TMI Blog2018 (7) TMI 1546X X X X Extracts X X X X X X X X Extracts X X X X ..... ot 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. - I.T.A. No.190/Coch/2015, I.T.A. No.151/Coch/ 2015 - - - Dated:- 10-4-2018 - S/SHRI CHANDRA POOJARI, AM AND GEORGE GEORGE K., JM For the Revenue- Shri Shantham Bose, CIT(DR) For the Assessee- Shri A.S. Narayanamoorthy, CA O R D E R Per CHANDRA POOJARI, ACCOUNTANT MEMBER: The assessee filed appeal against the order of the Assessing Officer dated 16/01/2015 passed u/s. 143(3) r.w.s. 144C of the Act with reference to direction of Dispute Resolution Panel (DRP), Bengaluru u/s. 144C (5) of the I.T. Act dated 29/12/2014 for the assessment year 2010-11. The Revenue filed appeal against the direction of the DRP u/s. 144C (5) dated 29/12/2014 in terms of section 253(2A) of the I.T. Act. 2. We shall first take the assessee s appeal in ITA No.190/Coch/2015. The facts of the case are that the assessee carried on the business as jewelers and retail dealer of textile goods. For the assessment year under consideration, the assessee had entered into international transaction with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x / Dispute Resolution Panel is not justified in treating interest of ₹ 92,28,405/- on working capital loans availed from banks as incurred for acquisition of assets and disallowing the same under proviso to section 36(1)(iii) on notional basis. The improvements to leasehold properties was considered as a revenue expenditure and hence the proviso to section 36(1) (iii) was not applicable at all. The Assessing officer / Dispute Resolution Panel failed to consider that the ITAT in appellant's own case in IT(TP) 6/coch/2013 dated 9.5.2014 for the assessment year 2007-08 has deleted the disallowance and the department has accepted the same and the hence, addition should not have been made. 2.1 Ground Nos. 2 3 were not pressed by the Ld. AR as these grounds are not arising out of the DRP s directions dated 29/12/2014 or in the order of the Assessing Officer. Hence, he made an endorsement to the effect that these grounds are not pressed. Thus these grounds are dismissed as not pressed. 2.2 Ground No. 4 is with regard to disallowance of notional interest of ₹ 92,28,405/- on working capital loans availed from banks as incurred for acquisition of assets and the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unal in IT(TP)A No. 02/Coch/2012. The High Court found that the expenditure incurred for renovation of the premises taken on lease to set up a new show room is a revenue expenditure incurred by the assessee the question whether the borrowed funds are used for renovation or no borrowed funds were used is irrelevant. Therefore there is no question of any disallowance of notional interest on the borrowed funds. In other words in view of the judgment of the Kerala High Court holding that the expenditure incurred on renovation of the leasehold premises for setting up a new show room is revenue expenditure the interest on such borrowing has to be allowed as revenue expenditure. Hence there is no question of any disallowance. Accordingly, the order of the lower authority is set aside and the entire addition on account of disallowance of notional interest is deleted. 4.2 The Ld. AR submitted that the expenditure was incurred with regard to renovation of leasehold premises shown in the books of account as capital work in progress. However, for income tax purpose, it was claimed as revenue expenditure. It was further submitted by the Ld. AR that the assessee is having own funds in the fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing funds were used towards capital work in progress. However, the DRP mentioned in its order that the assessee is paying interest and has utilized a part of the funds for capital work in progress and the assessee was not able to substantiate that no interest bearing funds were used for capital work in progress. 6.1 It was also observed by the Assessing Officer in his draft assessment order and gave a finding that as per the cash flow statement forming part of Annual Report, net cash generated from operating activities was negative viz. (Rs.17,22,62,076). According to the Assessing Officer the cash generated from investing activities was also negative viz. (Rs.28,61,84,579). However, the Assessing Officer found that cash generated from financing activities was a huge positive viz. ₹ 37,16,36,584/- which was only because the assessee-company had availed a huge loan of ₹ 63,00,06,705/- during the year. Despite this, it was noticed that the net increase in cash and cash equivalent for the year was negative and only because of the opening cash balance of ₹ 31,78,37,651/- there was a net cash in hand at the end of the F.Y. The Assessing Officer found that the cash g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 102,33,29,393/-. The TPO vide order dated 27/01/2014 u/s.92CA determined the TP adjustment to Arm's Length Price to the extent of ₹ 369,19,518/- out of the assessee s international transactions of sale of gold jewellery (Rs. 56.80 crores) with Joy Alukkas Gold Jewellery LLC, Dubai (AE) which was declared by the assessee at 1.01% of the operating cost of ₹ 56.23 crores. Assessee in its TP study adopted TNMM method and selected 12 comparable companies with three years average margin of 3.59%. The TPO in his order has compared the Non-AE segment (Rs.1616 crores sales) profit margin at 6.36% and AE segment (Rs. 56.80 crores) margin at 1.01%. 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%. In case of assessee, the operating profit was at ₹ 56,84,544/- which after considering the forex loss of ₹ 2,60,87,316/- came to be computed as operating loss of ₹ 2,04,02,772/- and operating margin was arrived at (-) 3.62%. The TPO further selected MD Overseas Ltd as comparable which qualified all filters with a PLI (Operati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he TPO was objected by the assessee before the DRP. The DRP disposed of this issue by observing as under: 3.1.6.4 Having said that we find that the average mark-up earned by the companies engaged in distribution of jewellery at 2.18% at page 12 of the TPO is a good example of the margins in distribution. Merely because the companies selected were engaged in distribution of diamond jewellery also does not make them bad comparables as the assets and risk involved are the same. Thus the mark up attributable to the manufacturing activity fo Non-AE jewellery segment of the assessee has been rightly computed at 4.18% which should be the benchmark or the arm s length price for the manufacturing activity for the AE segment of the assessee, where the PLI (OP/OC) of the assessee is (-) 3.62% (Page 14 of the TPO s order) and the difference comes to 7.8%. No further exercise is required to determine the ALP of manufacturing activity of the assessee s AE segment. The Assessing Officer/TPO is directed accordingly. Objection of the assessee is rejected. 9. Against this, the Revenue is in appeal before us. 10. We have heard the rival submissions and perused the record. The TPO has consi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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