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Income Tax Appellate Tribunal, DELHI BENCH “I-1” NEW DELHI
This is assessee’s appeal against the assessment order dated 28.09.2012, passed by the Assessing Officer pursuant to DRP’s directions u/s 144C of the Income-tax Act, 1961, relating to AY 2008-09.
Brief facts of the case are that the assessee is a subsidiary of BT Holdco BV, Netherlands. The company was incorporated on 26.12.2000 and is primarily engaged in the business of providing telecom services and related support services to BT group companies. The assessee had filed return of income declaring income at Rs. 34,87,73,051/-. The assessment, as
per the directions of ld. DRP, was completed at a total income of Rs. 38,12,60,404/- as under: Total income as shown by the assessee Rs. 348773051/- Add:- Addition on a/c of Arm/s Length Price u/s 92CA(3) Rs. 57,37,292/- Capitalization of training and recruitment expenses NIL Disallowance of prior period expenses Rs. 2,67,50,061/- Total Income Rs. 38,12,60,404/-
3. Being aggrieved, the assessee is in appeal before us and has taken following grounds of appeal: “The Appellant respectfully submits that on the facts and circumstances of the case and in law, while passing the assessment order under section 143(3) read with section 144C of the Income Tax Act, 1961 (,the Act'), the Dispute Resolution Panel (,DRP') and the Deputy Commissioner of Income Tax, Circle 3( 1), New Delhi [hereinafter referred to as 'the learned Assessing Officer' ('learned AO')] have erred in:
1. Disallowing deduction for prior-period expenditure of INR 26,750,061 (being expenditure liable to tax deduction at source under Chapter XVIIB of the Act) during AY 2008-09 by incorrectly appreciating the provisions of Section 40(a)(ia) of the Act. 1.1 The Hon'ble DRP and the learned AO ought to have allowed the deduction for prior period expenditure of INR 26,750,061 under the first proviso to section 40(a)(ia) of the Act for AY 2008- 09, since the appellant has duly deducted and deposited taxes on the said expenditure during AY 2008-09. 1.2 The Hon'ble DRP and the learned AO ought to have allowed the deduction for prior period expenditure of INR 26,750,061 under the first proviso to section 40(a)(ia) of the Act in AY 2008- 09, since the said expenditure was not claimed as deduction in AY 2007-08.
1.3 Without prejudice, the Hon'ble DRP and the learned AO ought to have appreciated that even if the expenditure would have been charged to the profit & loss for AY 2007-08, the same would have been allowed as a deduction under the provision of section 40(a)(ia) of the Act only during AY 2008- 09, being the AY where taxes were deducted and deposited by the appellant into the Government Treasury 2. Rejecting the economic analysis undertaken by the assessee in accordance with the provisions of the Act read with the Income Tax Rules, 1962, (,the Rules') and re-determining the arm's length price (,ALP') of the international transaction pertaining to payment of interest on External Commercial Borrowings ('ECB') and holding that the assessee's international transactions are not at arm's length”
Wrongly benchmarking the international transaction pertaining to payment of interest on ECB using the Great Britain Pound (,GBP') London inter-bank offer rate ('LIBOR') as the comparable uncontrolled price.
4. Failure to grant the benefit of +/- 5% range as laid down in proviso to section 92C(2) of the Act.
Initiating penalty proceedings under section 271(1)(c) of the Act for AY 2008-09, which is inappropriate in absence any concealment / furnishing of inaccurate particulars of income by the appellant during the course of assessment proceedings.
Restricting the credit for withholding taxes deducted by the customers to INR 5,785,747 as against INR 12,898,516 claimed by the appellant in its return of income.
Brief facts apropos ground no. 1 are that AO noticed that during the year under consideration the assessee company claimed prior period expenses aggregating to Rs. 33,23,29,562/-. The details of expenses were as under: Rats and Taxes 4,196,326/- Repair & maintenance 29,835,472/- Miscellaneous (net) 564305/- Communication exp. (2266541)
5. The AO observed that since the expenses pertained to FY 2006-07 (AY: 2007-08), therefore, the same were clearly disallowable and the assessee also disallowed these expenses u/s 37. However, in the computation of income assessee claimed deduction u/s 40(a)(ia) on the ground that during the year TDS was deducted and, therefore, the expenses were allowable as per proviso to section 40(a)(ia). He, therefore, in order to verify the assessee’s claim required the assessee to furnish the necessary details along with the allowability of the same. The assessee filed following reply: “Expenditure of INR 26,750061 pertains to FY 2006-07. Details of the said expenditure have been enclosed as Annexure 4.
Ordinarily the said expenditure is deductible in the hands of BT India in FY 2006-07, provided appropriate taxes have been withheld on the same, in accordance with the provisions of section 40(a)(i)/ section 40(a)(ia) of the Act.
Given that no taxes have been withheld at source on these payments on or before the due date of filing the tax return for FY 2006-07. However, as per the provisions of section 40(a)(i)/ section 40(a)(ia) of the Act, the said expenses can be claimed as a tax deduction in the financial year in which appropriate taxes have been withheld at source.
Since BT India booked these expenses in its profit and loss account during the subject assessment year, taxes at appropriate rates were deducted and deposited into the Indian government treasury during the subject assessment year. Accordingly, BT India has claimed the deduction for these expenses (although prior period expenses) in the income tax return for the subject year in accordance with the provisions of section 40(a)(i)/40(a)(ia) of the Act ….. Balance prior period expenses amounting to INR 1383175/- has been considered as disallowance for the purpose of computation of profits and gains from business under the provisions of the Act in Income- tax return of BT India for the subject assessment year”
6. The AO did not accept the assessee’s contention for the following reasons: (i) Since the expenses were not related for the year under reference, therefore, not allowable u/s 37 and the assessee also had disallowed these expenses accordingly. (ii) The provisions of section 40 are not for allowing any deduction. Section 40 uses the term “amount not deductible”, which implies that section 40 speaks about disallowance of expenses. (iii) Expenses disallowable u/s 37 cannot be allowed u/s 40 because section 40 is an independent section i.e. for disallowance of expenses for which compliance of TDS provisions had not been made.
Ld. DRP confirmed the action of AO, inter alia, observing that the provision of section 40(a)(ia) comes into operation if in earlier year, in view of the main section 40(a)(ia), some amount had been disallowed. Ld. DRP further pointed out that in the present case since assessee debited this amount in its P&L A/c of FY 2006-07, thus, there was no question of disallowance of this amount u/s 40(a)(ia) in AY 2007-08.
Ld. counsel for the assessee referred to page 150 of the PB wherein the details with respect to the claim of prior period expenses were furnished before the AO, which has been reproduced hereinabove.
He referred to pages 162 and 163 of PB and pointed out that the payments made were subject to provisions of TDS u/s 194C and 194J. He further referred to page 170-173 of PB, wherein the decision of Hon’ble Delhi High Court in the case of CIT Vs. SMC Construction India is contained in which it has been held that in regard to the fees paid to foreign entity for rendering technical services, which is amenable to TDS provision, the deduction is allowable in the year in which tax is paid. 10. Ld. DR submitted that expenses should be debited in the year in which it accrued. He submitted that basic principle of accounting cannot be given a go bye on the basis of allowability/ disallowability of expenses on the basis of provisions of the Act. He pointed out that since assessee had not debited these expenses in AY 2007-08, therefore, merely by taking recourse to section 40(a)(ia), deduction cannot be allowed. He submitted that pre- requisite of disallowance in previous year has not been fulfilled. He further pointed out that AO has not examined the genuineness of these payments because these were prior period expenses. He pointed out that an anomalous situation will be created if this amount is allowed. 11. We have considered rival submissions and perused the record of the case. It is well settled law that entries made in the books of account are not decisive regarding allowability/ disallowability of expenditure. The main plank of revenue’s submission is that since assessee did not make the entry in the P&L A/c in the year in which the liability actually accrued, therefore, the assessee’s claim is to be denied.
We are not inclined to accept this proposition advanced by revenue for the simple reason that the real income of an assessee is to be determined as per the provisions of the Income-tax Act and not on the basis of entries made in the books of account. As per the proviso of section 40(a)(ia), admittedly, the deduction is allowable in regard to an expenditure only in the year in which the TDS amount has been deposited. There is no dispute on this count. Further, even if an assessee had not debited these expenses in the P&L A/c of earlier year that cannot be the basis for denying deduction which is otherwise admissible to assessee. We further find that section 40(a)(ia) does not mandate for any disallowance in earlier year for proviso to section 40(a)(ia) to come into operation. We find that the assessee’s claim is fully covered by the decision of Hon’ble Delhi High Court in the case of SMC Construction (supra), wherein the Hon’ble Delhi High Court has approved the following findings of the Tribunal: “From the bare reading of this provision, it would reveal that sum chargeable under this Act is payable either outside India or in India to a non-resident is not allowable as a deduction unless tax has been deducted at the source or after deduction of such tax, it has not been paid before the expiry of the time prescribed under sub-section (1) of section 200 and in accordance with that provisions of Chapter XVI-B of the Act. In the case of ABN Amro Bank, the Income-tax Appellate Tribunal has observed that when a deduction is not allowable because of the statutory provisions it would make no difference whether the same was claimed or not by the assessee. Because of section 40(a)(i) of the Act, the deduction has to be allowed in computing the income ,of previous year in which such tax deducted at source has been paid. This section 40(a) (i) starts with a non obstante clause which implies that section 40 overrides the provisions of sections 30 to 38 of the Act. The amounts which may otherwise be allowable as a business expenditure as per the provisions of sections 30 to 38 and which is 'chargeable to tax in the hands of the recipient would not be allowed .as a deduction unless requisite amount of tax has been deducted on the' said amount. Thus, mere passing a debit entry in the books of account, of these expenses would not be sufficient for claiming the deduction in the present account in the concerned year then also deduction would not be admissible unless tax has been paid on such amount. The proviso to section 40(a)(i) makes it clear that if tax has been deducted in the subsequent year and paid then deduction would be allowed in that year. Therefore, we are of the opinion that the learned first appellate authority has rightly deleted the disallowance. We do not find any merit in this appeal of the Revenue. It is dismissed.”
Respectfully following the decision of Hon’ble Delhi High Court, this ground is allowed.
Brief facts apropos ground nos. 2 to 4 are that the assessee had, inter alia, entered into international transaction of payment of interest on external commercial borrowings of Rs. 3,32,11,250/-. The interest had been paid to BT plc. @ 9.72%. The outstanding balance as on 31.3.2008 was Rs. 341,505,490/-. The assessee had bench marked the interest against the PLR prevailing in India during that period. Ld. TPO was of the opinion that the same should have been benchmarked against the LIBOR, which was the prevalent rate in the market from where the loan had been extended. He observed that during the period in question the 6 month LIBOR was 5.1435% (average rate from April, 2007 to March 2008), which was much less than the rate of interest charged by the AE from assessee. He further pointed out that even if the AE was to charge a premium on this rate, it would not be more than 200 basis points which totalled to 7.14%, which was much lower than 9.72% and beyond the +/-% range of 5%, which ranges from 7.49% to 6.78%. AO, therefore, show caused the assessee as to why the interest paid should not be reduced from 9.72% to 7.14%.
The assessee in its reply pointed out that since the loan was rupee denominated, the interest was payable at the rate of India LIBOR + 50 basis points per annum and the same had been bench marked against the prevailing PLR in India, which ranged between 12.75% to 13.25% at the relevant time. Assessee also relied on the order of the ITAT Delhi Bench in the case of Sony India (P) Ltd., wherein it had been stated that form and substance should be respected as long as a written agreement was in place.
Ld. TPO, however, pointed out that this decision had no relevance to the present context and further referred to the loan agreement dated 29.6.2004 between British Telcommunications Plc. And BT (India) Pvt. Ltd., wherein it was pointed out that interest paid would be “the closing 6 months INR LIBOR rate (calculated at the closing 6 months GPB LIBOR rate plus the market premium to the INR) plus the applicable borrowing margin”. Ld. TPO pointed out that as per this agreement the INR LIBOR, which was quoted by assessee, was nothing but the GPB LIBOR plus a mark-up. He worked out the applicable interest rate at 8.044% and computed the excess rate at 1.68% and corresponding amount of Rs. 5,737,292/- observing as under: “The data for the average rate of 6 months GPB LIBOR has been seen and it is calculated that the average during FY 2007- 08 works out to 6.044% (enclosed as Annexure-C). As suggested in the show cause notice 200 basis points can be added to this to arrive at an interest rate of 8.044%. The assessee had paid at the rate of 9.724%, which is beyond the +/- 5% margin of 8.044%. Therefore, the excess payment of 1.68% per annum will be disallowed. This works out to an amount of Rs. 5,737,292. This amount will be reduced from the interest pay out made by the assessee.”
Before ld. DRP the assessee had, inter alia, submitted as under:
“At the time of preparation of Transfer Pricing documentation (copy enclosed as item 6 of Paper Book I), the assessee had computed the ALP in accordance with the provisions of the Act read with the Rules. For the purpose of establishing the ALP of its impugned transactions with its associated enterprises ('AE'), based on the provisions of Rule 10C, the Comparable Uncontrolled Price ('CUP') method was selected as the most appropriate method to determine the arm's length nature of rate of interest paid by the assessee. The CUP method was selected because public information from authentic sources on same/ similar uncontrolled transactions was available. In order to benchmark this transaction the assessee used, the Prime Lending Rate ('PLR') interest rate taken from Reserve Bank of India ('RBI') [web: http://www.rbi.org.in]. The PLR of RBI prevailing during FY 2007-08 was available and thus has been used as a CUP for the purpose of benchmarking the transaction of payment of interest between BT India and BT Pic. The assessee had undertaken a Transfer Pricing (TP') study, carried out by an independent external consultant. A detailed analysis was undertaken to determine the functions performed, risks assumed and assets utilized by the assessee in respect of the transactions undertaken by it with its AE. Further, the economic analysis for the determination of the ALP was undertaken in accordance with the provisions of the Act, read with the Rules. Based on the TP study, the independent external consultant concluded that international transactions entered by the assessee with its AE are at arm’s length from an Indian Transfer Pricing perspective.”
Ld. counsel referred to objections raised before ld. DRP and referred to para 6.3 of the said objections contained at page 46 of appeal set wherein it was, inter alia, stated as under: “We would bring to the Hon’ble Panel’s attention that applying the GBP LIBOR is not appropriate in the instant case as the ECB is denominated in Indian rupees and accordingly an appropriate comparable uncontrolled price would be the interest rate uncontrolled lenders would have charged the assessee for the loan in India. Further, since the loan is denominated in Indian Rupee, the assessee does not bear any foreign exchange risk as it would in case it would have taken a loan in foreign currency. Hence a PLR comparison is appropriate in the instant case.”
The assessee further relied on the following decisions for the proposition that a comparison for determining the arm’s length interest rate for loans would be dependent on the currency in which the loan was denominated: -Sony India (P) Ltd. (ITA nos. 1189/Del/2005 & ors.) - Siva Industries Ltd. (ITA no. 2148/Mds/2010)
Thus, it was submitted before ld. DRP that the currency in which the loan is denominated is a key determinant in identifying the relevant interest rate to be used for benchmarking purposes. Ld. DRP, however, in para 4.1 of its order merely upheld the TPO’s finding. Ld. counsel after referring to detailed submissions made before ld. DRP, as noted above, pointed out that ld. DRP has not at all considered assessee’s submissions and upheld the ld. TPO’s order. He pointed out that in subsequent assessment year 2009-10 ld. DRP has accepted the assessee’s case. In this regard he has filed a copy of ld DRP’s order for AY 2009-10 wherein in para 7.1.3 ld. DRP has held as under:
“7.1.3 This Panel has carefully considered the submissions of the taxpayer and the reasoning given by TPO in his order and holds:
1. 1. Currency in which the loan is denominated is a key determinant in identifying the relevant interest rate for benchmarking.
2. Since the taxpayer is based in India a d ECB is denominated in INR as provided on Page 148 of Paper book, an appropriate uncontrolled price would be the interest rate uncontrolled lenders would have charged the taxpayer for the loan in India. This would definitely have been the interest rate chargeable in Indian market on rupee loan. For this purpose, the PLR of RBI is appropriate comparable.
3. During the course of proceedings before this Panel the taxpayer has submitted letter dated 09.12.2013 the contents of which are as under: "This is in reference to the captioned proceedings. In this regard, we wish to furnish the following information for your kind consideration: 1. Details regarding External Commerdal Borrowing- The assessee has entered into a loan agreement with BT PIc. The loan (external Commercial Borrowing) was denominated in INR The Loan amount along with the interest was returnable/ repayable in India Rupees and any expenditure related to foreign exchange conversion was to be borne by the associated enterprise. It is pertinent to note that the Assessee has subsequently repaid the said loan in Indian Rupees. The relevant documents substantiating this are attached as Annexure L Also no foreign exchange conversion is applicable since the loan was denominated in Indian Rupees. We request you to take the above on record and oblige." Therefore, the taxpayer has rightly benchmarked its loan transaction with the PLR available for the financial year. From page 27 of the TPO's order it is observed that as against average prime lending rate of 12.96% applicable during the year, the taxpayer had paid to its AE at the average interest rate of 10.22%. Since, the rate of interest is less than the prime lending rate applicable during the year, the Panel finds no infirmity in the TP approach of the taxpayer and is of the opinion that no adjustment is called for on this account. The TPO/AO is directed to delete addition proposed on this account.
Ld. counsel further referred to the decision of Hon’ble Delhi High Court in the case of CIT Vs. Cotton Naturals (I) (P) Ltd. (2015) 55 Tamann.com 523 (Delhi), wherein the Hon’ble Delhi High Court in paras 39 & 40 has observed as under:
The question whether the interest rate prevailing in India should be applied, for the lender was an Indian company/assessee, or the lending rate prevalent in the United States should be applied, for the borrower was a resident and an assessee of the said country, in our considered opinion, must be answered by adopting and applying a commonsensical and pragmatic reasoning. We have no hesitation in holding that the interest rate should be the market determined interest rate
applicable to the currency concerned in which the loan has to be repaid. Interest rates should not be computed on the basis of interest payable on the currency or legal tender of the place or the country of residence of either party. Interest rates applicable to loans and deposits in the national currency of the borrower or the lender would vary and are dependent upon the fiscal policy of the Central bank, mandate of the Government and several other parameters. Interest rates payable on currency specific loans/ deposits are significantly universal and globally applicable. The currency in which the loan is to be re- paid normally determines the rate of return on the money lent, i.e. the rate of Interest. Klaus Vogel on Double Taxation Conventions (Third Edition) under Article 11 in paragraph 115 states as under:- "The existing differences in the levels of interest rates do not depend on any place but rather on the currency concerned. The rate of interest on a US $ loan is the same in New York as in Frankfurt-at least within the framework of free capital markets (subject to the arbitrage). In regard to the question as to whether the level of interest rates in the lender's State or that in the borrower's is decisive, therefore, primarily depends on the currency agreed upon (BFH BSt.B 1. II 725 (1994), reo I § AStG). A differentiation between debt-claims or debts in national currency and those in foreign currency is normally no use, because, for instance, a US $ loan advanced by a US lender is to him a debt-claim in national currency whereas to a German borrower it is a foreign currency debt (the situation being different, however, when an agreement in a third currency is involved). Moreover, a difference in interest levels frequently reflects no more than different expectations in regard to rates of exchange, rates of inflation and other aspects. Hence, the choice of one particular currency can be just as reasonable as that of another, despite different levels of interest rates. An economic criterion for one party may be that it wants, if possible, to avoid exchange risks (for example, by matching the currency of the loan with that of the funds anticipated to be available for debt service), such as taking out a US $ loan if the proceeds in US $ are expected to become available (say from exports). If an exchange risk were to prove incapable of being avoided (say, by forward rate fixing), the appropriate course would be to attribute it to the economically more powerful party. But, exactly where there is no 'special relationship', this will frequently not be possible in dealings with such party. Consequently, it will normally not be possible to review and adjust the interest rate to the extent that such rate depends on the currency involved. Moreover, it is questionable whether such an adjustment could be based on Art. II (6). For Art. II (6), at least its wording, allows the authorities to 'eliminate hypothetically' the special relationships only in regard to the level of interest rates and not in regard to other circumstances, such as the choice of currency. If such other circumstances were to be included in the review, there would be doubts as to where the line should be drawn, i.e., whether an examination should be allowed of the question of whether in the absence of a special relationship (i.e., financial power, strong position in the market, etc., of the foreign corporate group member) the borrowing company might not have completely refrained from making investment for which it borrowed the money."
The aforesaid methodology recommended by Klaus Vogel appeals to us and appears to be the reasonable and proper parameter to decide upon the question of applicability of interest rate. The loan in question was given in foreign currency i.e. US $ and was also to be repaid in the same currency i.e. US $. Interest rate applicable to loans granted and to be returned in Indian Rupees would not be the relevant comparable. Even in India, interest rates on FCNR accounts maintained in foreign currency are different and dependent upon the currency in question. They are not dependent upon the PLR rate, which is applicable to loans in Indian Rupee. The PLR rate, therefore, would not be applicable and should not be applied for determining the interest rate in the extant case. PLR rates are not applicable to loans to be re-paid in foreign currency. The interest rates vary and are thus dependent on the foreign currency in which the repayment is to be made. The same principle should apply.
With reference to above decision ld. counsel submitted that in the present case PLR rate should be applied as loan is in Indian currency.
Ld. DR has filed written submissions in which primarily he has referred to various decisions wherein it has been held in principle that TP adjustment is required in regard to interest if not realized from its AEs.
We have considered the submissions of both the parties and have perused the record of the case. Admittedly the external commercial borrowings, made by assessee, are denominated in the Indian currency. Therefore, for bench marking the interest rate paid by assessee @ 9.72%, the prevailing PLR in India, was to be applied and not the 6 months GPB LIBOR in view of the decision of Hon’ble Delhi High Court in the case of Cotton Naturals (I) (P) Ltd. (supra). Brief terms and conditions relating to interest in respect of loan taken by assessee for meeting the funding requirement for import of capital equipment, new projects, expansion and modernization of BT India, were as under: Associated Terms & conditions enterprise - The loan is denominated in INR BT Plc - Interest is payable by BT India on the unpaid principal amount of the loan at the rate of LIBOR + 50 basis points per annum - Interest payments are made on yearly basis; and - BT India shall reply the loan in equal monthly instalments beginning from the expiry of three years from the first drawdown of loan.
Since, the interest paid by assessee is much less than as per PLR, therefore, no adjustment is called for. In the result, this ground is allowed.
In the result, assessee’s appeal is allowed. Order pronouncement in open court on 10/06/2016.