Vena Energy MH Wind Power Private Limited, Bangalore V. Deputy Commissioner of Income Tax, Central Circle-2(2), Bangalore

ITA 197/BANG/2021

• Counselvise Citation: [2022] 106 COUNSELVISE.COM (IT) 9654 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 1 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-07-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Assessment Year: 2016-2017
• Appeal Filed On: 23-05-2021
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: OSD
• Assessee Lawyers: PADAMCHAND KHINCHA
• Keywords: Depreciation; Transfer pricing; International transaction; Non-deduction of tax; Retraction; TDS
• Section: 132; 12; 92C; 143(3); 115JB; 40(a)(ia); 194C; 10B; 194J; 13; 22; 20

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH : BANGALORE BEFORE SHRI GEORGE GEORGE K., JUDICIAL MEMBER AND Ms. PADMAVATHY S, ACCOUNTANT MEMBER IT(TP)A Nos.195 to 198/Bang/2021 Assessment year : 2016-17 Vena Energy KM Wind Power Pvt. Ltd. PAN : AAECE 0231E Vena Energy Fatanpur Power Pvt. Ltd. PAN: AADCE 6919N Vena Energy Patan Power Pvt. Ltd. PAN : AADCE 6973A Vena Energy MH Wind Power Pvt. Ltd. PAN: AADCE 6921C 2/1, First Floor, Icon Annexe, Infantry Road, Bangalore – 560 001. Vs. The Deputy Commissioner of Income Tax, Circle 2(2), Bangalore. APPELLANT RESPONDENT Appellant by : Shri Padamchand Khincha, CA Respondent by : Smt. Susan Dolores George, CIT(OSD)(DR) Date of hearing : 14.06.2022 Date of Pronouncement : 07.07.2022 O R D E R Per Padmavathy S., Accountant Member These are appeals by four different assessees against the final assessment order passed by the AO u/s. 143(3) r.w.s. 144C(13) of the IT(TP)A Nos.195 to 198/Bang/2021 Page 2 of 26 Income-tax Act, 1961 [the Act] dated 24.3.2021 pertaining to assessment year 2016-17. All these appeals were heard together and disposed of by this common order for the sake of convenience and brevity. 2. The common issues that arise in all the appeals are with respect to:- (i) Transfer Pricing adjustment towards interest on issue of Non-Convertible Debentures (NCD) (ii) Addition made protectively towards depreciation against the amount capitalized as Capital Work In Progress. (iii) Disallowance of salary expenses for non-deduction of tax at source, and (iv) Disallowance of depreciation on pre-operative expenses. 3. We will first take up IT(TP)A Nos.195/Bang/2021 for adjudication. The brief facts pertaining to this assessee are that the assessee is a private limited company and is the wholly owned subsidiary of Energon Renewable Pte. Ltd (AE). The assessee is principally engaged in the business of generation and sale of power generated from renewable sources of energy. The assessee filed return of income on 30.11.2016 declaring a total income of Rs.1,31,97,470 under the regular provisions of the Act and book profit of Rs.2,68,75,280 u/s. 115JB of the Act. The case was selected for scrutiny under CASS. The assessee had international transactions with its AE and therefore a reference was made to the TPO. During the TP IT(TP)A Nos.195 to 198/Bang/2021 Page 3 of 26 proceedings, the TPO made an adjustment of Rs.6,46,60,083 towards interest on Non-Convertible Debentures (NCD) issued to the AE. The AO passed the draft assessment order incorporating the TP adjustment and also made the following other additions:- a. Disallowance of salary expenses u/s. 40(a)(ia) of the Act – Rs.14,13,595. b. Disallowance of depreciation of capitalized salary expenses – Rs.36,82,829. c. Disallowance of pre-operative expenses – Rs.24,58,440. 4. Against the draft assessment order, the assessee filed objections before the DRP, which confirmed the TP adjustments and also the disallowances listed in (i) & (ii) above. With regard to pre-operative expenses, the DRP reduced the amount of disallowance to Rs.9,45,270. In pursuance of the directions of the DRP, the AO passed the final assessment order. Aggrieved, the assessee is in appeal before the Tribunal. TP adjustment towards interest on issue of NCD 5. During the year under consideration the assessee made a payment towards interest on NCD to its AE @ 14.70% amounting to Rs.17,66,73,460. The interest payment was made towards unsecured NCD that were subscribed by the AE redeemable at par after 25 years from the availability period as defined in the NCD Trust Deed. The NCD is having a face value of Rs.62,50,000 each, partly paid up and carried an interest @ 14.70% p.a. In the TP study, the assessee has IT(TP)A Nos.195 to 198/Bang/2021 Page 4 of 26 chosen Comparable Uncontrollable Price [CUP] method as the most appropriate method (MAM) for determination of the arm’s length price [ALP]. Accordingly, the assessee applied certain filters to arrive at the comparable companies. The assessee selected a range of 10% (35 th percentile) to 16% (65 th percentile) as arm’s length range with the median of 14% and since the interest paid by the assessee to its AE is at 14.70%, the assessee concluded that the interest is at arm’s length. 6. The TPO rejected the comparables of the assessee stating that the filters applied by the assessee are not appropriate and rejected the CUP taken by the assessee that MAM. The TPO applied fresh filters to choose difference comparables to arrive at the median coupon rate of 9.32%. Therefore, the TPO made an adjustment for the difference in interest rate [14.7 – 9.32 = 5.38%] and computed the TP adjustment towards excess interest payment amounting to Rs.6,46,60,082. 7. The assessee raised objections before the DRP with regard to the filters applied by the TPO for choosing the comparables and also rejecting the internal CUP method and the regulatory rate. The DRP upheld the various filters applied by the TPO and the comparables thus arrived at by the TPO. With regard to the TPO rejecting the internal CUP and regulatory rate, the DRP held that the CUP method requires strict comparability in terms of products of services. In the instant case, the instrument involved is NCD, whereas the proposed comparable under CUP method is bank loan or loan from third party. The rate of interest charged in the case of debenture is decided by the IT(TP)A Nos.195 to 198/Bang/2021 Page 5 of 26 borrower and the amount is required to be paid at maturity. The debenture is an instrument tradeable in the open market and is a hybrid instrument which could be treated as a debt as well as equity. On the other hand, loan is issued by the bank and periodic payment of principal and interest is required to be made. Hence, the internal CUP method was rejected and the DRP held that arm’s length interest rate of NCD is required to be computed in the manner prescribed u/s. 92C of the Act. The assessee took an alternate plea before the DRP stating that according to section 194LD(2) of the Act the maximum allowable rate of interest for a rupee denominated bond of an Indian company cannot exceed SBI base rate on the date of issue plus 500 basis points which works out in assessee’s case to 14.85% and therefore no TP adjustment is warranted. The DRP rejected this contention stating Section 194LD(2) of the Act does not provide any guidelines for determination of ALP interest rate in the case of NCD. Aggrieved, the assessee is in appeal before the Tribunal. 8. Before us, the ld. AR made detailed written submissions which are as follows. i. While arriving at the ALP of the transaction entered by the assessee, the DRP/TPO failed to consider the interest rate on loans availed from Banks and third party financial institution which constitute internal CUP after appropriate adjustments for the difference in the debenture instruments. These third party interest rates provides a high level CUP subject to adjustment for tenure (inter-company borrowing is for 25 years whereas third party borrowing is for ~15 years) and security (inter-company IT(TP)A Nos.195 to 198/Bang/2021 Page 6 of 26 borrowing is unsecured whereas third party borrowing is secured). If these third-party interest rates are adjusted for tenure and security, the same will result in an increase in rate over and above the 3rd party rates. ii. In case of the Assessee, it has obtained loans from third party domestic financial institutions in future years. For the current year, the Assessee refers to the rate of interest on loans secured by its sister concerns (Vena Patan – 12% and Vena Fatanpur - 11.75% & 11.85%) from third parties for project finance. After considering appropriate adjustment to the interest, the adjusted rate of interest on third party borrowings will be at 15% (approx.) iii. Without prejudice to the above, it was submitted that the AO ought to have appreciated the fact that the assessee has not claimed the said expenditure in the subject AY as the same has been charged to ‘Capital work-in-progress’ as per Note 16 of the Financial statement at page 222 of PB-I. Therefore, the company has neither claimed any depreciation on the same nor claimed the said amount as an expenditure in the P&L account during the subject AY. In this regard, reference was invited to page 246 of PB-1 – Clause A.12.(ii) of Schedule BP of the ITR and page 249 of PB I for Depreciation schedule of ITR. It is therefore submitted that for the subject AY 2016-17, there ought not to be any disallowance made as no expense or charge has been claimed by the assessee company in the subject AY. In fact, as no expenditure has been claimed, the TP provisions should be held as not applicable. Hence, the TP addition is to be deleted in its entirety. iv. Reliance was placed on the Delhi Tribunal decision in the case of Assotech Moonshine Urban Developers (P.) Ltd. v. DCIT, New Delhi, ITA No. 1749 (DELHI) of 2017, at paragraph 6, IT(TP)A Nos.195 to 198/Bang/2021 Page 7 of 26 where it has upheld benchmarking the interest payment on INR denominated debentures against the prevailing SBI Prime Lending Rate (PLR) + 300 basis points as the appropriate arm’s length interest rate. Also SBI+300 basis point was held as ALP in Granite Gate Properties Pvt Ltd, 116 taxmann.com 952 (Delhi Trib.). v. Likewise, it was submitted that the Bangalore ITAT has accepted interest rate benchmarking based on rates linked to SBI Prime Lending Rate as the appropriate benchmarking rate for INR denominated debentures in the case of M/s Praxair India Pvt. Ltd vs ACIT, LTU, in IT(TP)A No.506/Bang/2016 dated 6.12.2021. vi. Reliance is placed on RBI’s ‘Master Direction – Borrowing and Lending transactions in Indian Rupee between Persons Resident in India and Non-Resident Indians/ Persons of Indian Origin’ (”Master Directions”) which is placed on record, wherein in para 2.1.2 of the RBI direction, it is stated that the rate of interest shall not be more than the Prime Lending Rate of State Bank of India plus 300 basis points. Although the said regulations have been issued in the context of borrowings from NRI/PIO, it was submitted that the same carry substantial persuasive value. Details of SBI PLR rates and Assessee’s rate SBI PLR [A] Allowable basis points as per RBI master guidelines [B] Net rate [A+B] Assessee’s rate of interest 14.45%* 300 basis points 17.45% 14.70% *Source:https://sbi.co.in/web/interest-rates/interest-rates/benchmark-prime- lending-rate-historical-data *SBI PLR rate is considered as the rate prevalent on the day of issue of Debentures IT(TP)A Nos.195 to 198/Bang/2021 Page 8 of 26 It is accordingly submitted that the interest rate (14.70%) paid by the Assessee in this case is within the arm’s length range of the prevailing rate of SBI PLR + 300 basis points, when the Debentures were issued by the Assessee (July 21, 2015). vii. Reliance is placed on provision of section 194LD(2) of the Act wherein the maximum allowable rate of interest for a rupee denominated bond of an Indian entity cannot exceed SBI base rate + 500 basis points (Notification No SO 2311 (E)dated July 29, 2013). The Debentures issued by the assessee (to a FII entity of the Group) were covered by section 194LD (lower rate of TDS) since the interest rate paid was within the range prescribed by the aforesaid Notification issued under section 194LD. viii. It is accordingly submitted that the interest rate (14.70%) paid by the Assessee in this case is as per the rate prescribed under section 194LD of the Act (prevailing rate of SBI Base + 500 basis points when the Debentures were issued by the Assessee (21 July 2015). Therefore, since the same is as per the prescribed rate, no further transfer pricing adjustment is called for. 9. On the other hand, the ld. DR submitted that i. The DRP has held that Transfer pricing is not an exact science and the TPO and the Assessee have to make the TP analysis depending on the prevailing economic conditions and circumstances in each year. This is because the dynamics and profile of business keep on changing year on year. Therefore the TPO may not be in a position to directly apply the findings of the Hon'ble ITAT regarding comparables in earlier year to the current years. Further the DRP held that Rule 10B provides for making reasonably accurate adjustment to the uncontrolled comparable transaction to eliminate the material effects of differences on the price, cost or profits. The working capital requirements and impact depends on various factors such as business cycles, the nature of business activity with its IT(TP)A Nos.195 to 198/Bang/2021 Page 9 of 26 correlation on the general economic trends, the fund and capital position of the company, its marketing strategies, its market share etc.all of which cannot be capture in the year end Receivable and Payable position. Further, the assessee had failed to demonstrate such material differences so as to warrant an adjustment and therefore the DRP upheld the TPO's reasoning. He thus submitted that the assessee's ground may be dismissed. ii. With regard to the objection of the assessee in comparing secured debentures with unsecured debentures by the revenue authorities, the ld. DR submitted that the assessee has not contested debentures issue before the TPO. Also the DRP noted that the assessee in its TP report has also not applied this filter. In view of the above, the Hon'ble DRP did not consider the same as an appropriate filter and rejected the assessee's ground. Hence the decision of the DRP may be upheld. iii. On the assessee’s plea to consider the interest rate on loans availed from Banks and third party financial institution which constitute an internal CUP after making appropriate adjustments for the difference in the debenture instruments, the ld. DR submitted that the CUP method requires strict comparability in terms of product or services. In the instant case, the instrument involved is NCD, whereas the proposed comparable under CUP is bank loan or loan from third parties. The rate of interest charged in the case of debenture is decided by the borrower and amount is required to be paid at maturity. Debenture as an instrument is tradeable in the open market. Debenture is a hybrid instrument which can be treated as debt as well as equity. On the other hand, loan is issued by the bank and periodical payments of principal and interest is required to be made. Also, loan being a specific agreement between two parties is no tradable in open market. In view of the above, the Hon'ble DRP rejected the IT(TP)A Nos.195 to 198/Bang/2021 Page 10 of 26 grounds of the assessee regarding suitability of internal CUP which is to be upheld. iv. The ld. DR submitted that the arm’s length interest rate on NCDs is required to be computed in the manner prescribed in section 92C of the Act. Section 194LD(2) of the Act, to which reference was made by the assessee, does not provide any guidelines for determination of the arm’s length interest rate in case of NCD and therefore it was rightly rejected by the DRP. 10. We heard the rival submissions and perused the materials on record. On perusal of the agreements relating to the issue of debentures we notice the following facts (i) As per clause 2.1 of the Debenture Subscription Agreement dated 01/05/2015, the debentures issued are unlisted, unrated, unsecured and redeemable non-convertible and having the nominal value in INR (Page 356 of paper book). (ii) The Debenture Trust Deed dated 01/05/2015 contains the definition of ‘Interest Rate’ for the purpose of the agreement as annual coupon rate of SBI Base Rate + 500 bps , ‘SBI Base Rate’ as the base rate as advised by State Bank of India on its website as on the Effective Date and ‘Redemption Date’ means the date on the 25 th anniversary of the date of expiry of the availability period. (Page 381 to page 383 of paper book), (iii) As per clause 5.7 of the Debenture Trust Deed all the payment to the debenture holder is to be done in INR (page 390 of paper book). 11. The summary of inference from the above is that the assessee has issued unsecured non-convertible debentures in INR to its AE that are redeemable after 25 years carrying interest rate of 14.70%. The IT(TP)A Nos.195 to 198/Bang/2021 Page 11 of 26 assessee in the TP study has taken the comparables applying various filters including the transactions having duration equal to or greater than 15 years whereas we notice that this filter is not applied for the comparables selected by the TPO. One of contentions of the ld AR was that the longer the duration of the loan, the interest rate will be directly proportional to the same more so when the loan is unsecured. The TPO has did not consider this filter stating that the same is yielding few comparables (Page 12 of order u/s.92CA) and this reason is upheld by the DRP. In the given case the debentures are unsecured with a repayment period of 25 years and in our considered view duration of the debt / loan is a significant factor in the determination of interest rate given that the debentures are unsecured and the reason quoted by the TPO/DRP for not applying this filter is not right. 12. The TPO has rejected the internal CUP comparison of the assessee with the loans obtained from the financial institutions / banks for the reason that in the case of debentures interest rate is decided by the borrower whereas in the case of bank loans the interest rate is decided by the lender and that the repayment of debenture is on maturity and in the case of bank loan repayment is periodical. The TPO had stated few more similar reasons for concluding that the internal CUP is not MAM. One of the key criteria for determining the interest rate is the risk involved. When the loan is unsecured the risk is higher and there would be a higher rate of interest charged for the loan. Applying this logic the assessee has justified the interest charged at 14.70% with that of the third party borrowings where the interest is IT(TP)A Nos.195 to 198/Bang/2021 Page 12 of 26 charged between 11.05% to 12.50%. This contention of the assessee has merits as the assessee has taken loan in the form of non-convertible unsecured debentures which has a higher risk factor as it is unsecured. Even applying the contention of the of the TPO that debenture has repayment on maturity and loan has periodical repayment justifies higher rate of interest charged for debenture in the commercial sense. 13. We notice that the coordinate bench of the Tribunal in the case of M/s Praxair India Pvt. Ltd (supra) has considered the issue of interest rate Compulsory Convertible Debentures issued in INR and held that 8.6.2 The Hon’ble Delhi High Court in the case of CIT v Cotton Naturals (I) Pvt. Ltd. (supra) had held that the interest rate should be the market determined interest rate applicable to the currency concerned in which the loan has to be repaid. The relevant finding of the Hon’ble High Court reads as follows:- “39. 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 IT(TP)A Nos.195 to 198/Bang/2021 Page 13 of 26 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 repaid 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), re 1 § 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 IT(TP)A Nos.195 to 198/Bang/2021 Page 14 of 26 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. 11 (6). For Alt. 11 (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. 40. The aforesaid methodology recommended by Klaus Vogal 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 and 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 IT(TP)A Nos.195 to 198/Bang/2021 Page 15 of 26 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.” 8.6.3 In the instant case, admittedly, the CCDs are issued in INR, interest is paid in INR and CCD’s are repaid also in INR. Therefore, placing reliance on the judgment of the Hon’ble Delhi High Court in the case of CIT v. Cotton Naturals (I) Pvt. Ltd. (supra), we hold that the TP study of the assessee to justify the interest rate by arriving at average rupee cost and comparing the same with SBI prime lending rate is correct. It is ordered accordingly. 14. In assessee’s case the NCDs are issued in INR and the interest is also paid in INR and considering the ratio laid in M/s Praxair India Pvt. Ltd (supra), and the Master Directions issued by RBI, we are in agreement with the contention of the ld AR that the interest rate by the assessee is justified when benchmarked with the SBI Prime Lending Rate on the date of issue debenture. We therefore hold that the interest charged by the assessee on the unsecured non-convertible debentures issued to the AE is within arm’s length and TP adjustment stands deleted. Corporate tax issues 15. The brief facts of the issue are that a search u/s. 132 of the Act was conducted in the premises of Vena Energy Power Resources Private Limited (“VEPRPL”) (earlier known as Energon Power Resources Private Limited), which is one of the group company of the assessee. During the course of search proceedings, a statement dated IT(TP)A Nos.195 to 198/Bang/2021 Page 16 of 26 21.08.2018 of Mr Subrahmanya Srinivas Sista (Country Head) was recorded according to which, certain capitalized expenses recorded in the books of accounts were allegedly stated to be not necessarily and completely demonstrated or attributable to the respective project SPVs (Q68 and Q69 of the statement). Based on the said statement, the AO issued a show cause notice requiring the assessee to show cause as to why the aforementioned sums should not be disallowed. In response, the assessee emphasised the fact that the statement of Mr. Subrahmanya Srinivas Sista recorded at the time of search proceedings stood retracted 14.9.2018 and that such expenses can be substantiated on the basis of available documentation. It also furnished documentation in support of its claim during the course of the said proceedings. However, the AO concluded that while the letter of withdrawal / retraction was filed on 14.9.2018, no such evidence in support of the expense claims or in support of the retraction was furnished until the time of submission under the subject assessment proceedings (i.e., 4.12.2019). Therefore, the AO held the retraction to not to be a valid retraction per se. 16. The AO has also held that the documentation provided by the assessee in the form of journal voucher, a copy of e-mail and copies of invoices raised, does not establish the purpose for which expenditure was incurred or its genuineness. Therefore, the AO made certain additions to the total income of the Company on the basis of the statement that was recorded. The DRP upheld the additions / disallowances made. IT(TP)A Nos.195 to 198/Bang/2021 Page 17 of 26 17. The key contention of the ld AR was with regard the sworn statement of Mr Subrahmanya since the basis on which the AO made additions is the statement recorded during the course of search u/s.132 of the Act. In this regard the ld. AR submitted that the assessee has been repeatedly asking for the statement recorder from 21/08/2018 and since there was no response received the assessee filed a letter of retraction of statement recorded on 17/09/2018. The assessee filed one more letter on 26/11/2019 and finally the copy of the Statement u/s 132 was provided to the assessee only on 29/11/2019. Hence, the ld AR submitted that the evidence in support of the expense claims could not be provided earlier when the Statement was retracted i.e. 17/09/2018 but was immediately furnished thereafter on 04/12/ 2019 as soon as the Statement copy was made available to the assessee. 18. In the above background, we now consider the issue on merits based on the grounds raised by the assessee. Disallowance/additions towards salary cost 19. During the year under consideration the assessee has paid a total salary cost Rs.2,92,64,181 VEPRPL as a reimbursement. Out of this a sum of Rs.2,45,52,196 was capitalized and the balance of Rs.47,11,985 was debited to the P&L account. In addition to the submissions made with regard to the retraction of statement made by Mr.Subramanya, the assessee on merits submitted that these salary payments are cost to cost reimbursements to the sister concerns who deploy the manpower to render services for the assessee. The AO did IT(TP)A Nos.195 to 198/Bang/2021 Page 18 of 26 not accept the contention and proceeded to make a disallowance u/s.40(a)(ia) of Rs.14,13,595 i.e.30% of Rs.47,11,985 towards the amount debited to the P&L account. The AO also held that the amount capitalized is not eligible for capitalization based on the sworn statement, and therefore arrived at the depreciation @ 15% of the capitalized amount of Rs.2,45,52,196 i.e. Rs.36,85,829 and disallowed the same substantively. The AO made a protective disallowance towards the same capitalized salary cost stating that in case of the said amount getting allowed to be capitalized on genuineness, the disallowance u/s.40(a)(ia) would prevail and therefore arrived at a sum of Rs.11,04,849 i.e. Rs.2,45,52,196 x 30% x 15% for the protective disallowance. The DRP confirmed both the substantive and the protective disallowance made by the AO. Aggrieved the assessee is in appeal before the Tribunal. 20. With regard to the disallowance of salary cost debited to P&L account 30% of which is disallowed u/s.40(a)(ia) the Ld. AR submitted that for the very same nature of expense, i.e., salary cost reimbursement, the portion which has been charged to the P&L account by the assessee has been considered by the AO to be a genuine expense and a disallowance on the same has been made by the AO only for alleged non deduction of tax. However, when the very same expense has been charged to capital work-in-progress, the AO has questioned the genuineness of the expense. This clearly shows the adjustments made the AO are arbitrary in nature and without any basis. IT(TP)A Nos.195 to 198/Bang/2021 Page 19 of 26 21. With regard to the depreciation disallowance of salary cost capitalised the ld AR submitted that the assessee has not capitalized the said expenditure to the cost of plant and machinery and consequently has not claimed any depreciation on the same during the year, as the said expenditure has been capitalized as ‘capital work-in- progress. Therefore, the assessee has neither claimed any depreciation on the same nor claimed the said amount as an expenditure in the P&L account during the year (page 246 of PB-1 – Clause A.12.(ii) of Schedule BP of the ITR and page 249 of PB I for Depreciation schedule of ITR). It is therefore submitted that there ought not to be any disallowance made as no expense or charge has been claimed by the assessee. 22. The ld. AR also submitted that for the subject AY 2016-17, there ought to be no disallowance made (protective or otherwise) as no expense or charge has been made by the Company. Without prejudice, the AO while making protective disallowance has ignored that section 40(a)(ia) is not applicable on capital expenditure. The provisions of section 40(a)(ia) does not provide for disallowance of depreciation, since it is not an expenditure, but a statutory allowance. Reliance is on the jurisdictional Karnataka HC decision in the case of PCIT vs Tally Solutions (P.) Ltd. [2021] 123 taxmann.com 21 (Karnataka). 23. The ld. DR submitted that the DRP noted that from the perusal of the statement of Shri Subrahmanya Srinivas Sista it is clear that the IT(TP)A Nos.195 to 198/Bang/2021 Page 20 of 26 amount claimed as capitalized have actually not incurred by the assessee. Therefore, this amount is not liable for capitalization and depreciation claimed on the same is required to be disallowed. In view of the above, the Hon'ble DRP upheld the additions made by the AO. 24. Further the ld. DR submitted that the DRP noted that the services rendered are in the nature of technical/professional services, the payment made by assessee to VEPRPL attracts the provision of 194J. Since TDS is not deducted by the assessee, the AO has correctly applied the provisions of sec.40(a)(ia) and disallowed 30% thereof. From the perusal of the statement of Shri Subrahmanya Srinivas Sista it is clear that the amount claimed as capitalized have actually not incurred by the assessee. Therefore, the ld. DR submitted that this amount is not liable for capitalization and depreciation claimed on the same is required to be disallowed, as rightly held by the revenue authorities. 25. We have considered the rival submissions and perused the material on record. With regard to the protective and the substantive disallowance made by the AO, on perusal of financial statements of the assessee we notice that the impugned amounts have not been capitalized and is accounted a capital work in progress for the year under consideration. We therefore agree with the contention of ld AR that when there is no capitalization of the impugned payment and any depreciation claim towards the same, the disallowance of depreciation is not tenable. Since there is no charge of depreciation during the year. IT(TP)A Nos.195 to 198/Bang/2021 Page 21 of 26 Further the AO has made the disallowance without examining the details submitted by the assessee in this regard and has done the disallowance merely based on the statement of Mr.Subramanya which according to ld AR is subsequently retracted. In the light of these discussions we delete the protective and substantive disallowance of depreciation. 26. Next we will consider the issue of disallowance of salary cost debited to the P&L account u/s.40(a)(ia). The ld AR submitted that employees were working under the direct supervision and control of the assessee and that the employees have been deployed to meet the business needs of the assessee. The ld AR brought to our attention the break-up of salary expense reimbursed to VEPRPL which is available at page 415 of the Vena KN PB. VEPRPL has cross-charged salary expense to the assessee on a cost-to-cost basis without any mark-up and the assessee has merely reimbursed the salary cost of the employees to VEPRPL. According to the ld AR The salary was paid by VEPRPL to the employees for administrative convenience only on which VEPRPL has deducted appropriate taxes under section 192, wherever applicable. On perusal of materials on record it is clear that the amount paid by the assessee to VEPRPL is only a reimbursement of the salary cost and not to carry out any work as defined in section 194C of the Act or provide any technical / consultancy services to the Assessee as defined under section 194J of the Act. Further there is no element of income in the salary cost reimbursed by the assessee to VEPRPL. We notice that the Karnataka High Court in the case of IT(TP)A Nos.195 to 198/Bang/2021 Page 22 of 26 Kalyani Steels Ltd [2018] 91 taxmann.com 359 (Karnataka) has held that there cannot be a TDS on the reimbursement since there was no ‘income’ element. The salary cost which is paid by VEPRPL to the employees has already been tax deducted and therefore the amount reimbursed by the assessee is only on a cost to cost basis cannot be subject to TDS under 194C / 194J. In view of the above discussion we hold that the salary cost paid by the assessee to VEPRPL cannot be disallowed u/s.40(a)(ia). Disallowance of depreciation on pre-operative expenses 27. The assessee had incurred a sum of Rs.1,22,92,200 towards pre- operative expenses and had capitalized the entire amount. The AO disallowed 1/5 th of the said expense. The DRP doubted the genuineness of the said expense based on the statement of Mr. Subramanya Srinivas however restricted the disallowance to the depreciation calculated @ 7.69% amounting to Rs 9,45,270/- (7.69% of Rs 1,22,92,200). 28. The ld. AR reiterated reiterated that the aforementioned statement recorded during search formed the basis upon which the expenses was disallowed by the AO. However, the subsequent withdrawal of the statement and the fact that the expenses can be substantiated on the basis of documentation conclusively proves that the AO has erred in making such disallowance. It is submitted that the Assessee has incurred the expenditure towards purchase of stamp paper and professional/ consultancy fees and had deducted taxes at source wherever applicable and that such expenditure was incurred for the IT(TP)A Nos.195 to 198/Bang/2021 Page 23 of 26 purposes of business supported by documentary evidence submitted during the course of assessment proceedings (Page 415 and 420 of Vena KN PB-1). 29. Further, notwithstanding and without prejudice to the above, the ld. AR submitted that the AO disallowed depreciation @ 7.69 %, without appreciating the fact that the assessee has not capitalized the said expenditure to the cost of plant and machinery and consequently has not claimed any depreciation on the same during the year, as the said expenditure has been capitalized as ‘capital work-in-progress. Therefore, the company has neither claimed any depreciation on the same nor claimed the said amount as an expenditure in the P&L account during the year. (page 246 of PB-1 – Clause A.12.(ii) of Schedule BP of the ITR and page 249 of PB I for Depreciation schedule of ITR). It is therefore submitted that no disallowance is warranted, as no expense or charge has been claimed by the assessee. 30. The ld. DR submitted that DRP noted that the genuineness of expenditure of Rs.1,22,92,200 is not proved in view of the statement of Mr.Subramanya Srinivas Sista, the depreciation claim (7.69 % of 1,22,92,200) is required to be disallowed and directed the AO accordingly and the same may be upheld. 31. We have considered the issue of disallowance of depreciation where the amount is not capitalized but is accounted as capital work in progress in para 25 of this order. Considering the fact that the pre- operative expenses are not capitalized and no depreciation is claimed IT(TP)A Nos.195 to 198/Bang/2021 Page 24 of 26 for the year under consideration we delete the disallowance of depreciation on pre-operative expenses. 32. The common issue in appeals 196 to 198/BANG/2021 is the determination of ALP of the interest on the issue NCDs to the AEs. The details of interest charged by these assessee is tabulated below Name of Entity Date of issue Tenure (in years) Face value (in INR lacs) Rate of interest (Coupon rate) Issue size (in INR cr.) Coupo n rate as per TP order Adjustment (Amt in INR) Vena Energy Fatanpur Power Private Limited 06 May 2015 25 50.00 14.85% 500 9.32% 5,52,70,305 Vena Energy MH Wind Power Private Limited 31 December 2014 25 40.00 15.00% 260 10.24% 10,62,43,105 Vena Energy Patan Power Private Limited 24 December 2013 25 50.00 14.85% 500 9.32% 5,11,01,745 33. Considering that the NCDs are issued to the same AE under the same terms as in the appeal ITA No.195/Bang/2021, and in view of our decision given in para 14 of this order we hold that no adjustment is warranted towards interest on NCDs issued by the assessee to the AE. 34. The issue of disallowance made towards salary cost debited to the P&L account u/s.40(a)(ia), protective and substantive disallowance depreciation on the salary cost accounted in capital work in progress and the disallowance of depreciation on the pre-operative expenses accounted in capital work in progress is common to appeal no 196 and IT(TP)A Nos.195 to 198/Bang/2021 Page 25 of 26 198/BANG/2021. The details of the disallowances made is given in the table below. Sl No Particulars Total amount of expenditure under question Total disallowance made by Assessing Officer in the Final Assessment Order Total amount of expenditure under question Total disallowance made by Assessing Officer in the Final Assessment Order Vena Energy Fatanpur Power Private Limited Vena Energy Patan Power Private Limited 1 Disallowance on capitalized salary cost 5,09,04,261 76,35,639 (5,09,04,261*15%) 1,40,21,898 21,03,285 (1,40,21,898*15%) 2 Disallowance on salary charged to P&L 32,10,929 9,63,279 (32,10,929*30%) 46,65,866 13,99,760 (46,65,866*30%) 3 Disallowance on capitalized pre- operative cost 37,88,734 2,91,354 (37,88,734*7.69%) 28,82,246 2,21,645 (28,82,246*7.69%) 35. In view of our decision given para 25,26 and 31 of this order we delete the disallowances made towards salary cost and the depreciation. 36. In the result, the appeal is allowed in favour of the assessee Pronounced in the open court on this 07 th day of July, 2022.. Sd/- Sd/- ( GEORGE GEORGE K. ) ( PADMAVATHY S. ) JUDICIAL MEMBER ACCOUNTANT MEMBER Bangalore, Dated, the 07 th July 2022. /Desai S Murthy / IT(TP)A Nos.195 to 198/Bang/2021 Page 26 of 26 Copy to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. By order Assistant Registrar ITAT, Bangalore.