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

ITA 255/BANG/2022

• Counselvise Citation: [2022] 106 COUNSELVISE.COM (IT) 3341 (ITAT-BANGALORE)
• Duration Of Justice: 3 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-07-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Assessment Year: 2017-2018
• Appeal Filed On: 12-04-2022
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: PADAMCHAND KHINCHA
• Keywords: Depreciation; Opportunity of being heard; Retraction; TDS
• Section: 132; 12; 92C; 143(3); 115JB; 40(a)(ia); 194C; 194J; 13

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.252 to 255/Bang/2022 Assessment year : 2017-18 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 : Shri Srinivas T. Bidari, CIT(DR) Date of hearing : 14.07.2022 Date of Pronouncement : 26.07.2022 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.252 to 255/Bang/2021 Page 2 of 21 Income-tax Act, 1961 [the Act] dated 17.02.2022 pertaining to assessment year 2017-18. 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) & Rupee Denominated Bonds ("RDBs") (ii) Disallowance of depreciation on capitalized salary cost brought forward from AY 2016-17 (iii) Disallowance of depreciation on capitalized pre-operative cost brought forward from AY 2016-17 (iv) Disallowance under section 40(a)(ia) - 30% of salary cost charged to P&L (v) Disallowance of depreciation on capitalized salary cost, travel cost & Other Cost 3. We will first take up IT(TP)A Nos.254/Bang/2022 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 30.11.2017 declaring a total income of Nil after setting of IT(TP)A Nos.252 to 255/Bang/2021 Page 3 of 21 brought forward loss of Rs.3,16,64,653 under the regular provisions of the Act and negative book profit of Rs.20,11,07,559 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 proceedings, the TPO made an adjustment of Rs.20,07,90,532 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 & Service fees u/s. 40(a)(ia) of the Act – Rs.1,01,14,572. b. Disallowance of depreciation of capitalized salary cost & service fees – Rs.26,17,865. c. Disallowance of depreciation of capitalized Travel cost – Rs.2,36,705 d. Disallowance of depreciation of capitalized Other cost – Rs.68,25,634 e. Disallowance of depreciation on capitalized salary cost brought forward from AY 2016-17 – Rs.31,30,405 f. Disallowance of depreciation on capitalized pre-operative cost brought forward from AY 2016-17 – Rs.8,72,579 4. Against the draft assessment order, the assessee filed objections before the DRP, which confirmed the TP adjustments. In pursuance of the directions of the DRP, the AO passed the final assessment order. Aggrieved, the assessee is in appeal before the Tribunal. IT(TP)A Nos.252 to 255/Bang/2021 Page 4 of 21 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.54,85,28,406. 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 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 17.5% (65 th percentile) as arm’s length range with the median of 16.53% 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.20,07,90,532. 7. The assessee raised objections before the DRP with regard to the filters applied by the TPO for choosing the comparables and also IT(TP)A Nos.252 to 255/Bang/2021 Page 5 of 21 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 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. IT(TP)A Nos.252 to 255/Bang/2021 Page 6 of 21 8. Before us, the ld. AR submitted that coordinate bench of the Tribunal in assessee’s own case has considered the same issue and has deleted the TP adjustment. The ld AR also submitted that the international transaction entered by the Assessee with respect to payment of interest on NCDs is governed by the same agreement for both, AY 2016-17 and AY 2017-18 and there are no changes in the nature of transaction. Accordingly, the ld.AR submitted that the subject issue is a fully covered issue, the adjustment for AY 2017-18 ought to be deleted. The ld DR supported the order of the lower authorities. 9. We have considered the rival submissions and perused the material on record. We notice that the coordinate bench of the Tribunal in assessee’s own case (IT(TP)A Nos.195 to 198/Bang/2021 dated 07/07/2022) have considered the same issue and held that 10. We heard the rival submissions and perused the materials on record. On perusal of the agreements relating to the issue of dentures 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), IT(TP)A Nos.252 to 255/Bang/2021 Page 7 of 21 (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 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 IT(TP)A Nos.252 to 255/Bang/2021 Page 8 of 21 interest is 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 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 IT(TP)A Nos.252 to 255/Bang/2021 Page 9 of 21 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 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 IT(TP)A Nos.252 to 255/Bang/2021 Page 10 of 21 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 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 IT(TP)A Nos.252 to 255/Bang/2021 Page 11 of 21 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. ” 14. Considering the fact that the interest for the year under consideration is paid under the same agreement, we respectfully follow the decision of the coordinate bench of the Tribunal in assessee’s own case (supra) and 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. 15. Similar TP adjustment is done by the TPO for the other assessees in the appeals in ITA Nos. 252,253 & 255/Bang/2022 the details of which are given below. Name of Entity Date of issue ITA No. Tenure (in years) Face value (in INR lacs) Rate of interest (Coupon rate) Issue size (in INR cr.) Coupon rate as per TP order Adjustment (Amt in INR) Vena Energy Fatanpur Power Private Limited 06/05 2015 252/Bang/20 22 25 50.00 14.85% 500 9.32% 26,47,62,461 Vena Energy MH Wind Power Private Limited 31/12 2014 253/Bang/20 22 25 40.00 15.00% 260 10.24% 10,59,52,823 Vena Energy Patan Power Private Pvt Ltd 24/12 2013 255/Bang/20 22 25 50.00 14.85% 500 9.32% 6,66,68,445 IT(TP)A Nos.252 to 255/Bang/2021 Page 12 of 21 16. Considering that the NCDs are issued to the same AE under the same terms as in the appeal ITA No.254/Bang/2022, and in view of our decision given in para 13 & 14 above, we hold that no adjustment is warranted towards interest on NCDs issued by these assessees to the AE and the TP adjustment for these assessees also is deleted. Corporate tax issues 17. 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 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.04.12.2019). Therefore, the AO held the retraction to not to be a valid retraction per se. IT(TP)A Nos.252 to 255/Bang/2021 Page 13 of 21 18. 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. 19. 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. 20. In the above background, we now consider the issue on merits based on the grounds raised by the assessee. Disallowance/additions towards salary cost & Service fees u/s.40(a)(ia) and depreciation 21. During the year under consideration the assessee has paid a total of Rs.5,31,61,917 towards salary cost to VEPRPL as a reimbursement and service fees to Vena Energy Infrastructure Services Private Limited ("Vena Infra"). Out of this a sum of Rs.1,94,46,675 was capitalized and the balance of Rs.3,37,15,242 was debited to the P&L account. In addition to IT(TP)A Nos.252 to 255/Bang/2021 Page 14 of 21 the submissions made with regard to the retraction of statement made by Mr.Subramanya, the assessee on merits submitted that these payments include salary payments that are cost to cost reimbursements to the sister concerns who deploy the manpower to render services for the assessee and also for the service fees paid to Vena Infra TDS is done u/s.194J. With regard to service fees paid to Vena Infra the assessee submitted that TDS was done u/s.194J at 10% up to 04/10/2016 and after that TDS was done at 5% on the basis of lower withholding of tax certificate submitted by Vena Infra u/s.197. 22. The AO did not accept the contention and proceeded to make a disallowance u/s.40(a)(ia) of Rs.1,01,14,572 i.e. 30% of Rs.3,37,15,242 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.1,74,52,432 i.e. Rs.26,17,865 and disallowed the same substantively. The AO made a protective disallowance towards the same capitalized amounts 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.7,85,359 i.e. Rs.1,74,52,432 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. 23. The ld. AR submitted with regard to the disallowance made towards salary cost that a similar disallowance was made by the AO in the assessment year 2016-17, and the coordinate bench of the Tribunal has deleted both the disallowance of depreciation and the disallowance of 40(a)(ia). The ld AR also submitted that there is no change in the facts for the year under consideration and therefore the decision of the Hon’ble Tribunal is squarely applicable for the year under consideration also. IT(TP)A Nos.252 to 255/Bang/2021 Page 15 of 21 24. We heard the DR and notice that the coordinate bench of the Tribunal in assessee’s own case for the assessment year 2016-17 has considered the same disallowance and held that - 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. 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 IT(TP)A Nos.252 to 255/Bang/2021 Page 16 of 21 by the assessee to VEPRPL. We notice that the Karnataka High Court in the case of 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). 25. The coordinate bench of the Tribunal is assessee’s own case has relied on the decision of the Hon’ble Karnataka High Court in the case of Kalyani Steels Ltd (supra) to hold that there cannot be a TDS on the reimbursement since there was no ‘income’ element and that the amount reimbursed by the assessee is only on a cost to cost basis cannot be subject to TDS. Respectfully following the decision of the decision of the Hon’ble Tribunal we hold that no disallowance towards depreciation on capitalized salary cost and disallowance u/s.40(a)(ia) towards salary cost debited to the P&L is warranted. 26. Further with regard to disallowances done towards service fees, the ld.AR submitted that the assessee has complied with provisions of section 194J and hence there cannot be any disallowance towards the same. 27. With regard to the service fees we notice that the disallowance of depreciation and disallowance u/s.40(a)(ia) is done based on the contention that the agreement between the assessee and payees are not furnished and on the statement recorded during search proceedings. We also notice that the assessee has submitted evidences during the proceedings before the AO as well as the DRP which have not been considered by the lower authorities. The submission of the assessee that has deducted tax at source on the service fees to Vena Infra at 10% u/s.194J up to 04/10/2016 and at a lower rate of 5% based the certificate of IT(TP)A Nos.252 to 255/Bang/2021 Page 17 of 21 lower deduction of tax issued u/s.197 have also been not factually verified. In view of this we remit the issue relating to the service fee disallowance u/s.40(a)(i) and the depreciation disallowance done towards capitalized service fees to the AO with the direction to verify the facts and allow the claim in accordance with law after allowing reasonable opportunity of being heard to the assessee. The assessee is directed to submit the necessary evidences substantiating the claim before the AO and cooperate with the proceedings. It is ordered accordingly. Disallowance of depreciation on Travel cost & Other Cost 28. The assessee had incurred a sum of Rs.15,78,033 towards travel cost and Rs.455,04,226 towards other cost and these expenses have been capitalized. The AO disallowed the depreciation of the capitalized amount @ 15% and arrived at a disallowance of Rs.2,36,705 for travel cost and Rs.68,25,634 for other cost. The DRP doubted the genuineness of the said expense based on the statement of Mr. Subramanya Srinivas. 29. The ld. AR 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 for the purposes of business supported by documentary evidence submitted during the course of assessment proceedings (Page 107 and 129 of Vena KN PB-1). 30. The ld. DR submitted that DRP noted that the genuineness of expenditure is not proved in view of the statement of Mr.Subramanya Srinivas Sista, the depreciation claim is required to be disallowed and directed the AO accordingly and the same may be upheld. IT(TP)A Nos.252 to 255/Bang/2021 Page 18 of 21 31. We have considered the rival submissions and material on record. We notice that the disallowance of depreciation on the capitalized cost incurred towards travel and other cost is done merely based on the statement of Mr.Subramanya without examining the evidences and supporting submitted by the assessee. This in our considered view is not correct and therefore we remit this issue back to AO to verify the genuineness of these expenses based on facts and supporting furnished by the assessee to allow the depreciation claim in accordance with law. Needless to say that the assessee should be given a reasonable opportunity of being heard. This issue is allowed in favour of the assessee for statistical purpose. Disallowance of depreciation on capitalized salary cost & pre- operative cost brought forward from AY 2016-17 32. For the assessment 2016-17, the AO made disallowance towards depreciation on capitalized salary cost and pre-operative expenses based on the statement recorded from Mr.Subramanya and by stating that the assessee has not substantiated the genuineness of the expenses incurred. The coordinate bench of the Tribunal vide order dated 07/07/2022 has deleted the said additions stating that these have not been capitalized in the books of the assessee for the said assessment year and hence there is no disallowance of depreciation warranted (Refer para 25 and 31). In view of this there is no question of brought forward written down cost towards capitalized salary cost and pre-operative expenses and therefore no disallowance on the brought forward cost is to be disallowed. We delete the disallowance made towards depreciation on the brought forward cost of salary and pre-operative expenses. This issue is allowed in favour of the assessee. IT(TP)A Nos.252 to 255/Bang/2021 Page 19 of 21 33. The issue of disallowance made towards depreciation on the brought forwad cost of salary and pre-operative expenses is common to appeal no 252&255/BANG/2021. The details of the disallowances made is given in the table below. Sl No Particulars Total disallowance made by Assessing Officer in the Final Assessment Order 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 brought forward 64,90,293 17,87,792 2 Disallowance on capitalized pre- operative cost brought forward 2,68,948 2,04,600 34. In view of our decision given para 32 of this order we delete the disallowances made towards depreciation on capitalized salary cost and pre-operative expenses brought forward from 2016-17. 35. In IT(TP)A 255/Bang/2022 the TPO made a TP adjustment towards interest on Rupee Denominated Bonds (RDB) subscribed by Energon Energy Singapore (the AE). The RDBs were allotted on 29/12/2016 and are redeemable at par after 25 years and having a face value of Rs.1,00,00,000 each partly paid carrying an interest of 10.40% and during the year under consideration the assessee paid an amount of Rs.1,86,55,035 towards interest. The assessee has chosen CUP as MAM for arriving at the ALP of the interest payment. The assessee chose 5 comparables with average of 16.29% and since the interest paid by the assessee at 10.40% is less the assessee concluded that the interest payment is at arm’s length. IT(TP)A Nos.252 to 255/Bang/2021 Page 20 of 21 36. The TPO rejected the TP study of the assessee and based on his fresh search of comparables arrived at an average of 8.07%. The TPO therefore arrived at a TP adjustment of Rs.41,79,446 (10.40% less 8.07% = 2.33%). The DRP confirmed the adjustment made by the TPO. Aggrieved the assessee is in appeal before the Tribunal. 37. The ld AR submitted that the RDBs are the debt instruments which are similar to the NCDs except that the settlement is done in USD. The ld AR further submitted that though in the case of RDBs the settlement is done is USD as far as the assessee is concerned the liability is frozen in INR and that the loss or gain arising on settlement is born by the lender. The ld AR drew our attention to the relevant clauses of agreement entered into between the assessee and the AE in this regard (Page 378 to 411 of paper book). The ld AR therefore submitted that the ratio laid down by the coordinate bench of the Tribunal in the case of Praxair India Pvt Ltd (supra) would be applicable to the assessee’s hence and the adjustments towards interest on RDB needs to be deleted. 38. We heard the submissions of ld.DR who relied on the order of the lower authorities. On perusal of the RDB agreement we notice that as per clause 6 which stipulate that the payment of interest and the principal the liability of the assessee is fixed in INR to the amount borrowed and the interest thereon at the agreed rate. The gain or loss on forex is born by the AE based on the ‘reference rate’ as agreed in the agreement. From the review of this it is clear that the amount is borrowed in INR and liability towards interest and repayment is fixed in INR. Therefore we are of the considered view that the ratio laid down by the coordinate bench of the Tribunal in the case of M/s Praxair India Pvt. Ltd (supra) is squarely applicable to RDBs also. The decision rendered by the Hon’ble Tribunal is extracted in para 13 above. Respectfully following the same, we hold that the interest paid by the assessee on RDBs to its AE is within Arm’s Length IT(TP)A Nos.252 to 255/Bang/2021 Page 21 of 21 and the TP adjustment made in this regard is deleted. This issue is allowed in favour of the assessee. 36. In the result, ITA No.254/Bang/2022 is partly allowed, while ITA Nos.252, 253 & 255/Bang/2021 are allowed. Pronounced in the open court on this 26 th day of July, 2022.. Sd/- Sd/- ( GEORGE GEORGE K. ) ( PADMAVATHY S. ) JUDICIAL MEMBER ACCOUNTANT MEMBER Bangalore, Dated, the 26 th July 2022. /Desai S Murthy / Copy to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. By order Assistant Registrar ITAT, Bangalore.