2018 (7) TMI 1546 - AT - Income Tax

TPA - ALP determination - mark up determined by the TPO - Held that - TPO has considered the mark up of MD Overseas Ltd. as comparable and PLI was worked out at (-)1.14%. Since non AE jewellery segment margin was computed by the assessee at 6.36%, the assessee had to get the non AE jewellery segment margin at 6.36%. Hence by balancing the figure by adding (-)1.14% of the above, the Assessing Officer got the adjusted margin of assessee s non AE jewellery segment at 7.5% and made the addition on that basis. In our opinion, it is not appropriate to balance in such a way without making proper TP study on the issue. Accordingly, we remit this issue to the file of the Assessing Officer to refer the matter afresh to the TPO for further TP study and decide accordingly. This ground of appeal is partly allowed for statistical purposes. Allowable busniss expenditure - renovation of leasehold building - Held that - Expenditure incurred by the assessee on renovation of leasehold building is revenue expenditure and not a capital expenditure, though it was of enduring benefit or advantage unless at the end of the term of lease, the items on which expenditure was spent could be retrieved by the assessee.

Summary

Issues Involved:
1. Treatment of foreign exchange loss in determining the Arm's Length Price (ALP).
2. Disallowance of notional interest on borrowings for capital work in progress under section 36(1)(iii).
3. Determination of ALP for international transactions with associated enterprises.
4. Classification of expenditure incurred on renovation of leasehold premises as revenue or capital expenditure.

Detailed Analysis:

1. Treatment of Foreign Exchange Loss in Determining the ALP:

The Dispute Resolution Panel (DRP) treated foreign exchange loss as part of operating cost for determining the profit margin to establish the ALP of international transactions. The assessee argued that the Transfer Pricing Officer (TPO) had accepted their argument and excluded the foreign exchange loss from operating costs, following the principle of consistency. The assessee contended that the Safe Harbour Rules, which do not consider foreign exchange loss/gain as part of operating cost/income, should have been followed. However, this issue was not pressed by the assessee before the Tribunal, and thus, it was dismissed as not pressed.

2. Disallowance of Notional Interest on Borrowings for Capital Work in Progress:

The Assessing Officer disallowed ?92,28,405/- as notional interest on working capital loans, treating it as incurred for the acquisition of assets and disallowed it under the proviso to section 36(1)(iii) of the Act. The assessee argued that the interest was for improvements to leasehold properties and not for acquiring capital assets. They cited an earlier Tribunal order and a High Court judgment which held that such expenditure was revenue in nature. However, the Tribunal noted the absence of evidence that the capital work in progress was related to leasehold property renovations and upheld the disallowance. The Tribunal also noted that the assessee failed to substantiate that no interest-bearing funds were used for capital work in progress, leading to the dismissal of this ground of appeal.

3. Determination of ALP for International Transactions with Associated Enterprises:

The TPO had determined a TP adjustment of ?3,69,19,518/- to the value of international transactions. The DRP upheld some of the additions proposed in the draft assessment order. The Revenue's appeal challenged the DRP's decision to fix the average mark-up for companies engaged in distribution of jewellery at 2.18% instead of (-) 0.02% determined by the TPO. The Tribunal found the TPO's method of balancing figures without proper TP study inappropriate and remitted the issue back to the Assessing Officer to refer the matter afresh to the TPO for further TP study and decision.

4. Classification of Expenditure Incurred on Renovation of Leasehold Premises:

The Revenue's appeal also contested the DRP's decision to treat the expenditure on renovation of leasehold premises as revenue expenditure. The Tribunal referred to a Jurisdictional High Court decision in the assessee's own case, which held that such expenditure is revenue in nature. Following this precedent, the Tribunal decided the issue in favor of the assessee, dismissing the Revenue's ground of appeal on this matter.

Conclusion:

The appeal of the assessee was dismissed, and the appeal of the Revenue was partly allowed for statistical purposes. The Tribunal remitted the issue of TP adjustment back to the Assessing Officer for further study by the TPO, while upholding the disallowance of notional interest and supporting the classification of renovation expenses as revenue expenditure. The order was pronounced in the open Court on April 10, 2018.