TMI Blog2017 (5) TMI 729X X X X Extracts X X X X X X X X Extracts X X X X ..... rucial 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions of proviso to section 36(1)(iii) following conditions should be fulfilled. 1. Capital Borrowed for acquiring capital assets 2. interest is paid in respect of capital borrowed 3. The acquisition of assets should be for the purpose of expansion of an existing business or profession 4. Interest Liability may or may not be capitalized In the instant case, the Ld. A.O. has not brought anything on record to indicate that capital was borrowed for capital work-in-progress. Secondly, no evidence is there on record to indicate that any interest-bearing funds were utilized to create this capital work-in-progress and hence, no interest was paid in relation to such capital work-in-progress. This way, the first and second conditions for capitalizing interest are not fulfilled. Accordingly, interest is not required to be capitalized as per the provisions of proviso to section 36(1 )(iii). It is well settled law that burden is on the revenue to prove that any part of borrowed funds was diverted to non business use. Reliance in this regard is placed on the following case laws: i) Shhadiram Sons v/s. DCIT 92 ITD 22 ii) Modipon Ltd. v/s. L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es that the Revenue deserves to succeed on the instant issue as per tribunal s decisions in the above two assessment years. He then highlights the fact that this tribunal thereafter decides the impugned question in assessee s favour in assessment year 2009-10 without considering its earlier findings. He thus seeks our agreement in following our findings in assessment years 1996-97 and 1998-99 (supra). Shri Dhinal Shah informs the bench 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. 7. The Revenue s third and last substantive ground pleads that the lower appellate authority has erred in deleting arm s length price adjustment of ₹ 16,84,60,644/-; as propose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dertaking to manufacturing division by availing state electricity undertakings wheeling facility instead of selling it in open market, the same is very much in the nature of an operating income to be included in computing arm s length price. 9. We come to facts relevant to the instant issue. The assessee has installed windmill (s) for generating wind power. It thereafter entered into a wheeling agreement with the state electricity undertaking to sell the above generated wind power to its manufacturing division in lieu of payment of transmission cost computed at the rate as is charged by the state undertaking. For example, if the assessee pays one rupee per unit to state undertaking, it has charged the very rate to the windmill division supplying power for captive consumption. It records the very arrangement and rate in its books of accounts. This arrangement resulted in windmill income of ₹ 4,16,79,384/- against corresponding expenditure of ₹ 2,67,10,508/- . 10. We now advert to assessee s international transactions with its overseas associate enterprises involving gross sum of ₹ 54,58,95,740/- representing raw material purchases along with return of packagi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atment accorded to the interest income, the profits of the companies which were taken for comparison purposes were found to be more than the profits earned by the assessee and accordingly the addition on account of transfer pricing adjustment was made. It was the conclusion of the TPO that the income earned by way of interest by investing the surplus funds of the assessee in interest bearing instruments cannot be used to offset the assured return on costs. 5. The TPO was further of the view that in respect of the services rendered by the assessee, it should be remunerated on a cost-plus basis and the total costs should be made the basis of computing its earnings and not merely the commission and fixed fees paid to it. According to the TPO the commission rates and the fixed fees were determined by extraneous unascertainable factors which had no bearing with the corresponding costs incurred by the assessee. As the commission was paid on the basis of the value of the transactions put through because of the efforts of the assessee, the assessee is artificially made to bear the risks of the market which it was otherwise not meant to bear. In the proceedings before the TPO in its t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s which according to him arose for adjudication on this point: - i. Whether the interest income of ₹ 1.72 crore is part of operating income or not. ii. Whether loss on sale of fixed assets, interest paid to income tax, office closure cost, amount paid to telephone adalat are abnormal costs and are required to be excluded while computing the operating expenses. iii. Whether business promotion expenses disallowed by the A.O and admitted by the appellant should also be excluded while computing the operating expenses. iv. Whether, the appellant is entitled for adjustments to the operating profit, on account of differences in the working capital position and differences in the risks profile, between the appellant and the comparable companies. v. Whether the appellant is entitled to the benefit of +5% range mentioned in Proviso 92C(2) while computing the Arm's Length Price. 8. The submissions of the assessee before the CIT (Appeals) were mainly these. The parking of the surplus funds in interest bearing securities was an integral part of the assessee s operations, that one of the objects of the company was to invest the surplus funds in securi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . For these reasons, the CIT (Appeals) held that for the purpose of determining the arm s length price in respect of the controlled transaction of the assessee, the interest income of ₹ 1.72 crores was to be considered as nonoperating income. He thus endorsed the decision of the TPO/AO. 10. The assessee carried the matter in further appeal before the Income Tax Appellate Tribunal. After considering the rival contentions and examining the facts, the Tribunal agreed with the income tax authorities, recording the following findings: - (a) The purpose of the exercise before the TPO is to determine the arm s length price of the transactions of the assessee with its associates by comparing the same with un-controlled, comparable transactions and in doing so he has to consider all the components of the operating income from which the costs incurred in earning such income have to be deducted; (b) It was not sufficient to decide whether the interest income fell to be assessed as business income or as income under the residual head for the purpose of making the assessment; it was further necessary to find out whether the interest income forms part of the operating income o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Income Tax Act, 1961 under which the interest would fall to be assessed. It has been rightly observed by the Tribunal that such a consideration is not relevant for the purpose of determining the operating income of an assessee for the purposes of transfer pricing regulations. Moreover, the Tribunal has also found as a fact that the interest arose out of investment of surplus funds which were not immediately required for the core business of the assessee. The Tribunal s view that in such circumstances the interest income cannot be considered to be its operating income is essentially a question of fact to be gathered from the nature of the assessee s business and its business profile. All these factors have been rightly kept in view by the Tribunal. We are, therefore, of the opinion that the first three questions are not substantial questions of law meriting scrutiny of this Court. 12. We thus see 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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