2024 (6) TMI 317 - AT - Income Tax

Disallowance u/s. 14A r.w.r. 8D - Scope of principle of consistency - contention of the assessee is that assessee has computed disallowance in the same methodology as was adopted in the preceding AYs - Once the method of computation of disallowance u/s.14A has been accepted by the Tribunal in the past the same cannot be rejected - HELD THAT - As in the preceding AYs the provisions of Rule 8D were not applicable. As pointed earlier the provisions of Rule 8D were applicable from AY 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 AO to determine the amount of expenditure incurred in relation to earning of exempt income in accordance with the provisions Rule 8D if the AO 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. AO shall determine the amount of expenditure incurred in relation to earning exempt income in accordance with the provisions of section 14A(2) read with Rule 8D. The assessee in the impugned assessment year has worked disallowance u/s 14A following the same methodology as has been accepted by the AO in remand proceedings in AY 2001-02 and AY 2003-04. The said methodology was subsequently approved by the Tribunal in AY 2006-07 and Assessment Year 2007-08. Revenue has not disputed the fact that the manner of determination of suo-motu disallowance u/s.14A by the assessee is in accordance with the method accepted by Revenue in the past. Merely for the reason that Rule 8D was introduced from the impugned assessment year it cannot be said that there is any defect in the manner of computation of disallowance u/s. 14A by the assessee. We find merit in ground No.1 of appeal hence the same is allowed. Nature of expenses - expenditure on Shelved Projects - revenue or capital expenditure - HELD THAT - The assessee has incurred expenditure on various projects/ feasibility reports which were subsequently shelved. The assessee claimed the expenditure as revenue AO rejected the contentions of the assessee and treated the expenditure as capital. We find that in the preceding AY the Tribunal has been consistently holding that such expenditure is on revenue account and has decided the issue in favour of the assessee. AO 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 AYs. We see no reason to take a different view accordingly we reverse the findings of AO on this issue and allow ground No.2 of appeal. Disallowance of Prior Period Expenditure - assessee is following mercantile method of accounting - HELD THAT - We find that in AY 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 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. Disallowance of discount on issue of Euro Notes - HELD THAT - The assessee had issued 7.875% Euro Notes (2007) and 8.50% Euro Notes(2017) at a discount in AY 1998-99. 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 AY 1998-99 to AY 2003-04. AO disallowed the amount in AY 2004-05 and 2005-06 but the same was allowed by the CIT(A). We find that in AY 2006-07 discount on issue of Euro Notes was again disallowed by the AO. In the impugned assessment order the AO 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 AO has vanished. Accordingly ground No.4 of the appeal is allowed. Reduction in allowance of premium on pre payment of debentures and its impact on computation of deduction u/s. 80IA - HELD THAT - The Co-ordinate Bench while deciding this issue in Assessment Year Assessment Year 2006-07 2019 (12) TMI 819 - ITAT MUMBAI we direct the AO accordingly to give life to the issue of allowability of deduction towards premium on prepayment of debentures based on the final outcome of the appeals of the revenue for the Asst Years 2004-05 and 2005-06. Claim of deduction u/s. 80IA - HELD THAT - It is an undisputed fact that the initial assessment year for the purpose of deduction u/s. 80IA qua Supa Wind Power Project 17 MW Unit is AY 2007-08. The Tribunal has dealt with the issue of assessee s eligibility of claiming deduction u/s. 80IA in AY 2006-07 in detail. The findings on the issue in Assessment Year 2006-07 have been ipso-facto adopted in AY 2007-08. Thus assessee s claim of deduction u/s. 80IA on Supa Wind Power Project 17 MW Unit was allowed by the Tribunal in AY 2007-08. No material has been placed on record by the Revenue to show that the Department is in appeal against the findings of the Tribunal in AY 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 AY 2007-08. Thus the said Assessment Year becomes the initial Assessment Year for claiming deduction u/s. 80IA 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. Duplicate disallowance u/s.80IA - HELD THAT - 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. Disallowance of addition depreciation claimed u/s. 32(1)(iia) - HELD THAT - 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. AO 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 of appeal is allowed. Transfer Pricing Additions - Disregard of Rule 10B(2) - 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 - HELD THAT - 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. TP adjustment towards Guarentee fees - HELD THAT - For the purpose of bench marking the guarantee fee towards the loan obtained by the AE from Barclays Bank Plc. the assessee has obtained a letter from SBI quoting the rate charged. The assessee has arrived at a rate of 0.041% using SBI rate as the base and by applying the power trend analysis since according to the assessee the rate of guarantee fee is inversely proportional to the amount of loan. The amount of loan being huge i.e. USD 950 million the assessee justified the said rate and considered the same to be at arm s length. CUP method requires a high degree of comparability of products and functions therefore we see merit in the contention of the TPO. The rate obtained from SBI does not consider the specific aspects such as risk etc. thus cannot be applied carte blanche. Hence we are not convinced to accept the basis on which the assessee has bench marked the transaction. At the same time we notice that the TPO has also used general rates obtained from two banks viz. Allahabad bank and SBI and there is no proper reasoning provided by the TPO as to how the same 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. As decided in Strides Shasun Limited 2022 (9) TMI 1594 - ITAT MUMBAI followed the decision of the jurisdictional High Court in the case of Everest Kento Cylinder Ltd 2015 (5) TMI 395 - BOMBAY HIGH COURT 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 - HELD THAT - 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. 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%. 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 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. 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. ( 2017 (12) TMI 583 - RAJASTHAN HIGH COURT has held that where assessee has extended loan to its AE adjustment should be made at average LIBOR rate existing at that time. It is a settled legal position that for the purpose of determination of ALP the rate of interest should be charged in the currency in which loan is borrowed. Thus we find merit in the submissions of assessee in applying LIBOR in respect of loan advanced from India to the AE.

Summary

Issues involved:

1. Disallowance u/s. 14A of the Act
2. Disallowance of expenditure on Shelved Projects
3. Disallowance of Prior Period Expenditure
4. Disallowance of discount on issue of Euro Notes
5. Reduction in allowance of premium on pre-payment of debentures and its impact on computation of deduction u/s. 80IA of the Act
6. Claim of deduction u/s. 80IA of the Act
7. Duplicate disallowance u/s.80IA of the Act
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
9. Disallowance of additional depreciation claimed u/s. 32(1)(iia) of the Act
10. Transfer Pricing Additions- Disregard of Rule 10B(2)
11. TP adjustment towards Guarantee fees
12. TP Adjustments towards imputing interest on loan
13. Erroneous denial of relief granted by DRP
14. Erroneous application of section 133(6) of the Act for the purpose of comparability in Transfer Pricing

Summary:

1. Disallowance u/s. 14A of the Act:
The assessee challenged the disallowance of Rs. 32.60 crores u/s. 14A of the Act. The Tribunal found merit in the assessee's method of computation of disallowance, which was consistent with previous years and accepted by the Tribunal. The Tribunal allowed the assessee's claim, stating that the provisions of Rule 8D, introduced from the Assessment Year 2008-09, do not mandate a different method of computation if the assessee's method has been previously accepted.

2. Disallowance of expenditure on Shelved Projects:
The Tribunal reversed the Assessing Officer's decision to treat the expenditure on shelved projects as capital expenditure, citing consistent decisions in favor of the assessee in previous years. The Tribunal allowed the expenditure as revenue expenditure.

3. Disallowance of Prior Period Expenditure:
The Tribunal upheld the assessee's method of accounting for prior period expenses, which were crystallized during the year. The Tribunal allowed the prior period expenses of Rs. 11.67 crores, following its decision in the assessee's case for previous years.

4. Disallowance of discount on issue of Euro Notes:
The Tribunal allowed the assessee's claim for discount on the issue of Euro Notes, following its decision in the assessee's case for the Assessment Year 2006-07. The Tribunal found that the Assessing Officer's disallowance was not justified as the method of accounting for the discount had been consistently accepted in previous years.

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 Tribunal restored the issue to the Assessing Officer with directions to follow the decision for the Assessment Year 2006-07, where the premium on pre-payment of debentures was allowed over the future balance life of the debentures.

6. Claim of deduction u/s. 80IA of the Act:
The Tribunal allowed the assessee's claim for deduction u/s. 80IA on the Supa Wind Power Project 17 MW Unit, following its decision for the Assessment Year 2007-08. The Tribunal noted that once the deduction is allowed in the initial assessment year, it cannot be denied in subsequent years.

7. Duplicate disallowance u/s.80IA of the Act:
The Tribunal restored the issue to the Assessing Officer for re-examination and verification of the facts, agreeing with the assessee that double disallowance cannot be made while computing taxable income.

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 assessee did not press this ground as appropriate relief had been allowed u/s. 154 of the Act. The Tribunal dismissed this ground as not pressed.

9. Disallowance of additional depreciation claimed u/s. 32(1)(iia) of the Act:
The Tribunal allowed the assessee's claim for additional depreciation, noting that the method of claiming depreciation was similar to that accepted in the Assessment Year 2006-07.

10. Transfer Pricing Additions- Disregard of Rule 10B(2):
The Tribunal decided to address this generic ground while deciding the specific TP adjustments in grounds 11 and 12.

11. TP adjustment towards Guarantee fees:
The Tribunal found the TP adjustment computed by the TPO based on general rates of guarantee fees charged by banks to be untenable. The Tribunal directed the TPO to apply a rate of 0.5% for the ALP of corporate guarantee, following the decision in the case of Strides Shasun Limited.

12. TP Adjustments towards imputing interest on loan:
The Tribunal accepted the assessee's use of weighted average rate of interest for benchmarking the loan transaction, following the decision in Goodyear South Asia Tyres Pvt. Ltd. The Tribunal also directed the use of LIBOR for loans extended from India.

13. Erroneous denial of relief granted by DRP:
The assessee did not press this ground. The Tribunal dismissed it as not pressed.

14. Erroneous application of section 133(6) of the Act for the purpose of comparability in Transfer Pricing:
The Tribunal dismissed this ground as infructuous since grounds 11 and 12 were allowed.

Conclusion:
The appeal of the assessee was partly allowed.