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TMI Blog2018 (7) TMI 1546X X X X Extracts X X X X X X X X Extracts X X X X ..... nsaction with associate enterprise. Hence, a reference was made by the Assessing Officer to the Transfer Pricing Officer (TPO) to determine the arms length price (ALP). The TPO vide order dated 27/01/2014 passed u/s. 92CA (3) made a recommendation towards TP adjustment of Rs. 3,69,19,518/- to the value of international transactions. The Assessing Officer passed draft assessment order on 25/03/2014 proposing other additions also under normal provisions. The assessee filed objections before DRP, Bengaluru on 25/04/2014. The DRP vide its direction u/s. 144C (5) dated 29/12/2014 upheld some of the additions proposed in the draft assessment order. The Assessing Officer passed the final assessment order u/s. 144C r.w.s.143(3) of the Act dated 16/01/2015. The Assessing Officer made the following disallowances: Upward revision towards TP adjustment with Associated Enterprises 4,58,99,641 Notional interest on borrowings for capital work in progress 92,28,405 2. Against this, the assessee has raised ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ailed from banks as incurred for acquisition of assets and the same was disallowed u/s. 36(1)(iii) of the Act. 3. The facts of the case are that the Assessing Officer treated interest of Rs. 92,28,405/- on working capital loans availed from banks as incurred for acquisition of assets and disallowed the same under proviso to section 36(1)(iii). The Assessing Officer reasoned that as per proviso to sec. 36(1)(iii), any amount of interest paid in respect of capital borrowed for acquisition of asset for extension of existing business for any period beginning from the date on which the capital was borrowed till the date on which such asset was first put to use shall be capitalized along with the cost of such asset. The Assessing Officer held that since at the end of the year, the assets showed under capital WIP had not been put to use, interest on borrowed capital incurred for acquisition of such assets was required to be capitalized. 4. The contention of the Ld. AR is that the assessee had not acquired any capital assets but only carried out improvements to the lease hold premises to carry on its business more effectively and efficiently. The Ld. AR submitted that the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Ld. AR that the assessee is having own funds in the form of share capital and also internal generation of funds which was used for the purpose of acquisition of fixed assets and according to him, by any stretch of imagination, there cannot be any disallowance u/s. 36(1)(iii) of the Act towards notional interest incurred by the assessee on the amount spent on acquisition of capital work in progress. 5. On the other hand, the Ld. DR submitted that the assessee was paying interest on borrowed funds and it has been utilized for Capital WIP and the assessee could not substantiate the fact that no interest bearing funds were used for such capital WIP. The Ld. DR submitted that no day to day fund flow was furnished and in the absence of such fund flow the assessee's claim that no interest bearing funds were used for capital WIP remains unsubstantiated. It was submitted that it is settled legal position that it is the onus of the assessee who claimed any expenditure to prove that the said expenditure, including the expenditure claimed u/s. 36(1)(iii), was for business purposes and not for the acquisition of capital asset. 6. We have heard the rival submissions and perused t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e F.Y. The Assessing Officer found that the cash generated from the operations was negative not because of selling below cost but because of the huge stock pile-up of Rs. 19.30 crores during the financial year. Therefore, it was found that the assessee had no funds left to meet its obligation towards opening new stores. According to the Assessing Officer, the only conclusion possible was that the funds had come from the fresh loans of Rs. 63 crores taken during the financial year. Accordingly, on an average basis of the opening capital work in progress and closing work in progress, interest @11%, the Assessing Officer worked out the disallowance of interest as under: Opening capital work in progress : Rs. 2,26,10,066/- Opening capital work in progress : Rs. 14,51,79,105/- Average capital work in progress: Rs. 8,38,94,586/- Interest @11% on Rs. 8,38,94,586: Rs. 92,28,405/- The Assessing Officer held that a disallowance of Rs. 92,28,405/- was therefore made out of interest of Rs. 26,80,08,523/- debited to the P&L account, as attributable to amounts invested in capital work-in-progress. The assessee was not able to place any evidence contra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stic) segment of assessee at 6.36% and arrived at adjusted margin of NON-AE jewellery segment at 7.5% (-1.14+6.36%) in respect of the assessee. 8.1 As mentioned in the show cause notice to assessee the TPO selected 10 comparables companies out of the TP study accept/reject matrix of the assessee for which current year data was available and computed net mean margin of (-) 0.02%, and compared operating profit of AE segment of assessee at Rs. 56,84,544/- which after considering the forex loss of Rs. 2,60,87,316/- came to be computed as operating loss of Rs. 2,04,02,772/- with operating margin at (-) 3.62%. After adjusting the margin for distribution function (-0.02%) of the comparables, the PLI of domestic sales (Non-AE segment) at 6.36% was determined at 6.38% and adjustment @ 10% (-3.62 + 6.38) of the operating cost or Rs. 5,62,36,962/- was arrived at. 8.2. The assessee had adopted TNMM method and selected 12 comparables and used three years data to arrive at mean margin of 3.59% and claimed that in view of its operating margin was 1.01% the same was at arm's length. The assessee had raised this objection to reject the TP documentation maintained by the assessee under secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce 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. 11. Regarding Ground No. 3, in similar to issue came up before the Jurisdictional High Court in assessee's own case for the assessment year 2007-08 in ITA No.230/2014 dated 20/01/2014. The High Court had decided the issue in favour of the assessee by observing 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. Being so, following the above judgment of the Jurisdictional High Court (supra), we decide the issue in favour of the assessee. This ground of appeal of the Revenue is dismissed. 12. In the result, the appeal of the assessee is dismissed and the appeal of the Revenue is partly allowed for statistical purposes. Order pronounced in the open Court on this 10th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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