TMI Blog2016 (6) TMI 1370X X X X Extracts X X X X X X X X Extracts X X X X ..... see s claim is fully covered in the case of SMC Construction [ 2010 (1) TMI 10 - HIGH COURT OF DELHI] as held 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. - Decided against revenue TP Adjustment - international transaction of payment of interest on external commercial borrowings of ₹ 3,32,11,250/- - interest had been paid to BT plc. @ 9.72% - HELD THAT:- Admittedly the external commercial borrowings, made by asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lity 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 prerequisite 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. 12. 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 13. Respectfully following the decision of Hon ble Delhi High Court, this ground is allowed. 14. 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 ₹ 3,32,11,250/-. The interest had been paid to BT plc. @ 9.72%. The outstanding balance as on 31.3.2008 was ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 anal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 subst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g 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 crite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 22. With reference to above decision ld. counsel submitted that in the present case PLR rate should be applied as loan is in Indian currency. 23. 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. 24. 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 I ..... X X X X Extracts X X X X X X X X Extracts X X X X
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