has computed interest by applying 8.61% rate of interest as against

coupon interest 11% paid by the assessee and determined ALP interest

payment on NCDs at Rs.44,11,198/- as against amount reported in Form

3CEB for Rs.57,13,950/- and difference of Rs.13,02,752/- has been

treated as excess payment and proposed adjustment.

24.11.2023 and proposed TP adjustment as suggested by the TPO in

respect of interest payment made on NCDs of Rs.13,02,752/-. Further,

the TPO has also made addition in respect of disallowance of ‘employee

benefits expenses’ of Rs.8,04,95,000/- in respect of increase in the

‘employee benefits expenses’ to Rs.1176.70 lakhs from Rs.371.75 lakhs

as compared to last year on the ground that the assessee has failed to

substantiate huge increase in ‘employee benefits expenses’, even though,

there was a reduction in ‘revenue from operations’ from

Rs.30,43,44,953/- to Rs.23,60,96,779/-. Since the assessee didn’t

produce any satisfactory explanation regarding increase in ‘employee

benefits expenses, when compared to decrease in total ‘revenue from

operations, the AO disallowed a sum of Rs. Rs.8,04,95,000/- being :: 4 :: difference between ‘employee benefits expenses’ of the current financial

year and ‘employee benefits expenses’ of the previous financial year.

the company preferred to file an appeal before the Ld.CIT(A) instead of

filing objections before the Dispute Resolution Panel (DRP). Accordingly,

the AO passed the final assessement order u/s.143(3) r.w.s.144C(3)

r.w.s.144B of the Act on 28.12.2023 and determined total income at

Rs.3,37,99,006/- by making addition towards TP adjustment of

Rs.13,02,752/- and disallowing ‘employee benefits expenses’ of

Rs.8,04,95,000/-.

an appeal before the Ld.CIT(A). Before the Ld.CIT(A), the assessee

challenged the additions made by the AO towards disallowance of

‘employee benefits expenses’ of Rs.8,04,95,000/- and submitted that the

AO was completely erred in disallowing ‘employee benefits expenses’ only

on the basis of increase in the said expenses and decrease in ‘revenue

from operations’, even though, there is no direct link between increase in

‘employee benefits expenses’ and decrease in ‘revenue from operations’.

The assessee had also challenged the additions made by the AO towards

TP adjustment of Rs.13,02,752/- on the ground that the Ld.TPO has erred

in making adjustment by recomputing the interest payment on NCDs by :: 5 :: applying External Benchmark-based Lending Rates (EBLR) as against

Prime Lending Rate (PLR) considered by the assessee.

certain judicial precedents including the decision of the Hon’ble Supreme

Court in the case of CIT, Bombay v. M/S. Walchand & Co. (Pvt.) Ltd.,

Bombay reported in [1967] 65 ITR 381 (SC) and decision of the Hon’ble

Bombay High Court in the case of Extrusion Process Pvt. Ltd. v. CIT

reported in [1979] 119 ITR 287 (Bom.), deleted the additions made by

the AO towards disallowance of ‘employee benefits expenses’ by holding

that the AO was not justified in arbitrary disallowance of ‘employee

benefits expenses’ only on the basis of increase in expenses and reduction

in ‘revenue from operations’, even though, there is no direct nexus

between increase in expenses and decrease in ‘revenue from operations’.

The Ld.CIT(A) further observed that the reasonableness of the

remuneration to be considered from the point of view of businessman and

it was not open to the AO to decide what is the reasonable amount of

remuneration to an employee. Further, if an assessee justifies payment

of remuneration to a person with relevant details then which is not open

for the AO to question reasonableness, unless the AO makes out a case

that the expenditure incurred by the assessee is unreasonable or

excessive. In the present case, the assessee has furnished relevant

details of remuneration paid to Key Managerial Personnel (KMPs) who are

actively involved into day to day affairs which resulted in substantial :: 6 :: revenue in subsequent financial year and therefore, the remuneration

paid to KMPs from the point of view of the businessman can’t be

questioned, once it is proved that the said expenditure was incurred

wholly and exclusively for the purpose of the assessee. Therefore, the ld

CIT(A) deleted the addition made by the AO towards disallowance of

‘employee benefits expenses’ of Rs.8,04,95,000/-.

the basis of TP adjustment suggested by the TPO in respect of interest

payment on NCDs, the Ld.CIT(A) by following the decision of the ITAT

Hyderabad Special Bench in the case of Hyderabad Infratech (P.) Ltd. v.

DCIT reported in [2025] 171 taxmann.com 385 (Hyderabad - Trib.) (SB)

deleted the addition made by the AO by holding that, if NCDs

denominated in Indian currency, then for the purpose of benchmarking

interest payment on NCDs, PLR is appropriate, instead of EBLR rate

considered by the TPO. Therefore, directed the AO/TPO to delete addition

towards TP adjustment of Rs.13,02,752/-.

Nos.1 to 1.4 of the Revenue’s appeal is deletion of addition made by the

AO towards disallowance ‘employee benefits expenses’ of

Rs.8,04,95,000/-.

Ld.CIT(A) erred in deleting the disallowance without appreciating the fact

that the assessee failed to substantiate the genuineness and business

expediency of the expenditure as required u/s.37(1) of the Act. The CIT-

DR further referring the assessment order submitted that the AO has

brought out the clear facts that there was a steep increase in ‘employee

benefits expenses’ from Rs.371.75 lakhs to Rs.1176.70 lakhs, whereas

the ‘revenue from operations’ was decreased from Rs.30,43,44,953/- to

Rs.23,60,96,779/-. Although, there is a decrease in ‘revenue from

operations and huge increase in ‘employee benefits expenses, the

assessee has not substantiated expenditure by filing relevant evidence.

Although the assessee claims to have deducted TDS on ‘employee

benefits expenses’ and claimed that the employee benefit expenses has

been paid to KMPs for rendering services which resulted in enhanced

Revenue for the company in the subsequent years, but fact remains that

the assessee has not filed any details except stating that there is no link

between ‘revenue from operations’ and ‘employee benefits expenses’.

The Ld.CIT(A) without appreciating the relevant facts and also admitting

certain additional evidence filed by the assessee, has deleted the addition

without providing an opportunity to the AO to verify the additional

evidences filed by the assessee contrary to Rule 46A of the Income Tax

Rules, 1962. Therefore, he submitted that the addition made by the AO :: 8 :: should be upheld or in the alternative matter may be remanded back to

the file of the AO for further verification.

other hand, supporting the order of the CIT(A), submitted that the AO has

not disallowed the expenditure u/s.37(1) of the Act, because provisions of

Section 37(1) of the Act has to be invoked for disallowance of capital

expenditure or personal expenses. Further, any expenditure can be

disallowed u/s.37(1) of the Act, if such expenditure is personal in nature

or capital in nature only. Therefore, the arguments of the Ld.CIT-DR,

invoking Section 37(1) of the Act is incorrect. The Ld.Counsel for the

assessee further submitted that the assessee has paid remuneration to

KMPs which resulted in substantial increase in ‘employee benefits

expenses’ when compared to previous financial year. The assessee has

deducted TDS on the said payment and the employee has paid higher rate

of 38% tax on their income including remuneration received from

company whereas tax rates for the assessee company is at 25% which is

below the tax paid by individual employees and therefore, the allegation

of the AO is that it is a colorable device to reduce the profit is incorrect.

Further, the assessee also filed relevant acknowledgment of minutes of

board meeting to prove the payment of KMPs for rendering services and

also considering the importance of the services to the company. The

Ld.CIT(A) after considering the relevant facts has rightly deleted the :: 9 :: addition made by the AO. Therefore, he submitted that the order of the

Ld.CIT(A) should be upheld and ground taken by the Revenue should be

rejected.

record and had gone through orders of the authorities below. We also

carefully considered the reasons given by the AO to disallow ‘employee

benefits expenses’ of Rs.8,04,95,000/-. Admittedly, the AO disallowed

‘employee benefits expenses’ on the ground that there is a steep increase

in the expenses whereas there was a reduction in ‘revenue from

operations’ and the assessee couldn’t explain the rationale behind

enhanced ‘employee benefits expenses’ and when compared earlier

financial year. The AO was compared the expenditure incurred by the

assessee for the year under consideration when compared to earlier

financial year with corresponding ‘revenue from operations’ for the year

under consideration and corresponding ‘revenue from operations’ and

observed that the ‘employee benefits expenses’ has been increased from

Rs.371.75 lakhs to Rs.1176.70 lakhs whereas ‘revenue from operations’

decreased from Rs.30,43,44,953/- to Rs.23,60,96,779/- and the same

has not been explained or substantiated by the assessee. Except this,

there is no observation from the AO with regard to genuineness of

expenditure incurred by the assessee and corresponding supporting

evidences filed in respect of expenditure including Form 16 for deducting

TDS on the said payment, etc. The Ld.CIT(A) deleted the additions made :: 10 :: by the AO by holding that there is no nexus between expenditure and

‘revenue from operations’ and further the reasonableness of the expenses

has to be considered from the point of view of businessman and it was

not open to the AO to subjective satisfaction with regard to expenditure

which should have been incurred. The Ld.CIT(A) further observed that

the assessee company has justified payment of higher benefits to KMPs

for rendering services to the company and also considering the

importance of the services and the Ld.CIT(A) also noted that the company

has benefited from the services rendered by the KMPs which resulted in

substantial increase in ‘revenue from operations’ in the subsequent years.

Therefore, observed that the AO was erred in arbitrary disallowance of

expenditure only on the basis of increase in expenditure and decrease in

‘revenue from operations’.

delete the addition made by the AO towards disallowance of ‘employee

benefits expenses’. The first and foremost objection of the Revenue is

that genuineness of expenditure and business expediency of the

expenditure as required u/s.37(1) of the Act has not been proved by the

assessee. Admittedly, the AO does not disputed the genuineness of

expenditure incurred by the assessee and further, the AO was not on the

point of expenditure incurred by the assessee u/s.37(1) of the Act.

Further, Section 37(1) of the Act is applicable in a case where any :: 11 :: expenditure incurred by the assessee is personal in nature or capital in

nature and not being laid down or expanded wholly and exclusively

business or profession of the assessee. In the present case, it was not the

case of the AO that the expenditure incurred by the assessee was not for

the purpose of business of the assessee and further it is personal

expenditure in nature and capital expenditure in nature. Therefore, in our

considered view, the ground taken by the Revenue u/s.37(1) of the Act

fails.

expenditure which is evident from the observation of the AO. The AO has

disallowed ‘employee benefits expenses’ only on the basis of increase in

‘employee benefits expenses’ and decrease in ‘revenue from operations’.

The AO compared the ‘revenue from operations’ against expenditure

incurred under the head ‘employee benefits expenses’ and observed that

there is decrease in ‘revenue from operations’, and increase in ‘employee

benefits expenses’ and the same was not substantiated by the assessee.

We find that right from the stage of assessement to appellate

proceedings, the assessee claimed that it has paid remuneration to KMPs

for rendering services and also considered the importance of their

services to the company. The assessee has also filed relevant details

including Form 16 for deducting TDS on the said remuneration and also

filed corresponding minutes of the board meeting which approved higher :: 12 :: remuneration payment to the KMPs. From the details filed by the

assessee, it is observed that the assessee paid remuneration to KMPs

considering the importance of the services to the assessee company and

therefore, in our considered view reasonableness of any expenditure has

to be considered from the point of view of the businessman and it was not

open to the AO to adopt subjective standard with regard to appropriate

remuneration which should have been paid to the employees. Further, in

our considered view, the Rule that increased remuneration can only be

justified if there is a corresponding profit/Revenue is also not correct as

held Hon’ble Supreme Court in case of M/S. Walchand & Co. (Pvt.) Ltd.

(supra). A similar view taken by the Hon’ble Bombay High Court in the

case of Extrusion Process Pvt. Ltd., where it has been held

reasonableness of any expenditure has to be considered from the point of

view of the businessman and it was not open to the AO to adopt

subjective standard with regard to appropriate remuneration which

should have been paid to the employees. In our considered view, it is for

an assessee, a businessman who happens to be well versed in coming to

a conclusion as to what remuneration/salary is to be paid to any

employee and therefore, reasons given by the AO to disallow ‘employee

benefits expenses’ only on the basis of increase in expenses and decrease

in ‘revenue from operations’ is totally devoid of merits and can’t be

accepted. Further, it is not a case of the Revenue that the assessee has

not justified payment of higher remuneration to KMPs. The assessee has :: 13 :: filed relevant details including Form 16. The KMPs have paid higher rate

of tax of 38% on total income whereas the same income would have

suffered tax in the assessee’s company @ 25% and therefore, it is not a

case of tax avoidance planning as claimed by the AO, because it is a

revenue neutral and no loss of the Revenue to the department. Further,

the assessee also proved that it is a case that by paying higher

remuneration to KMPs, the company has earned more revenue from the

services of the above KMPs which was resulted in substantial increase in

‘revenue from operations’ in the subsequent financial year. Therefore,

from the above, it is clear that the assessee has justified payment to

higher remuneration to employees which resulted in increase in ‘employee

benefits expenses’ for the year under consideration when compared to

earlier financial year. Since there is no nexus between ‘revenue from

operations’ and ‘employee benefits expenses’, in our considered view, the

AO ought not to have disallowed the difference amount as unreasonable

or excessive. The Ld.CIT(A) after considering relevant facts has rightly

deleted the addition made by the AO. Further, although, the Revenue has

taken a ground under Rule 46A and violation of principles of natural

justice, but in our considered view going by the evidences considered by

the Ld.CIT(A) including Form 16 and minutes of board meeting, the above

two documents can’t be considered as additional evidences so as to apply

Rule 46A, because right from the assessement stage the assessee claims

to have filed Form 16A and further in so far as minutes of the board :: 14 :: meeting, it is only an additional documents which describe the payment of

remuneration to employees and therefore, in our considered view, ground

taken by the Revenue in light of Rule 46 is also devoid of merits and

can’t be accepted.

circumstances of the case, we are of the considered view that the AO was

not justified any arbitrary disallowance of ‘employee benefits expenses’.

The Ld.CIT(A) after considering the relevant facts has rightly deleted the

addition made by the AO and thus, we are inclined to uphold the findings

of the Ld.CIT(A) and reject the ground taken by the Revenue.

No.2 of the Revenue’s appeal is deletion of TP adjustment of

Rs.13,02,752/- made by the AO in respect of interest payment on NCDs.

directing to apply PLR as ALP rate without appreciating the fact that the

PLR has been replaced with marginal cost of funds lending rate and later

with corresponding benefit based lending rate and thus, application of

EBLR is more appropriate.

:: 15 :: 19. The Ld.Counsel for the assessee submitted that the issue is now

stands covered in favour of the assessee by the decision of ITAT Special

Bench in the case of Hyderabad Infratech (P.) Ltd. (supra) wherein it has

been held that if NCDs are denominated in Indian currency, for the

purpose of benchmarking interest payment, PLR of Indian bank is

appropriate rate but not EBLR considered by the AO. The Ld.CIT(A) after

considering the relevant facts has rightly deleted the addition made by

the AO and therefore, the order should be upheld.

available on record. This issue is no longer res-integra. The Co-ordinate

Bench of this ITAT Hyderabad in the case of Hyderabad Infratech (P.)

Ltd., had considered an identical issue and after considering the relevant

facts on this issue held that, if NCDs/ECDs/other debentures which are

denominated in Indian currency to be bench marked by applying PLR rate

instead of EBLR. In the present case, the assessee has borrowed NCDs at

a coupon rate of interest 11% which is much below the PLR for the year

under consideration, whereas the TPO has adopted EBLR rate @ 8.6%

and proposed adjustment of Rs.13,02,752/-. Since PLR is the appropriate

rate for benchmarking interest payment on NCDs, in our considered view,

the coupon rate of interest @11% paid by the assessee on NCDs is at ALP

and therefore, the TP adjustment proposed by the TPO can’t be upheld.

Ld. CIT(A) after considering relevant facts has rightly deleted the addition :: 16 :: made by the AO. Thus, we are inclined to uphold the findings of the

Ld.CIT(A) and reject the ground taken by the Revenue.

Order pronounced on the 05th day of June, 2026, in Hyderabad. Sd/- Sd/- (मंजूनाथा. जी) (र$वश सूद) (MANJUNATHA.G) (RAVISH SOOD) लेखा सद!य/ACCOUNTANT MEMBER �या&यक सद!य /JUDICIAL MEMBER

Hyderabad, dated 05.06.2026. TLN

आदेशकी �ितिलिप अ�ेिषत/ Copy of the order forwarded to:

िनधा�रती/The M/s. Matrix Power (Wind) Pvt. Ltd., 1 : H.No.8-2-293/82, FII/A/2 & 2/1, F-1, Plot No.2, Assessee Road No.5, Film Nagar, Jubilee Hills, Hyderabad-500 096. राज�/ The Revenue : The ACIT, Circle-5(1), Hyderabad. 2

3 The Principal Commissioner of Income Tax, Hyderabad. िवभागीय�ितिनिध, आयकर अपीलीय अिधकरण, हैदराबाद / DR, ITAT, Hyderabad 4 गाड�फ़ाईल / Guard file 5

आदेशानुसार / BY ORDER TUMMALACHARLA Digitally signed by TUMMALACHARLA LAKSHMI NARAYANA DN: cn=TUMMALACHARLA LAKSHMI LAKSHMI NARAYANA, c=IN, o=INCOME TAX APPELLATE TRIBUNAL, ou=INCOME TAX NARAYANA APPELLATE TRIBUNAL, CHENNAI BENCH Date: 2026.06.05 16:05:50 +05'30' Sr. Private Secretary ITAT, Hyderabad