2017 (5) TMI 729 - AT - Income Tax

Section 36(1)(iii) interest disallowance - CIT-A deleted the addition - Held that - CIT(A) has followed his preceding assessment year s reasoning in granting relief to the assessee on identical lines. No distinction on facts has been pointed out in the course of hearing pertaining to the two assessment years. Learned co-ordinate bench observes therein that the Assessing Officer has not brought anything on record to indicate interest bearing funds utilized in the capital work in progress. We accordingly adopt the same view herein as well to decline this first substantive ground against revenue Excess depreciation disallowance - CIT-A deleted the addition - Held that - The relevant figures involved in the impugned assessment year qua this depreciation issue are only consequential to those involved and decided in the immediate preceding assessment year since there is no new addition herein. His case therefore is that the preceding assessment years findings not modified in any manner so far shall apply mutatis mutandis herein as well. The Revenue fails to rebut this crucial factual position. We thus find that the CIT(A) has rightly deleted the impugned disallowance. The Revenue s second substantive ground is accordingly rejected. Transfer pricing adjustment - CIT(A) treated foreign exchange fluctuation gain/loss as an operating item not to be excluded for the purpose of computing arm s length price - Held that - The Revenue fails to rebut application of the extracted judicial pronouncements holding identical foreign exchange fluctuation gains/losses as operating item under the transfer pricing parlance. We thus affirm CIT(A) s findings on this third issue as well. Non considering windmill income as an operating income for the purpose of determining the arm s length price in question - Held that - CIT-A held that it was a universal practice followed under transfer pricing regulations to exclude interest from the operating revenue for computing the net profit from the operating activity except where the earning of interest itself was the main activity. In this view he held that the interest income cannot be considered as the assessee s operating income. He also found that the interest income in the present case was not so interwoven with the international transaction that it cannot be separated. No reason to disturb learned CIT(A) s conclusion excluding assessee s windmill income in computing the arm s length price in question. Mr. Dhinal Shah then invites our attention the above extracted portion clause (g) not only excluding the said assessee s interest income but also the corresponding interest expenditure. We find merit in this alternative plea as even the above judicial precedent has adopted the very course of action. The Transfer Pricing Officer is accordingly directed to re-finalize consequential computation treating both windmill income and expenditure as non operating for computing the arm s length price in question after affording adequate opportunity of hearing to assessee. The instant cross objection is partly accepted for statistical purposes.

Issues Involved:
1. Deletion of Section 36(1)(iii) interest disallowance.
2. Deletion of excess depreciation disallowance.
3. Deletion of arm's length price adjustment in Transfer Pricing.
4. Treatment of windmill income as operating income for transfer pricing adjustment.

Detailed Analysis:

1. Deletion of Section 36(1)(iii) Interest Disallowance:
The Revenue's first grievance was the deletion of interest disallowance/addition of ?12,64,738/- under Section 36(1)(iii). The Assessing Officer (AO) had invoked this provision due to the assessee's failure to establish non-utilization of interest-bearing funds for capital work in progress. The CIT(A) reversed the AO’s findings, noting that the AO did not provide evidence that capital was borrowed for the capital work-in-progress or that interest-bearing funds were used. The CIT(A) cited case laws supporting that the burden of proof lies on the Revenue to show diversion of borrowed funds for non-business use. The Tribunal upheld CIT(A)’s decision, noting no factual distinction between the current and preceding assessment year, where a similar issue was adjudicated against the Revenue.

2. Deletion of Excess Depreciation Disallowance:
The Revenue's second issue involved the deletion of excess depreciation disallowance/addition of ?12,28,371/-. The AO had restricted the assessee's depreciation claim based on earlier assessment years' records. The CIT(A) deleted the disallowance following the order from the preceding assessment year. The Tribunal noted that the figures for the impugned year were consequential to those from the previous year and upheld CIT(A)’s decision, as the Revenue failed to rebut this position.

3. Deletion of Arm's Length Price Adjustment in Transfer Pricing:
The Revenue's third issue was the deletion of an arm's length price adjustment of ?16,84,60,644/-. The AO had excluded foreign exchange gain/loss from the computation of arm's length price. The CIT(A) reversed this, treating foreign exchange fluctuation gain/loss as an operating item. The Tribunal affirmed CIT(A)’s findings, citing multiple judicial precedents that supported treating foreign exchange gains/losses as operating items under transfer pricing parlance. The Revenue’s appeal on this ground was rejected.

4. Treatment of Windmill Income as Operating Income for Transfer Pricing Adjustment:
The assessee’s cross objection involved treating windmill income as operating income for transfer pricing purposes. The assessee argued that the windmill income, generated from selling wind power to its manufacturing division, should be included in computing the arm's length price. The Tribunal noted that the windmill income was unrelated to the international transactions involving raw material purchases and sales of finished goods. Citing the Delhi High Court’s decision in Marubeni India Pvt. Ltd., the Tribunal held that merely treating windmill income as business income does not make it part of the manufacturing division’s income for transfer pricing adjustments. However, the Tribunal directed the Transfer Pricing Officer to re-finalize the computation, treating both windmill income and expenditure as non-operating items, thus partly accepting the cross objection for statistical purposes.

Conclusion:
The Revenue's appeal was dismissed, and the assessee’s cross objection was partly accepted for statistical purposes. The Tribunal upheld the CIT(A)’s decisions on all substantive grounds, affirming that the interest disallowance, excess depreciation disallowance, and arm's length price adjustment were correctly deleted. The windmill income was directed to be treated as non-operating for transfer pricing adjustments.

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