2022 (10) TMI 354 - AT - Income Tax

Nature of expenses - Repair Maintenance Expenses - assessee treating the entire expenditure incurred on constructing a weather shed as revenue in nature as opposed to the Revenue treating it as capital in nature - HELD THAT - Taking note of the fact that temporary structures are entitled to depreciation at the rate of 100% as per the depreciation rates under Income Tax Rules,1962, as per Rule 5, Appendix-I, as pointed by the for the assessee before us, and not controverted by the Revenue , we see no infirmity in the claim of the assessee to the entire amount of expenditure on construction of temporary weather shed as revenue in nature. Such claim of the assessee, we have noted, is in accordance with provisions of law, as prescribed under the Act read along with Rules made thereunder. Revenue has been unable to controvert the assesses claim either on facts or in law. Therefore, finding merit in the contentions of the ld.counsel for the assessee, we allow entire claim incurred on construction of temporary weather shed as revenue in nature, and accordingly direct deletion of addition of made by the Revenue by treating the same as capital in nature. Addition made to the income of the assessee on account of Transfer Pricing adjustment made to the transaction of purchases of components by the assessee entered into with its Associate Enterprise(AE) - HELD THAT - The entire exercise of determining ALP of an international transaction by comparing profitability ratio of the assessee-company with that of a comparable entity indulging in the same type of transactions, requires the comparison of the correct profits of both the entities, after making all necessary adjustment to arrive at the correct profits. Now since the assessee has clearly demonstrated that it had booked excess purchases in the impugned yearthe same needed to be reduced for the purpose of arriving at the correct profit, and only thereafter profitability ratio of the assessee was required to be calculated. The contentions of the assessee in this regard, we find is correct. The authorities below i.e. both the AO and the CIT(A) have given no reason absolutely for dismissing this contentions of the assessee. We find merit in the contention of assessee and noting the working given by the assessee after making this adjustment to the profitability ratio of the assessee, resulting in the same being comparable with the comparable case, we hold that the assessee has fairly demonstrated its international transactions of purchases of parts/spare parts with its AE to be at ALP requiring no adjustment at all to be made to the same u/s 92 of the Act. We direct deletion of adjustment made to the international transactions of parts/spare parts and allow ground no.3 of the appeal.

Summary

Issues Involved:
1. Disallowance of repairs and maintenance expenses.
2. Addition made on account of Transfer Pricing adjustment for purchases of components.

Issue-wise Detailed Analysis:

1. Disallowance of Repairs and Maintenance Expenses:

The first issue pertains to the disallowance of repairs and maintenance expenses amounting to Rs.1,81,420/-. The assessee claimed these expenses for constructing a temporary weather shed in its rented premises, treating them as revenue expenditure. The Assessing Officer (AO) disagreed, classifying the expenses as capital in nature due to the enduring benefit of the structure. Consequently, the AO disallowed Rs.2,01,600/- as capital expenditure but allowed depreciation of Rs.20,160/-, resulting in a disallowance of Rs.1,81,420/-.

The CIT(A) upheld the AO's decision, stating that constructing a weather shed amounted to creating a new asset, not merely repairing an existing structure. The assessee argued that the expenditure was for a temporary structure, which should be treated as revenue expenditure. They highlighted that temporary structures are eligible for 100% depreciation under Income Tax Rules, 1962.

After hearing both parties, the Tribunal found merit in the assessee's claim, noting that the temporary nature of the shed was undisputed. Since temporary structures are entitled to 100% depreciation, the entire expenditure should be treated as revenue in nature. Thus, the Tribunal allowed the assessee's claim and directed the deletion of the Rs.1,81,420/- addition.

2. Addition Made on Account of Transfer Pricing Adjustment for Purchases of Components:

The second issue involves an addition of Rs.66,72,802/- due to a Transfer Pricing adjustment related to the assessee's international transactions for purchasing components from its Associate Enterprise (AE). The Transfer Pricing Officer (TPO) proposed this adjustment, which was upheld after considering the assessee's response.

The assessee contended before the CIT(A) that the profit ratio used for comparison was incorrect due to excess purchases of Rs.66,72,802/- booked as a provision, which was later reversed and offered to tax in the subsequent year. The CIT(A) did not consider this contention and upheld the TPO's adjustment.

The Tribunal examined the evidence, including submissions and reworking of profitability ratios after adjusting for excess purchases. It found that the profitability ratio of the assessee, after adjustment, was comparable to that of the comparable entity, indicating that the transactions were at arm's length. The Tribunal noted that the authorities below had not provided reasons for dismissing the assessee's contentions.

Thus, the Tribunal directed the deletion of the Rs.66,72,802/- adjustment, holding that the assessee had demonstrated that its international transactions were at arm's length.

Conclusion:

In conclusion, the Tribunal allowed the appeal, directing the deletion of both the disallowance of repairs and maintenance expenses and the Transfer Pricing adjustment. The decision was pronounced on 7th October 2022 in Ahmedabad.