2014 (4) TMI 75 - AT - Income Tax

Disallowance u/s 36(1)(iii) - interest expense towards work in progress - Held that - Assessee has not discharged onus on it to establish that no part of its borrowings stand utilized toward capital work-in-progress, so that no part of interest thereon is properly attributable thereto, so as to warrant being disallowed u/s.36(1)(iii) read with proviso thereto - Do not find any substance in assessee s case - Onus to prove its return and claims preferred thereby being only on assessee refer CIT v. Calcutta Agency Ltd. 1950 (12) TMI 4 - SUPREME Court - Matter restored back to allow assessee an opportunity to substantiate its case before assessing authority Decided partly in favor of assessee. Transfer pricing adjustments - determination of ALP - operating margin - Held that - The difference in the operating margin, as per the TPO s order itself, is within the range of 5% and, accordingly, no adjustment under law is required to be made. No doubt, the safe harbor rule of 5% is with reference to the arm s length price; the same however translates to an equivalent difference in the operating margin, as the costs toward the same are not disturbed. In fact, if a part of the interest cost, as contended by the Revenue, is to be excluded from the operating cost, being a part of the capital cost, the assessee s profit margin would rather stand further improved. - Addition is not valid - Decided in favor of assessee.

Summary

Issues:
1. Disallowance under section 36(1)(iii) for capital work-in-progress.
2. Transfer pricing adjustment on international transactions with associated enterprises.

Issue 1: The first issue in the appeal concerns the disallowance of Rs.21,44,720 claimed under section 36(1)(iii) for capital work-in-progress. The Appellate Tribunal noted that the assessee failed to prove that none of its borrowings were used for the capital work-in-progress, leading to the disallowance. However, as the assessee claimed to have sufficient free reserves deployed for this purpose, the Tribunal decided to give the assessee another opportunity to substantiate its case before the assessing authority. The Tribunal emphasized that the onus to prove the claims lies with the assessee and directed a speaking order on the matter in accordance with the law.

Issue 2: The second issue involved a transfer pricing adjustment of Rs.1,49,53,475 on international transactions with associated enterprises. The Tribunal found that the Transfer Pricing Officer (TPO) had considered the operating margin of the assessee to be below the average of comparable companies. However, the Tribunal observed that the difference fell within the 5% safe harbor rule, indicating no requirement for adjustment. The Tribunal also noted that the introduction of new comparables by the TPO was logical, and the operating margin difference did not necessitate any adjustment under the law. Consequently, the Tribunal held that the sustenance of the adjustment directed by the Dispute Resolution Panel was not valid in law and ordered its deletion. The appeal was partly allowed on this issue for statistical purposes.

In conclusion, the Appellate Tribunal addressed the two main issues raised in the appeal, providing detailed analysis and rulings on each matter. The judgment highlighted the importance of substantiating claims and complying with transfer pricing regulations while ensuring fairness and adherence to legal principles.