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Facts
The assessee, engaged in electricity generation, transmission, and distribution, entered into international transactions involving loans to its Associated Enterprise (AE) and providing corporate guarantees. The Transfer Pricing Officer (TPO) made adjustments, and the Assessing Officer (AO) made further additions. The assessee filed objections, and the Dispute Resolution Panel (DRP) granted partial relief, leading to the final assessment order.
Held
The Tribunal allowed Ground No.1 (Disallowance u/s 14A), holding that the assessee's method of disallowance computation was consistent with past accepted practices and that Rule 8D's applicability from AY 2008-09 did not invalidate the method. Grounds No. 2, 3, and 4 were also allowed based on previous Tribunal decisions favoring the assessee. Ground No. 5 was allowed for statistical purposes, restoring the issue to the AO for a decision based on final outcomes of related appeals. Ground No. 6 was allowed as the deduction for the Supa Wind Power Project was accepted in the initial assessment year and subsequent years. Ground No. 7 was allowed for statistical purposes, restoring the issue of double disallowance to the AO. Ground No. 9 was allowed, as the assessee's claim for additional depreciation was allowed in a similar case. Ground No. 10 was clubbed with Grounds No. 11 and 12. Ground No. 11 was partly allowed, directing the TPO to recompute ALP for corporate guarantee at 0.5%. Ground No. 12 was allowed, accepting the assessee's weighted average interest rate for the loan. Ground No. 13 was dismissed as not pressed. Ground No. 14 was dismissed as infructuous.
Key Issues
The primary issues involved disallowances under Section 14A, expenditure on shelved projects, prior period expenditure, discount on Euro Notes, premium on debentures, deduction under Section 80IA, additional depreciation, and transfer pricing adjustments related to guarantee fees and interest on loans.
Sections Cited
14A, 8D, 32(1)(iia), 80IA, 115JB, 133(6), 92C, 10B(2)
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Income Tax Appellate Tribunal, MUMBAI BENCH “H”, MUMBAI
Before: SHRI VIKAS AWASTHY& MS. PADMAVATHY.S
अपीलाथ� �ारा/ Appellant by : Shri Nitesh Joshi with Shri Ninad Patade �ितवादी�ारा/Respondent by : Shri Manoj Kumar& Shri Pravin Salunke सुनवाई की ितिथ/ Date of hearing : 20/10/2023 घोषणा की ितिथ/ Date of pronouncement : 12/01/2024 आदेश/ORDER PER VIKAS AWASTHY, JM:
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.
The assessee is engaged in generation, transmission and distribution of electricity. During the period relevant to assessment year under appeal, the assessee had entered into international transaction of provision of loan to its Associated Enterprise(AE), Tata Power Mauritius and provision of corporate guarantee to its other A.E. In assessment proceedings the Assessing Officer referred international transactions to the Transfer Pricing Officer (TPO). The TPO vide order dated 24/10/2011 made adjustment of Rs. 154,46,89,113/- in respect of aforesaid loan transaction and corporate guarantee. The Assessing Officer further made additions/disallowances under various provisions of the Act. Aggrieved by the draft assessment order dated 29/12/2011, the assessee filed objections before the Dispute Resolution Panel (DRP). The DRP vide directions dated 28/09/2012 granted part relief to the assessee. The Assessing Officer passed the final impugned assessment order, accordingly. The assessee in appeal has raised multiple grounds assailing the assessment order and the directions of DRP confirming additions.
Shri Nitesh Joshi appearing on behalf of the assessee submitted that the assessee has filed concise grounds of appeal vide letter dated 18/11/2021,the same may be considered for adjudication. Since, the assessee has raised multiple grounds of appeal, the grounds raised in appeal are decided in seriatim.
Ground No.1: Disallowance u/s. 14A of the Act – Rs.32.60 crores.
The ld.Counsel for the assessee submitted that during the period relevant to assessment year under appeal, the assessee has earned following income exempt from tax:-
Clause of item 2 Head of Income Amount (crores of Rs.) (b) Interest on US 64 tax free bonds 19.89 (c) Dividend from trade investment 8.44 (e) Dividend from subsidiaries 4.36 (f) Dividend from other investments 10.15 (h) Profit on sale of long term investment 342.02 The assessee made suo-moto disallowance of Rs.46,11,225/-. The assessee had made detailed submissions before the Assessing Officer along with computation of suo-moto disallowance u/s. 14A of the Act. A perusal of the submissions before the Assessing Officer would show that the assessee had allocated administrative expenses on prorate basis of total income. The manner of computation of disallowance was accepted by the Assessing Officer in assessment proceedings in Assessment Years 2001-02 and 2003-04. Suo- moto disallowance on similar lines was made thereafter. The Assessing Officer in Assessment Years 2006-07 and 2007-08 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 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-moto disallowance u/s. 14A of the Act, therefore, the disallowance made by the Assessing Officer should be deleted.
Per contra, Shri Manoj Kumar representing the Department vehemently defended the assessment order and the manner of recording satisfaction by the Assessing Officer in respect of disallowance u/s. 14A of the Act . He submitted that the Assessing Officer has rejected assessee’s computation of disallowance by giving detailed reasons and after having examining the books of account of the assessee.
We have heard the submissions made by rival sides and have examined orders of authorities below. In ground No.1 of appeal, the assessee has assailed disallowance made by Assessing Officer u/s. 14A of the Act. The Assessing Officer while making disallowance u/s. 14A of the Act invoked the provisions of Rule 8D of Income Tax Rule,1962 [ in short ‘the Rules’]. The contention of the assessee is that assessee has computed disallowance u/s. 14A of the Act in the same methodology as was adopted in the preceding Assessment Years. Once the method of computation of disallowance u/s. 14A has been accepted by the Tribunal in the past the same cannot be rejected.
6.1 It is pertinent to mention that Rule-8 was inserted by the Income Tax (5th Amendment) Rules, 2008 w.e.f. 24/03/2008. Thus, the provisions of Rule 8D would be applicable in the impugned assessment year i.e. Assessment Year 2008-09. Section 14A(1) of the Act mandates the assessee to make disallowance of expenditure incurred in relation to income exempt from tax. In the instant case the assessee made suo-moto disallowance of Rs.46,11,225/- in respect of administrative expenses. The manner of computation of disallowance was accepted by the Tribunal in the preceding Assessment Years. However, in the preceding Assessment Years the provisions of Rule 8D were not applicable. As pointed earlier the provisions of Rule 8D were applicable from Assessment Year 2008-09 onwards. A bare perusal of Section 14A of the Act would show that the Section does not mandate the assessee to make disallowance u/s. 14A of the Act in accordance with Rule 8D. Section 14A(2) of the Act mandates the Assessing Officer to determine the amount of expenditure incurred in relation to earning of exempt income in accordance with the provisions Rule 8D if, the Assessing Officer having regard to the accounts of the assessee if not satisfied with 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 primary submission, the other submissions viz. availability of own interest free funds to cover the investments etc. are not deliberated upon.
Ground No.2: Disallowance of expenditure on Shelved Projects - Rs.8,77,45,024/-
The ld.Counsel for the assessee submitted that in the past assessee has been claiming expenditure on shelved projects as revenue expenditure. The Department has been consistently disallowing the same stating it to be on capital account. The Tribunal in Assessment Year 1997-98 to Assessment Year 2000-01 has decided this issue in favour of assessee. The Assessing Officer records this fact but decided the issue against the assessee on the ground that the Department has not accepted the decision of the Tribunal in the past and the matter is sub-juiced. The ld.Counsel for the assessee submitted that the issue is squarely covered by the order of Tribunal in Revenue’s appeal for Assessment Year 2006-07 in ITA No.4050/Mum/2012(supra).
The ld.Counsel for the assessee vehemently defended the findings of Assessing Officer on this issue, however, he fairly stated that this issue has been considered by the Tribunal in assessee's own case in appeal by the Revenue in the preceding Assessment Years.
Both sides heard. The assessee has incurred expenditure to the tune of Rs.8,77,45,024/- on various projects/ feasibility reports which were subsequently shelved. The assessee claimed the expenditure as revenue, the Assessing Officer rejected the contentions of the assessee and treated the expenditure as capital. We find that in the preceding Assessment Years the Tribunal has been consistently holding that such expenditure is on revenue account and has decided the issue in favour of the assessee. The Assessing Officer in the impugned order has recorded this fact but decides it otherwise only for the reasons that the Department has not accepted the decision of the Tribunal and is in appeal. No contrary decision has been placed before the Bench on this issue by the Revenue. Nor any order of Higher Forum has been brought before us staying the order of Tribunal in assessee’s case in the preceding Assessment Years. We see no reason to take a different view, accordingly we reverse the findings of Assessing Officer on this issue and allow ground No.2 of appeal.
Ground No.3: Disallowance of Prior Period Expenditure – Rs.11,67,58,625/- :
The ld.Counsel for 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).
The ld. Departmental Representative placed reliance on the directions of the DRP and the assessment order.
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 distinction in the facts. Therefore, following the decision of Co-ordinate Bench in assessee's own case, ground No.3 of appeal is allowed for parity of reasons.
Ground No.4: Disallowance of discount on issue of Euro Notes – Rs.18,88,103/- :
The ld.Counsel for the assessee submitted that the issue is squarely covered by the decision of Tribunal in assessee's own case in for Assessment Year 2006-07 (supra). The facts are identical in impugned assessment year.
The Ld. Departmental Representative supported the assessment order and directions of the DRP. However, he fairly admitted that this issue has been considered by the Tribunal in Assessment Year 2006-07.
Both sides heard. The assessee had issued 7.875% Euro Notes (2007) and 8.50% Euro Notes(2017)at a discount in Assessment Year 1998-99. The assessee has been consistently writing off discount on issue of Euro Notes over the period of debentures. The same has been consistently allowed by the Department from Assessment Year 1998-99 to Assessment Year 2003-04. The Assessing Officer disallowed the amount in Assessment Year 2004-05 and 2005-06 but the same was allowed by the CIT(A). We find that in Assessment Year 2006-07 discount on issue of Euro Notes was again disallowed by the Assessing Officer. The Co-ordinate Bench vide order dated 29/11/2019 reversed the decision of Assessing Officer by observing as under:
“8.1 …………… We find that the assessee has been consistently claiming the write off on account of discount on issue of Euro notes commencing from A.Yrs 1998- 99 onwards which has been rightly allowed as deduction by the ld. AO up to A.Y.2003- 04. Though for A.Yrs 2004-05 and 2005-06, this claim of deduction was not allowed by the ld. AO, the said assessments have quashed by this Tribunal vide its order dated 04/09/2019 on completely technical ground without going into the merits of the addition / disallowance. The ld. AO had observed that in earlier year, the assessee had earned some gain out of this transaction and the same had not been offered to tax as it is notional in nature. We are unable to persuade ourselves to accept to the contentions of the ld. AO that assessee had made certain foreign exchange fluctuation gain in the earlier year which was not offered to tax by the assessee on a totally different footing, whereas the subject mentioned issue in dispute being liability 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:
The ld. Counsel for the assessee submitted that the genesis of this issue is in Assessment Year 2004-05. The assessee had clamed deduction of Rs.40.84 crores as premium on pre-payment of debentures in Assessment Year 2004- 05. The asessee’s claim was partly allowed in Assessment Year 2004-05. The premium on pre-payment of premium was calculated on pro-rata basis to be allowed as deduction in Assessment Year 2004-05, 2005-06 and 2006-07, respectively. The ld. Counsel for the assessee pointed that this issue has been decided by the Tribunal in assessee's own case in (supra) in Assessment Year 2006-07. The facts in the impugned assessment year are identical. Thus, this issue can be disposed of in the similar terms.
The ld. Departmental Representative vehemently supported the findings of the Assessing Officer on the issue. However, the ld. Departmental Representative fairly stated that the issue has been considered by the Tribunal in assessee's own case in the preceding Assessment Years and there has been no change in facts in the instant Assessment Year.
Both sides heard. We find that the issue in regard to reduction in allowance of premium on pre-payment of debentures is recurring since Assessment Year 2004-05. The Co-ordinate Bench while deciding this issue in Assessment Year Assessment Year 2006-07 has held as under:
“ 5.1. We have heard rival submissions. The brief background of this issue is that the assessee prepaid debentures liability with premium in the A.Y.2004-05. The premium on prepayment of debentures was Rs.40,84,00,000/-, which was claimed as deduction while computing business income for A.Y.2004-05 by the assessee. We find that the assessee had taken conscious decision to prepay the debentures on the grounds of commercial expediency in order to terminate the high interest liability of the assessee. The ld. AO while completing the assessment for A.Y.2004-05 held that the premium paid on prepayment of debentures could not be allowable in full in A.Y. 2004-05 but the same would be allowed as deduction over the future balance life of the debentures. Accordingly, the ld. AO allowed the sum of Rs.4,74,82,120/- towards premium on prepayment of debentures (i.e. apportioned portion) as deduction in A.Y.2006-07 i.e. year under appeal. This was calculated at 70.08% of Rs.6,77,54,167/- . We find that the ld. AO had adopted 70.08% as applicable to undertakings in respect of 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 pursuant to the order of this Tribunal for the A.Yrs 2004-05 and 2005-06 dated 04/09/2019. But since the orders passed by this Tribunal has been subjected to further appeal by the revenue before the Hon’ble High Court, the ld. AR argued that though this issue would be academic in nature at present, but if the revenue succeeds in High Court for A.Yrs 2004-05 and 2005-06, then adjudication of allowability of premium on prepayment of debentures in A.Y.2006-07 would become relevant. Hence, the ld. AR fairly pleaded only for a finding / direction in this regard in this year. The ld DR also fairly agreed in this regard for issuance of the said direction / finding in this order. We find lot of force in the fairness exhibited by both the parties before us that the issue under dispute before us would resume its life, in case if the revenue succeeds in its appeal before the Hon’ble High Court. Hence, we direct the ld. 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. The ground Nos. 3(a) to 3(d) raised by the assessee are disposed off subject to the directions mentioned hereinabove.” Both sides are unanimous in stating that the facts in the impugned assessment year are identical to Assessment Year 2006-07. Thus, the issue is restored to Assessing Officer with similar directions. The ground No.5 of appeal is allowed for statistical purpose.
Ground No.6 : Claim of deduction u/s. 80IA of the Act :
The ld. Counsel for the assessee submitted that initial Assessment Year for claiming deduction u/s. 80IA of the Act on Supa Wind Power Project 17 MW Unit was Assessment Year 2007-08. The Tribunal in Assessment Year 2007-08 has allowed assessee’s claim of deduction u/s. 80IA of the Act following the decision of Hon'ble Supreme Court of India in the case of Velayudhaswamy Spinning Mills Pvt. Ltd., 244 Taxman 58 (SC).
Per contra, ld. Departmental Representative defended the finding of Assessing Officer on this issue. The ld. Departmental Representative submitted that a perusal of section 80IA(5) would show that deduction u/s. 80IA of the Act is to be allowed on the profits and gains of eligible business and not each unit of the business. The assessee is treating each unit of windmill as a separate business. Without 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.
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 Department has accepted the findings of Tribunal in allowing deduction u/s. 80IA on Supa Wind Power Project 17 MW Unit in Assessment Year 2007-08. Thus, the said Assessment Year becomes the initial Assessment Year for claiming deduction u/s. 80IA of the Act on Supa Wind Power Project 17 MW Unit. Once assessee’s claim of deduction has been accepted in the initial Assessment Year, the same cannot be denied in the subsequent Assessment Years. Ergo, ground No.6 of appeal is allowed. Ground No.7: Duplicate disallowance u/s.80IA of the Act: 22. The ld. Counsel for the assessee submits that that the DRP/Assessing Officer have erred in disallowing the claim of deduction u/s. 80IA for an amount of Rs.2,49,19,983/- twice. Once while allowing deduction of premium on pre-payment of debentures and again while allowing aggregate deduction u/s. 80IA of the Act. Since, the amount of Rs.2,49,19,983/- was not considered as deductible for arriving at the assessed income, the same cannot be attributed to any unit for calculating deduction u/s. 80IA of the Act in respect of any of the units. Similar issue was raised by the Assessing Officer in reassessment proceedings initiated for Assessment Year 2006-07. However, considering the submissions of the assessee, reassessment proceedings were dropped by the Assessing Officer. 23. The ld. Departmental Representative strongly supported the findings of Assessing Officer /DRP on the issue of duplicate disallowance u/s.80IA of the Act. 24. We have heard the submissions made by rival sides. In principle, we are in agreement with the submissions of the assessee that double disallowance cannot be made while computing taxable income. Taking into consideration entire facts of the case, we deem it appropriate to restore this issue back to the file of Assessing Officer for re-examination and verification of the facts. Needless to say that the Assessing Officer while deciding this issue shall grant reasonable opportunity of making submissions to the assessee, in accordance with law. The ground No.7 of appeal is thus, allowed for statistical purpose.
Ground No.8: Adjustment made to the book profits computed u/s. 115JB of the Act with respect to disallowance of deduction claimed u/s. 80IA of the Act :
The ld. Counsel for the assessee submits that appropriate relief has been allowed to the assessee vide order dated 31/03/2013 passed u/s. 154 of the 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 :
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. 32(1)(iia) of the Act.
Per contra, ld. Departmental Representative prayed for upholding the findings on the issue in assessment order.
Both sides heard. A perusal of the assessment order reveals that the assessee’s claim of additional depreciation has been disallowed by the Assessing Officer merely following the reasoning given in Assessment Year 2006-07. The ld. Counsel for the assessee has pointed that in First Appellate proceedings for Assessment Year 2006-07 the issue was restored to the Assessing Officer for examining as to whether the assessee was following WDV or SLM for claiming depreciation and if the assessee’s method of depreciation is WDV, the additional depreciation claimed be allowed u/s. 32(1)(iia) of the Act. The Assessing Officer while giving effect to the directions of the CIT(A) in Assessment Year 2006-07 allowed the assessee’s claim of depreciation. These facts have not been rebutted by the Department. The contention of the assessee is that the method of assessee’s claim of depreciation is similar to the one as was in Assessment Year 2006-07. Thus, in view of un-rebutted facts, ground No.9 of appeal is allowed. Ground No.10:Transfer Pricing Additions- Disregard of Rule 10B(2): 29. The ld.Counsel for the assessee submits that the TPO has not provided any reason for rejecting systematic benchmarking analysis undertaken by the appellant for the underlined loan transaction and guarantee commission, which is mandatory as per provisions of section 92C(3) of the Act. We find that objection raised in ground No.10 is generic hence, ground No.10 is dealt with while deciding TP adjustments in ground No.11 and 12, respectively. Ground No.11 :TP adjustment towards Guarentee fees :
The ld.Counsel for the assessee submitted that during the year under consideration, the assessee provided guarantee for a loan of USD 950 million granted by Barclays Bank PLC to its AE Tata Power (Cyprus) Ltd. (TPCL). The secured bridge loan was signed on 25.06.2007. The term of the loan was six years. The margin money chargeable was @ 3.5% p.a. and the interest rate chargeable was margin + LIBOR. The default interest rate was LIBOR + Margin + 2% p.a. The assessee applied CUP as the most appropriate method. The assessee benchmarked the transaction based on the guarantee fees rate obtained from SBI. The rates provided by SBI are as under: Amount Rate of Guarantee 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.
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 TPO and held that the rate of 2.075% as appropriate rate.
The ld.Counsel for the assessee further submitted that the reason for TPO not accepting the rate benchmarked by the assessee is that the letter of SBI dated 30 August 2011 (page 492 of paper book) mentioning the guarantee rates is of a general nature and does not mention the specific conditions, the kind of margin or the security placed for the purpose of such guarantee. He asserted that the letter issued by SBI is very specific to the case of assessee and therefore is more authentic than rates applied by the TPO based on rate charged by SBI and Allahabad bank which is used in another assessee's case. He submitted that the CUP method requires a high degree of comparability of products and functions and the rates adopted by TPO based on generic rates provided by Allahabad Bank and SBI, where there is no information on a specific comparable transaction that has been undertaken by the bank/ third party.
Without prejudice to the primary submissions, the ld.Counsel for the assessee made alternate prayer to adopt the weighted average guarantee rate of 0.46% based on unilateral APA of the assessee with CBDT. He referred to relevant extract of APA at page 182 to 185 of the paper book filed along with chart. He made second alternate prayer to adopt corporate guarantee rate of 0.5% as approved in the case of CIT vs. Everest Kento Cylinders Ltd. 58 taxmann.com 254 (Bom) and followed by the Tribunal in various cases.
The Ld. Departmental Representative relied on the order of TPO and the directions of the DRP.
We have heard the parties and perused the material on record. 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. The 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 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 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 the purpose of determining arm‟s length price. Both the parties could not give us any reason to deviate from the above arm‟s-length price as held by the coordinate bench, which has been upheld by the honourable Bombay High Court. The case of Asian Paints [supra} cited before us for benchmarking @ 0.20 % has different and distinguishing facts. Further corporate guarantee commission is to be charged at that amount of Guarantee given and cannot be reduced to the extent of amount of borrowings by the AE as both are separate and distinct facts. Considering the various decisions in this regard, we direct the AO to limit the adjustment to 0.5% p.a. on the amount of corporate guarantee provided based on the period for which the guarantee was operative in respect of each of the AE‟s during the year under consideration. The learned transfer-pricing officer is directed to compute the arm‟s-length price of the corporate guarantee at the rate of 0.5%. Accordingly ground number 4 of the appeal is allowed with above directions.”
The coordinate bench in the above decision has followed the decision of the jurisdictional High Court in the case of Everest Kento Cylinder Ltd (supra) and in assessee's case also the assessee and the revenue could not provide any reason for us to deviate from the decision of the coordinate bench. Accordingly we direct the TPO to apply the rate of 0.5% and re-compute ALP of corporate guarantee. The ground No.11 of appeal is partly allowed. TP Adjustments towards imputing interest on loan – Ground No.12
The assessee, during the year, granted USD 273 million as inter- company loan to its Associated Enterprise (AE), Tata Power (Mauritius) Ltd (TPML) on 25/06/2007 with a maturity date of 31/12/2021. The loan was granted to TPML in order to acquire 30% equity stock in 2 major Indonesian Coal Producers for securing assessee’s fuel requirements in Mundra Ultra Mega Power Plant. The assessee has used proceeds from foreign currency convertible bonds (FCCB) issued for lending the loan to the extent of USD 200 million. Balance USD 73 million was funded out of available balance in India. The assessee, for the purpose of transfer pricing held that the average rate of interest i.e. effective rate over the tenure of the loan is 4.11%. The interest rate for comparable transactions was claimed to be 5.31%, worked out as under:
Average comparable spread 77.17 bps A) Average Spread in terms of % 0.77 B) Average 12 month LIBOR (1 April 2007 – 4.54% 31 March 2008) Fixed Interest Rate of Comparable Transactions 5.31 (A+B)
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% to arrive at the TP adjustment as below:-
Amount of loan, USD 200 @41.022/USD= Rs.820,45,32,319/- Interest @6.88 p.a. (for 280 days) Rs.43,30,19,481/- Interest already charged @0% p.a. NIL Therefore, the ALP = Rs.43,30,19,481/- 105% of the transaction value NIL 95% of the transaction value NIL
With regard to the USD 73 million, which is given from funds available in India, the TPO applied the weighted average of 7.55% per annum considering that the domestic market borrowing rate ranges from 7.5% p.a. to 10.53% p.a. The TPO added a mark up of 3% on the said average cost of borrowing to cover the risk factor and accordingly applied rate of 10.55% to compute the TP adjustment.
Aggrieved, assessee filed objections before the DRP stating that the rate of interest paid by the assessee towards FCCB is 3.88% and compared to the same the rate of interest charged i.e.4.11% from the AE is at arm's length. The assessee also raised objections towards adding 3% towards risk. The DRP upheld the TP adjustment by stating that TPO is correct in adding 3% towards risk and that even in case of loan out of own funds interest rate should be imputed for the purpose of ALP.
The Ld.Counsel for the assessee submitted that loan to AE was for investment on behalf of the assessee. The Mauritius entity was a Special Proposed Vehicle (SPV) for the purpose of investments. The assessee had charged effective rate of interest 4.71%. He furnished a chart tabulating computation of weighted average interest rate.
Period Rate(A) Weight(Number of Weighted years(B) Rate (A*B) July 2007 to June 2009 0% 2 0 July 2009 to June 2010 2.5% 1 2.5 July 2010 to Dec 2021 5% 11 55 Total 14 57.5 Weighted Average Rate(57.5/14) 4.11% Since, the effective rate of interest is more than LIBOR i.e. 4.54% no T.P adjustment is required as the transaction of advancing loan is at arms length. To support his contentions to use weighted average rate as effective rate Ld.Counsel for the assessee placed reliance on the decision in the case of Goodyear South Asia Tyres Pvt. Ltd. vs. ACIT, 53 taxmann.com 169 (Pune-Trib) and decision in the case of GCorp Services Private Limited vs. ACIT in IT(TP)A No.198/Bngr/2022 for assessment year 2017-18 decided on 13/09/2022. The Ld.Counsel for the assessee further submitted that the TPO had erred in adding adhoc 3% towards risk. He further submitted that for the purpose 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).
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%.
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 which the assessee has borrowed FCCB loan i.e. 3.88%. The TPO has added 3% margin towards the risk element. Similarly for the USD 73 million which is funded from India, the TPO has applied average borrowing cost of 7.55% and added 3% mark-up towards risk element and applied 10.55% for making the TP adjustment. The TPO while making the TP adjustment has considered the rate of interest as Nil, during the relevant period as per agreement between the assessee and AE the rate of interest charged is Nil. The rate of interest for first two years is 0%. The TPO has rejected assessee’s theory of weighted average rate. The assessee has shown that the average rate of interest for 14 years period is 4.71%. In this regard we find that in the case of Goodyear South Asia Tyres Pvt. Ltd. vs. ACIT (supra) the Tribunal has accepted the concept of effective rate of interest. The relevant extract of the aforesaid decision reads as under:
“20. So however, one pertinent point has been raised by the assessee before us to the effect that in order to benchmark the interest cost incurred by the assessee it would be appropriate to evaluate the effective rate of interest payable by the assessee on the technical knowhow loan and foreign currency cash loan raised from the associated enterprise. Notably, the said argument has been raised by the assessee not only before us but also before the TPO as is evident from para 5 of the order of the TPO wherein the arguments of the assessee have been reproduced. The plea of the assessee is that the rate of interest of 12% for the current year cannot be considered in isolation by ignoring the interest-free moratorium period of initial nine years. The Ld. Representative for the assessee submitted in the course of hearing that although the rate of interest payable during the five year repayment schedule is 12%, but if the initial interest-free period of nine years is considered, the effective rate of interest would be even lower than the rate of 5.46% considered by the TPO as an arm's length rate. In this context, our attention has been drawn to a working furnished in the course of the hearing. With respect to the technical knowhow loan, it is explained that actual interest cost of Rs. 1,15,58,522/- (inclusive of the increased cost of borrowings on account of exchange in fluctuation) is spread over the period of loan the effective rate of interest for 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 relation to technical knowhow and foreign currency cash loans, which have been succinctly noted by us in the earlier part of this order, clearly establish that in the initial period of nine years there was a moratorium on interest payment and that assessee was not required to incur any interest costs. It is only subsequent to the moratorium period, assessee was to incur interest cost and that too, during the period of repayment of loans. Of course, during the moratorium period the liability towards principal amount of loan was liable to be increased by 5% on account of exchange rate fluctuation. Considering the entirety of terms and conditions, therefore, the cost of borrowings to the assessee (i.e. on technical knowhow and foreign currency cash loans) are to be computed after factoring the initial period of moratorium. Therefore, it would be inappropriate to merely compare the stated rate of interest of 12% with the prevailing rates without taking into consideration the specific terms and conditions of the assessee's borrowings. Therefore, in-principle, we are agreement Avith the assessee for the proposition that it would be appropriate to compute effective rate of interest in respect of international transaction of loan entered into with the associated enterprise before carrying out the exercise of benchmarking such international transactions vis-a-vis the arm's length price/interest of the comparable uncontrolled transactions. On this aspect, the Ld. Departmental Representative reiterated the stand of the TPO to the effect that the Transfer Pricing Regulation of India provide that for comparability of an uncontrolled transaction with an international transaction, data relating to the relevant financial year alone is to be used and that the data relating to other periods not being more than two years prior to such financial year can be considered only if such data revealed facts which have an influence on determination of the transfer pricing in relation to the transaction being compared. In other words, as per the Ld. Departmental Representative, the aforesaid approach of considering the data of other years would not be appropriate. In our considered opinion, the aforesaid argument is quite fallacious. While computing the yearly effective rate of interest in respect of impugned loans what is being sought is the factoring of the terms and conditions of the 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.
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 &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 assessee was charged 3.75% by the associated enterprise. The assessee had put up a defence on the ground that the effective rate of royalty payable was @ 2.30% on sales. It was contended that the royalty of 3.75% was payable after reducing various expenses from the sale value of the products but the effective rate worked out to 2.30%, which was comparable to arm's length rate being considered by the Revenue. On the basis of the assertion of the assessee to the effect that the effective rate of royalty was lower than the comparable transaction, the addition made by the TPO was deleted by the Tribunal. The Ld. Representative for the assessee submitted that the concept of the effective rate of royalty as against the stated rate of royalty
was approved by the Tribunal for the purpose of benchmarking the international transaction of the assessee. In the present case also, in our view the ratio of the decision of the Ahmedabad Bench of Tribunal in the case of Hitachi Home & Life Solutions (India) Ltd. (supra) applies. Therefore, in conclusion, without opining on the other arguments raised by the assessee, we deem it fit and proper to delete the addition with respect to the interest paid on Technical knowhow and foreign currency cash loans on the ground that the effective rate of interest incurred by the assessee is lower than the arm's length rate of interest considered by the TPO. Thus, on this aspect assessee succeeds.”
The Bangalore Bench in the case of GCorp Services Private Ltd. following the decision rendered in the case of Goodyear South Asia Tyres Pvt. Ltd. (supra) adopted effective rate of interest, where there is a moratorium period in the initial years.
In the present case there was moratorium period of first two years, wherein Nil interest was charged by the assessee. For the next one year the assessee charged 2.5% interest and for the remaining 11 years the assessee has charged 5% interest per annum. Thus, weighted average rate of interest charged by the assessee over the period of 14 years including moratorium period is 4.11%. In the light of facts of the case and the decision referred above, we accept weighted average rate applied by the assessee.
In so far as the interest rate of loan extended from India, the TPO has charged rate of interest at 7.5% to 10.53% per annum. 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. (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:
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.
In the result, appeal of the assessee is partly allowed. Order pronounced in the open court on Friday the 12th day of January, 2024.