The Addl.CIT, Range-5, Ahmedabad V. M/s. Rajratna Metal Industries Ltd., Ahmedabad

ITA 1050/AHD/2015

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 5910 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-05-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: I
• Next Hearing Date: 13-02-2017
• Assessment Year: 2010-2011
• Appeal Filed On: 24-04-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SRINIVAS BIDARI
• Assessee Lawyers: ANKIT GANDHI
• Keywords: Capital asset; Business income; Depreciation; Transfer pricing; International transaction
• Section: 143(3); 92E

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD I BENCH AHMEDABAD BEFORE SHRI PRAMOD KUMAR, ACCOUNTANT MEMBER, AND SHRI S. S. GODARA, JUDICIAL MEMBER. ITA NO. 1050/AHD/2015 WITH CO NO. 91/AHD/2015 (ASSESSMENT YEAR: 2010-11) ADD.CIT, RANGE-5, AHMEDABAD APPELLANT VS. M/S. RAJRATNA METAL INDUSTRIES LTD., 909, SAKAR-III, NR. INCOME-TAX CIRCLE, ASHRAM ROAD, AHMEDABAD 380009 RESPONDENT/CROSS OBJECTOR PAN: AAACR9980M /BY REVENUE : SHRI SRINIVAS BIDARI, CIT. D.R. /BY ASSESSEE : SHRI DHINAL SHAH & SHRI ANKIT GANDHI, A.R. /DATE OF HEARING : 13.02.2017 /DATE OF PRONOUNCEMENT : 12.05.2017 ORDER PER S. S. GODARA, JUDICIAL MEMBER THIS REVENUES APPEAL AND ASSESSEES CROSS OBJECTIO N FOR ASSESSMENT YEAR 2010-11 ARISE AGAINST THE CIT(A)-9, AHMEDABAD S ORDER DATED ITA NO.1050/AHD/15 WITH CO NO.91/AHD/15 (ADDL.CIT V S. RAJRATNA METAL INDUSTRIES LTD.) A.YS. 2010-2011 - 2 - 12.01.2015 IN CASE NO.CIT(A)-XI/447/ADDL.CIT.R-5/13 -14, IN PROCEEDINGS U/S.144C R.W.S. 143(3) OF THE INCOME TAX ACT, 1961; IN SHORT THE ACT. HEARD BOTH SIDES. CASE FILE PERUSED. 2. WE COME TO REVENUES APPEAL RAISING THREE SUBSTA NTIVE GROUNDS. ITS FIRST GRIEVANCE IS THAT THE CIT(A) HAS ERRED IN DEL ETING SECTION 36(1)(III) INTEREST DISALLOWANCE / ADDITION OF RS.12,64,738/-; AS MADE IN THE COURSE OF THE REGULAR ASSESSMENT IN QUESTION FRAMED ON 27.02. 2014. THE ASSESSING OFFICER INVOKED THE ABOVE DISALLOWANCE PROVISION IN FACTS OF THE INSTANT CASE AFTER NOTICING THE ASSESSEE TO HAVE CREATED CAPITAL WORK IN PROGRESS OF RS.3,63,10,080/- WITHOUT ATTRIBUTING ANY INTEREST C APITALIZATION. HE THUS QUOTED ASSESSEES FAILURE IN ESTABLISHING NON UTILI ZATION OF INTEREST BEARING FUNDS TO MAKE THE IMPUGNED DISALLOWANCE. 3. THE CIT(A) REVERSES ASSESSING OFFICERS FINDINGS AS UNDER: 4.2 I HAVE CAREFULLY CONSIDERED THE CONTENTIONS OF THE APPELLANT. I HAVE ALSO PERUSED THE ASSESSMENT ORDER AND THE SUBMISSION MAD E BY THE LD. A.R. IT IS SEEN THAT FOR CAPITALIZING INTEREST AS PER THE PROVISION S 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 BORROW ED 3. THE ACQUISITION OF ASSETS SHOULD BE FOR THE PUR POSE OF EXPANSION OF AN EXISTING BUSINESS OR PROFESSION 4. INTEREST LIABILITY MAY OR MAY NOT BE CAPITAL IZED IN THE INSTANT CASE, THE LD. A.O. HAS NOT BROUGHT A NYTHING 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-PROGRE SS AND HENCE, NO INTEREST WAS PAID IN RELATION TO SUCH CAPITAL WORK-IN-PROGRE SS. THIS WAY, THE FIRST AND SECOND CONDITIONS FOR CAPITALIZING INTEREST ARE NOT FULFILLED. ACCORDINGLY, INTEREST IS NOT REQUIRED TO BE CAPITAL IZED AS PER THE PROVISIONS OF PROVISO TO SECTION 36(1 )(III). ITA NO.1050/AHD/15 WITH CO NO.91/AHD/15 (ADDL.CIT V S. RAJRATNA METAL INDUSTRIES LTD.) A.YS. 2010-2011 - 3 - IT IS WELL SETTLED LAW THAT BURDEN IS ON THE REVENU E TO PROVE THAT ANY PART OF BORROWED FUNDS WAS DIVERTED TO NON BUSINESS USE. RE LIANCE IN THIS REGARD IS PLACED ON THE FOLLOWING CASE LAWS: I) SHHADIRAM & SONS V/S. DCIT 92 ITD 22 II) MODIPON LTD. V/S. LTO 22 TTJ 108 III) JCIT V/S. STERISHEETS LTD. 106 TTJ 460 IT IS NOTICED THAT THE A.O. HAD MISERABLY FAILED TO DISCHARGE HIS ONUS AND FAILED TO PROVE THAT PART OF INTEREST BEARING FUND WAS DIVERTED AS NON INTEREST BEARING FUNDS. FURTHER, THE ISSUE WAS ALSO CONCLUDED IN FAVOUR OF THE APPELLANT IN A.Y.2009-2010 BY MY PREDECESSOR AND SINCE, THE FACT S ARE IDENTICAL IN THIS YEAR AS IT WAS IN A.Y.2009-10, FOLLOWING THE ORDER OF MY LD . PREDECESSOR, THIS GROUND OF APPEAL IS ALLOWED AND CAPITALIZATION OF INTEREST OF RS. 12,64,738 IS DELETED. 4. LEARNED DEPARTMENTAL REPRESENTATIVE STRONGLY SEE KS TO RESTORE THE IMPUGNED INTEREST DISALLOWANCE. IT IS EVIDENT FROM ABOVE EXTRACTED LOWER APPELLATE FINDINGS THAT THE CIT(A) HAS FOLLOWED HIS PRECEDING ASSESSMENT YEARS REASONING IN GRANTING RELIEF TO THE ASSESSEE ON IDENTICAL LINES. NO DISTINCTION ON FACTS HAS BEEN POINTED OUT IN THE CO URSE OF HEARING PERTAINING TO THE TWO ASSESSMENT YEARS. MR. DHINAL SHAH THEN FIL ES BEFORE US THIS TRIBUNALS ORDER IN REVENUES APPEAL ITA NO.540/AHD/2012 DECID ED ON 11.06.2015 IN PRECEDING ASSESSMENT YEAR ADJUDICATING THE ISSUE IN QUESTION AGAINST THE REVENUE. LEARNED CO-ORDINATE BENCH OBSERVES THEREI N THAT THE ASSESSING OFFICER HAS NOT BROUGHT ANYTHING ON RECORD TO INDIC ATE INTEREST BEARING FUNDS UTILIZED IN THE CAPITAL WORK IN PROGRESS. WE ACCOR DINGLY ADOPT THE SAME VIEW HEREIN AS WELL TO DECLINE THIS FIRST SUBSTANTIVE GR OUND. 5. THE REVENUES SECOND SUBSTANTIVE GROUND PLEADS T HAT THE CIT(A) HAS ERRED IN DELETING EXCESS DEPRECIATION DISALLOWANCE / ADDITION OF RS.12,28,371/- THEREBY NOT CONSIDERING THIS TRIBUNA LS DECISIONS IN ASSESSMENT YEARS 1996-97 AND 1998-1999. THE ASSESSING OFFICER WENT BY CASE RECORDS OF THE SAID TWO ASSESSMENT YEARS WHEREIN DEPRECIATI ON WAS ALLOWED ON CERTAIN ITA NO.1050/AHD/15 WITH CO NO.91/AHD/15 (ADDL.CIT V S. RAJRATNA METAL INDUSTRIES LTD.) A.YS. 2010-2011 - 4 - ASSETS ALTHOUGH THE ASSESSEE HAD NOT RAISED ANY SUC H CLAIM. HE THEREFORE REWORKED THE RELEVANT DEPRECIATION FIGURES. THE ISS UE TRAVELLED UP TO THE TRIBUNAL. A CO-ORDINATE BENCH UPHELD ASSESSING OFF ICERS REASONING. HE MADE THE SAME OBSERVATIONS HEREIN AS WELL TO RESTRI CT ASSESSEES DEPRECIATION CLAIM FROM RS.15,87,03,423/- TO RS.15,74,75,052/-. THE DIFFERENTIAL AMOUNT OF RS.12,28,371/- STOOD DISALLOWED. THE CIT(A) FOL LOWS HIS ORDER PASSED IN PRECEDING ASSESSMENT YEAR 2008-09 ON THE VERY ISSUE TO DELETE THE ABOVESTATED DISALLOWANCE. 6. SHRI BIDARI VEHEMENTLY ARGUES THAT THE REVENUE D ESERVES TO SUCCEED ON THE INSTANT ISSUE AS PER TRIBUNALS DECISIONS IN TH E ABOVE TWO ASSESSMENT YEARS. HE THEN HIGHLIGHTS THE FACT THAT THIS TRIBU NAL THEREAFTER DECIDES THE IMPUGNED QUESTION IN ASSESSEES FAVOUR IN ASSESSMEN T 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 (S UPRA). SHRI DHINAL SHAH INFORMS THE BENCH THAT THE RELEVANT FIGURES INVOLVE D IN THE IMPUGNED ASSESSMENT YEAR QUA THIS DEPRECIATION ISSUE ARE ONL Y CONSEQUENTIAL TO THOSE INVOLVED AND DECIDED IN THE IMMEDIATE PRECEDING ASS ESSMENT YEAR SINCE THERE IS NO NEW ADDITION HEREIN. HIS CASE THEREFORE IS T HAT THE PRECEDING ASSESSMENT YEARS FINDINGS NOT MODIFIED IN ANY MANNER SO FAR SH ALL APPLY MUTATIS MUTANDIS HEREIN AS WELL. THE REVENUE FAILS TO REBU T THIS CRUCIAL FACTUAL POSITION. WE THUS FIND THAT THE CIT(A) HAS RIGHTLY DELETED THE IMPUGNED DISALLOWANCE. THE REVENUES SECOND SUBSTANTIVE GRO UND IS ACCORDINGLY REJECTED. 7. THE REVENUES THIRD AND LAST SUBSTANTIVE GROUND PLEADS THAT THE LOWER APPELLATE AUTHORITY HAS ERRED IN DELETING ARMS LEN GTH PRICE ADJUSTMENT OF RS.16,84,60,644/-; AS PROPOSED IN TRANSFER PRICING OFFICERS ORDER DATED ITA NO.1050/AHD/15 WITH CO NO.91/AHD/15 (ADDL.CIT V S. RAJRATNA METAL INDUSTRIES LTD.) A.YS. 2010-2011 - 5 - 21.01.2014 U/S.92CA(3) OF THE ACT AND ACCEPTED IN T HE ABOVESTATED ASSESSMENT ORDER. MR. BIDARI STRONGLY ARGUES THAT THE CIT(A) OUGHT NOT TO HAVE REVERSED THE IMPUGNED ADJUSTMENT ARISING FROM EXCLUSION OF FOREIGN EXCHANGE / LOSS; AS DONE BY THE ASSESSING OFFICER. MR. DHINAL SHAH QUOTES A CATINA OF CASE LAW THAT THE ISSUE OF EXCLUSION OF F OREIGN EXCHANGE GAIN/LOSS FOR THE PURPOSE OF COMPUTING ARMS LENGTH PRICE IN TRANSFER PRICING PROCEEDINGS IS NO MORE RES INTEGRA IN VIEW OF THE F OLLOWING JUDICIAL PRECEDENTS: 1. FISERV INDIA PVT LTD [TS-437-HC-2016(DEL)-TP] 2. AMERIPRISE INDIA PVT LTD [TS-174-HC-2016(DEL)-TP ] 3. NEC TECHNOLOGIES INDIA LTD [TS-221-ITAT-2016(DEL )-TP 4. SUBEX LTD [TS-181 -ITAT-201 6(BANG)-TP] 5. VISA CONSOLIDATED SUPPORT & SERVICES [TS-162-ITA T-2016(BANG)-TP] 6. SAP LABS INDIA PRIVATE LIMITED (145 TTJ 521) (BA NGALORE ITAT) 7. FOUR SOFT LTD. (ITA NO. 1495/HYD/20 10) (HYDERAB AD ITAT) 8. TRILOGY E BUSINESS SOFTWARE INDIA PRIVATE LIMITE D VS. DCIT (23 ITR(T) 464) (BANGALORE ITAT) 9. M/S CAPITAL IQ INFORMATION SYSTEMS (INDIA) PRIVA TE LIMITED VS. DCIT (ITA NO. 1961/HYD/2011) (HYDERABAD ITAT) 10. S. NARENDRA VS. ACIT ([2013] 32 TAXMANN.COM 196 ) (MUMBAI ITAT) 11. CORDYS R & D (INDIA) (P.) LTD. VS. DCIT (ITA NO . 1092/H YD/2010) (HYDERABAD ITAT) 12. TECHBOOKS INTERNATIONAL PVT LTD VS. ACIT (ITA N O. 722/DEL/2014) (DELHI ITAT) THE ASSESSEES CASE THEREFORE IS THAT THE CIT(A) H AS RIGHTLY TREATED FOREIGN EXCHANGE FLUCTUATION GAIN/LOSS AS AN OPERAT ING ITEM NOT TO BE EXCLUDED FOR THE PURPOSE OF COMPUTING ARMS LENGTH PRICE. THE REVENUE FAILS TO REBUT APPLICATION OF THE ABOVE EXTRACTED JUDICIA L 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. THE REVENUES LAST SUBSTANTIVE GROU ND AS WELL AS ITS APPEAL ITA NO.1050/AHD/2015 FAILS. ITA NO.1050/AHD/15 WITH CO NO.91/AHD/15 (ADDL.CIT V S. RAJRATNA METAL INDUSTRIES LTD.) A.YS. 2010-2011 - 6 - 8. WE NOW ADVERT TO ASSESSEES CO NO.91/AHD/2015 RA ISING SOLE SUBSTANTIVE GROUND PLEADING THAT THE LOWER AUTHORIT IES HAVE ERRED IN LAW AND FACTS BY NOT CONSIDERING ITS WINDMILL INCOME AS AN OPERATING INCOME BY DELETING THE ABOVE TRANSFER PRICING ADJUSTMENT ADDI TION OF RS.16.84 CRORES (SUPRA). ITS CASE IS THAT IT HAS ITSELF SOLD ITS W IND POWER FROM SECTION 80IA ELIGIBLE UNDERTAKING TO MANUFACTURING DIVISION BY A VAILING STATE ELECTRICITY UNDERTAKINGS WHEELING FACILITY INSTEAD OF SELLING I T IN OPEN MARKET, THE SAME IS VERY MUCH IN THE NATURE OF AN OPERATING INCOME T O BE INCLUDED IN COMPUTING ARMS 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 UNDER TAKING TO SELL THE ABOVE GENERATED WIND POWER TO ITS MANUFACTURING DIVISION IN LIEU OF PAYMENT OF TRANSMISSION COST COMPUTED AT THE RATE AS IS CHARGE D BY THE STATE UNDERTAKING. FOR EXAMPLE, IF THE ASSESSEE PAYS ONE RUPEE PER UNI T TO STATE UNDERTAKING, IT HAS CHARGED THE VERY RATE TO THE WINDMILL DIVISION SUPPLYING POWER FOR CAPTIVE CONSUMPTION. IT RECORDS THE VERY ARRANGEME NT AND RATE IN ITS BOOKS OF ACCOUNTS. THIS ARRANGEMENT RESULTED IN WINDMILL IN COME OF RS.4,16,79,384/- AGAINST CORRESPONDING EXPENDITURE OF RS.2,67,10,50 8/- . 10. WE NOW ADVERT TO ASSESSEES INTERNATIONAL TRANS ACTIONS WITH ITS OVERSEAS ASSOCIATE ENTERPRISES INVOLVING GROSS SUM OF RS.54,58,95,740/- REPRESENTING RAW MATERIAL PURCHASES ALONG WITH RETU RN OF PACKAGING MATERIAL AND SALE OF FINISHED GOODS. THE ASSESSEE EMPLOYED THE TRANSACTION NET MARGIN METHOD AS THE MOST APPROPRIATE METHOD TO BENCHMARK ITS ABOVE TRANSACTIONS. ALL THE LOWER AUTHORITIES RIGHT FROM TRANSFER PRICI NG OFFICER TO THE CIT(A) ITA NO.1050/AHD/15 WITH CO NO.91/AHD/15 (ADDL.CIT V S. RAJRATNA METAL INDUSTRIES LTD.) A.YS. 2010-2011 - 7 - EXCLUDE THE ABOVE WINDMILL INCOME AS A NON-OPERATIN G ONE FOR THE PURPOSE OF DETERMINING THE ARMS LENGTH PRICE IN QUESTION. 11. WE HAVE GIVEN OUR THOUGHTFUL CONSIDERATION TO R IVAL SUBMISSIONS. THERE DOES NOT APPEAR TO BE ANY DISPUTE ABOUT THE F ACT THAT ASSESSEES WINDMILL INCOME HAS NOTHING TO DO WITH ITS INTERNAT IONAL TRANSACTIONS INVOLVING ALTOGETHER DIFFERENT COMPONENTS OF RAW M ATERIAL PURCHASES, RETURN OF PACKAGING MATERIAL AND SALE OF FINISHED GOODS. IT ONLY ARGUMENT IS THAT IT HAS SOLD ITS CAPTIVE POWER FROM ONE DIVISION TO OTH ER AS ELIGIBLE FOR SECTION 80IA DEDUCTION INSTEAD OF GENERATING REVENUE FROM O PEN MARKET. IT HIGHLIGHTS THE FACT THAT THE ABOVE WINDMILL INCOME HAS ALREADY BEEN TAKEN AS BUSINESS INCOME FOR THE PURPOSE OF COMPUTING THE CO RRESPONDING SEC. 80IA DEDUCTION. WE SEE NO REASON TO CONCUR WITH THIS AR GUMENT AS BOTH THE ABOVESTATED DIVISIONS OF WINDMILL LAND AND STEEL MA NUFACTURING ARE ALTOGETHER SEPARATE WITHOUT HAVING ANY INTERWOVEN ELEMENT EMBE DDED THEREIN. WE OBSERVE THAT THE MERE FACT OF THE ABOVE WINDMILL IN COME ACCEPTED UNDER THE HEAD OF BUSINESS INCOME WOULD NOT MAKE IT AS INCOME DERIVED FROM MANUFACTURING DIVISION FORMING SUBJECT MATTER OF TH E IMPUGNED TRANSFER PRICING ADJUSTMENT. WE NOTICE IN THIS FACTUAL BACK DROP THAT HONBLE DELHI HIGH COURTS DECISION IN MARUBENI INDIA PVT. LTD. V S. DIT ITA NO. 1042/2011 DATED 25.04.2013 UPHELD THIS TRIBUNAL CO- ORDINATE BENCH DECISION DRAWING AN IDENTICAL DISTINCTION AS FOLLOWS: 4. THE FIRST THREE QUESTIONS PROPOSED BY THE ASSES SEE MAY BE NOW EXAMINED. IN THE COURSE OF THE ASSESSMENT PROCEEDINGS, THE AS SESSEES CASE WAS REFERRED TO THE TRANSFER PRICING OFFICER (TPO, FOR SHORT) AS THE INTERNATIONAL TRANSACTIONS WITH ASSOCIATED ENTERPRISES WERE MORE THAN RS.5 CRO RES. IN THE REPORT SUBMITTED BY THE TPO UNDER SECTION 92CA (3) OF THE ACT, HE PROPO SED AN ADDITION OF RS.2,60,49,881/- ON THE GROUND THAT THE COMMISSION AND SERVICE FEES RECEIVED BY THE ASSESSEE FROM MCJ DID NOT REPRESENT ARMS LENGT H PRICE. WHILE DOING SO, THE TPO TREATED THE INTEREST INCOME OF RS.1.72 CRORES R ECEIVED BY THE ASSESSEE AS NON- OPERATING INCOME. BECAUSE OF THIS TREATMENT ACCORDE D TO THE INTEREST INCOME, THE ITA NO.1050/AHD/15 WITH CO NO.91/AHD/15 (ADDL.CIT V S. RAJRATNA METAL INDUSTRIES LTD.) A.YS. 2010-2011 - 8 - PROFITS OF THE COMPANIES WHICH WERE TAKEN FOR COMPA RISON 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 INVEST ING 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-PL US 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 ASSESS EE. AS THE COMMISSION WAS PAID ON THE BASIS OF THE VALUE OF THE TRANSACTIONS PUT T HROUGH 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 PROCEEDI NGS BEFORE THE TPO IN ITS TRANSFER PRICING REPORT WHICH IT WAS REQUIRED TO SU BMIT BY SECTION 92E OF THE ACT, THE ASSESSEE CHOSE FIVE COMPARABLE COMPANIES AND TH E AVERAGE MARGIN CAME TO 8.37%. THE TPO COMPUTED THE ARMS LENGTH REMUNERATI ON IN THE FOLLOWING MANNER: - PERSONAL EXP 83,196,155 ADMN. & OTHER 119,967,293 DEPRECIATION 9,830,666 TOTAL COST (A) 212,994,114 COST PLUS MARKUP OF 8.37% (A) 230,821,721 AMOUNT EARNED AS COMMISSION AND SERVICE FEES (B) 204,771,840 AMOUNT SHORT CHARGED (A-B) 26,049,881 THE ARM'S LENGTH PRICE IN RESPECT OF COMMISSION AND MARKET RESEARCH SERVICE. FEES IS THEREFORE, DETERMINED AT RS.221,04 7,646 AS AGAINST RS.194,997,765 DECLARED IN FORM 3CEB.' ON THIS BASIS THE ASSESSING OFFICER MADE AN ADDITIO N OF RS.2,60,49,881/-. 6. THE ASSESSEE FILED AN APPEAL AGAINST THE AFORESA ID ADDITION BEFORE THE CIT (APPEALS) AND RAISED SEVERAL CONTENTIONS. IN PARTIC ULAR, IT WAS CONTENDED THAT THE APPROACH OF THE TPO/ AO IN TREATING THE INTEREST IN COME AS NON-OPERATING INCOME WAS FLAWED AND IT WAS POINTED OUT THAT THE SHORT TE RM INTEREST OF RS.1.72 CRORES RECEIVED BY THE ASSESSEE WAS ON ACCOUNT OF A TREASU RY FUNCTION WHICH REPRESENTED ITS CORE FUNCTION AND, THEREFORE, OUGHT TO HAVE BEE N TAKEN AS OPERATING INCOME. IT WAS ACCORDINGLY SUBMITTED THAT EXCLUDING THE INTERE ST REVENUE FROM THE COMPUTATION OF THE ARMS LENGTH PRICE WAS NOT APPRO PRIATE SINCE THE COST FOR EARNING THE INTEREST INCOME WAS BUILT INTO THE OPER ATING COST OF THE ASSESSEE. IT WAS ALSO SUBMITTED THAT THE DEMONSTRATIVE COSTS ALSO IN CLUDE INTEREST ON ACCOUNT OF INCOME TAX WHICH WAS NON-OPERATING INCOME AND SHOUL D BE EXCLUDED FROM THE COMPUTATION OF OPERATING PROFIT. ITA NO.1050/AHD/15 WITH CO NO.91/AHD/15 (ADDL.CIT V S. RAJRATNA METAL INDUSTRIES LTD.) A.YS. 2010-2011 - 9 - 7. THE CIT (APPEALS) DEALT WITH THE ASSESSEES SUBM ISSIONS IN DETAIL. HE NOTED THAT THE ASSESSING OFFICER/ TPO HAD TREATED THE INT EREST INCOME EARNED BY THE ASSESSEE AS NON-OPERATING INCOME AND AFTER DOING SO IT WAS FOUND BY THEM THAT THE PROFITS OF THE COMPARABLE COMPANIES WERE MORE THAN THE PROFITS OF THE ASSESSEE WHICH REQUIRE AN ADJUSTMENT TO THE PRICE. THEREAFTE R, HE FRAMED THE FOLLOWING ISSUES WHICH ACCORDING TO HIM AROSE FOR ADJUDICATIO N ON THIS POINT: - 'I. WHETHER THE INTEREST INCOME OF RS.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 ADALA T 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 W HILE COMPUTING THE OPERATING EXPENSES. IV. WHETHER, THE APPELLANT IS ENTITLED FOR ADJUSTME NTS TO THE OPERATING PROFIT, ON ACCOUNT OF DIFFERENCES IN THE WORKING CA PITAL POSITION AND DIFFERENCES IN THE RISKS PROFILE, BETWEEN THE APPEL LANT 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 ASSESSEES OPERATIONS, THAT ON E OF THE OBJECTS OF THE COMPANY WAS TO INVEST THE SURPLUS FUNDS IN SECURITIES, DEPO SITS, UNITS, SHARES, BONDS, DEBENTURES, ETC. AND THAT ACCORDING TO ITS MEMORAND UM OF ASSOCIATION THESE ACTIVITIES WERE PERMITTED AND THUS THE BUSINESS MOD EL OF THE ASSESSEE ENVISAGED THE UTILISATION OF SURPLUS FUNDS FROM TIME TO TIME TO G ENERATE OPERATING REVENUE. IT WAS, THEREFORE, CONTENDED THAT IT WAS NOT PROPER OR APPR OPRIATE TO EXCLUDE THE INTEREST INCOME FROM THE COMPUTATION OF THE ARMS LENGTH PRI CE SINCE THE COSTS FOR EARNING THE INTEREST INCOME WAS BUILT INTO OPERATING COSTS OF THE ASSESSEE. IT WAS REPRESENTED THAT THE TREASURY FUNCTIONS OF THE ASSE SSEE INCLUDED CASH MANAGEMENT, MANAGEMENT OF BANK ACCOUNTS, DATA MANAGEMENT, FINAN CIAL PLANNING AND FORECLOSING WITH CASH PLUS FINANCIAL MANAGEMENT, ET C. IN THE ALTERNATIVE AND WITHOUT PREJUDICE TO THE CONTENTION THAT THE INTERE ST INCOME IS INTRINSICALLY LINKED TO THE AGENCY AND MARKET RESEARCH BUSINESS, IT WAS SUB MITTED THAT IF THE CIT (APPEALS) WAS NOT PREPARED TO ACCEPT THAT THE INTER EST INCOME WAS THE ASSESSEES OPERATING INCOME, THEN ALL COSTS ASSOCIATED WITH TH E EARNING OF SUCH INCOME SHOULD BE SEGREGATED AND IF THAT WAS NOT DONE THOSE COSTS WOULD CONTINUE TO BE PART OF THE AGENCY AND MARKET RESEARCH BUSINESS WHICH WOULD PRE SENT AN UNTRUE PICTURE OF THE ENTIRE OPERATIONS. 9. THESE SUBMISSIONS WERE CONSIDERED BY THE CIT (AP PEALS) IN DETAIL WHO HELD THAT IT WAS A UNIVERSAL PRACTICE FOLLOWED UNDER TRA NSFER PRICING REGULATIONS TO ITA NO.1050/AHD/15 WITH CO NO.91/AHD/15 (ADDL.CIT V S. RAJRATNA METAL INDUSTRIES LTD.) A.YS. 2010-2011 - 10 - EXCLUDE INTEREST FROM THE OPERATING REVENUE FOR COM PUTING THE NET PROFIT FROM THE OPERATING ACTIVITY EXCEPT WHERE THE EARNING OF INTE REST ITSELF WAS THE MAIN ACTIVITY. IN THIS VIEW HE HELD THAT THE INTEREST INCOME CANNO T BE CONSIDERED AS THE ASSESSEES OPERATING INCOME. HE ALSO FOUND THAT THE INTEREST I NCOME IN THE PRESENT CASE WAS NOT SO INTERWOVEN WITH THE INTERNATIONAL TRANSACTIO N THAT IT CANNOT BE SEPARATED. HE ALSO HELD THAT THE COMMISSION RATES AND THE FEES BY WHICH THE ASSESSEE WAS REMUNERATED WERE IN NO WAY RELATED TO THE INTEREST EARNINGS OF THE ASSESSEE. ACCORDING TO THE CIT (APPEALS) WHILE EVALUATING THE ARMS LENGTH PRICE, WHAT WAS REQUIRED TO BE SEEN WAS THE RETURN ON COSTS; IF INT EREST IS INCLUDED AS PART OF THE OPERATING REVENUE, IT WOULD AMOUNT TO COMPUTING THE RETURN ON INVESTMENT WHICH WOULD BE WHOLLY INAPPROPRIATE. IT IS ALSO IRRELEVAN T, ACCORDING TO THE CIT (APPEALS) THAT THE INTEREST INCOME WAS TREATED AS B USINESS INCOME IN THE ASSESSMENT ORDER. FOR THESE REASONS, THE CIT (APPEA LS) HELD THAT FOR THE PURPOSE OF DETERMINING THE ARMS LENGTH PRICE IN RESPECT OF THE CONTROLLED TRANSACTION OF THE ASSESSEE, THE INTEREST INCOME OF RS.1.72 CRORES WAS TO BE CONSIDERED AS NON- OPERATING INCOME. HE THUS ENDORSED THE DECISION OF THE TPO/AO. 10. THE ASSESSEE CARRIED THE MATTER IN FURTHER APPE AL BEFORE THE INCOME TAX APPELLATE TRIBUNAL. AFTER CONSIDERING THE RIVAL CON TENTIONS AND EXAMINING THE FACTS, THE TRIBUNAL AGREED WITH THE INCOME TAX AUTH ORITIES, RECORDING THE FOLLOWING FINDINGS: - (A) THE PURPOSE OF THE EXERCISE BEFORE THE TPO IS T O DETERMINE THE ARMS LENGTH PRICE OF THE TRANSACTIONS OF THE ASSES SEE WITH ITS ASSOCIATES BY COMPARING THE SAME WITH UN-CONTROLLED, COMPARABLE T RANSACTIONS AND IN DOING SO HE HAS TO CONSIDER ALL THE COMPONENTS OF T HE OPERATING INCOME FROM WHICH THE COSTS INCURRED IN EARNING SUCH INCOM E HAVE TO BE DEDUCTED; (B) IT WAS NOT SUFFICIENT TO DECIDE WHETHER THE INT EREST 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 NE CESSARY TO FIND OUT WHETHER THE INTEREST INCOME FORMS PART OF THE OPERA TING INCOME OF THE ASSESSEE; (C) THE BUSINESS PROFILE OF THE ASSESSEE, WHICH HAS BEEN BROUGHT OUT BY THE INCOME TAX AUTHORITIES AND PARTICULARLY THE CIT (APPEALS) SHOWS THAT THE EARNING OF INTEREST INCOME WAS ONLY THE RESULT OF INVESTMENT OF THE SURPLUS FUNDS AND WAS NOT A PRIMARY INCOME-GENERATI NG ACTIVITY; (D) THE NATURE OF THE SERVICES PROVIDED BY THE ASSE SSEE TO ITS HOLDING COMPANY I.E. MCJ AND OTHER ASSOCIATE CONCERNS WAS T O RENDER MARKETING SUPPORT SERVICES AND FACILITATION BY PROVIDING INFO RMATION ON A PERIODIC BASIS, WHICH ACTIVITY WAS ALTOGETHER A DIFFERENT AC TIVITY FROM THE ACTIVITY WHICH GENERATED INTEREST INCOME; (E) THE TPO AND THE CIT (APPEALS) WERE RIGHT IN, TH EREFORE, SEGREGATING THE STREAM OF INTEREST INCOME FROM THE OTHER SERVICES RENDERED BY THE ASSESSEE WHICH WERE ITS CORE ACTIVITIES; ITA NO.1050/AHD/15 WITH CO NO.91/AHD/15 (ADDL.CIT V S. RAJRATNA METAL INDUSTRIES LTD.) A.YS. 2010-2011 - 11 - (F) IF INTEREST IS INCLUDED AS PART OF THE OPERATIN G INCOME THAT WOULD RESULT IN AN INAPPROPRIATE PROFIT-LEVEL INDICATOR ( PLI) IN THE CASE OF A SERVICE PROVIDER, SUCH AS THE ASSESSEE; (G) THEREFORE, NEITHER THE INTEREST INCOME NOR THE INTEREST EXPENDITURE WOULD BE A RELEVANT CONSIDERATION IN THE DETERMINAT ION OF THE ARMS LENGTH PRICE. 11. ON THE BASIS OF THE ABOVE FINDINGS, THE TRIBUNA L TOOK THE VIEW THAT NEITHER THE INTEREST INCOME OF RS.1.72 CRORES NOR THE INTER EST EXPENDITURE OF RS.1.22 CRORES CAN BE TAKEN INTO CONSIDERATION IN THE COMPUTATION OF THE ARMS LENGTH PRICE. 12. THE ASSESSEE HAS FRAMED THE FIRST THREE QUESTIO NS AGAINST THE AFORESAID FINDINGS OF THE TRIBUNAL. IT WAS FAIRLY ADMITTED ON BEHALF OF ASSESSEE THAT QUESTION NO.3 DID NOT ARISE OUT OF THE ORDER OF THE TRIBUNAL . SO FAR AS THE FIRST TWO QUESTIONS ARE CONCERNED, WE ARE SATISFIED THAT ESSENTIALLY TH EY ARE QUESTIONS OF FACT AND DO NOT GIVE RISE TO ANY SUBSTANTIAL QUESTIONS OF LAW. WHETHER A PARTICULAR ACTIVITY OF THE ASSESSEE I.E. THE INTEREST GENERATING ACTIVITY IN THIS CASE, SHOULD BE TAKEN INTO CONSIDERATION IN THE DETERMINATION OF THE ALP IS A QUESTION WHICH NEEDS TO BE DECIDED CONSIDERING THE NATURE OF THE BUSINESS OF T HE ASSESSEE, WHICH IS REFERRED TO AS 'BUSINESS MODEL' IN THE TRANSFER-PRICING JARGON. THE TRIBUNAL HAS RIGHTLY NOTED THAT THE FACT THAT THE MEMORANDUM OF ASSOCIATION GA VE POWERS TO THE ASSESSEE TO EARN INTEREST BY MAKING INVESTMENTS IS RELEVANT ONL Y FOR THE PURPOSE OF DETERMINING THE APPROPRIATE HEAD OF INCOME UNDER SECTION 14 OF THE 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 RELEV ANT FOR THE PURPOSE OF DETERMINING THE OPERATING INCOME OF AN ASSESSEE FOR THE PURPOSES OF TRANSFER PRICING REGULATIONS. MOREOVER, THE TRIBUNAL HAS ALS O FOUND AS A FACT THAT THE INTEREST AROSE OUT OF INVESTMENT OF SURPLUS FUNDS W HICH WERE NOT IMMEDIATELY REQUIRED FOR THE CORE BUSINESS OF THE ASSESSEE. THE TRIBUNALS VIEW THAT IN SUCH CIRCUMSTANCES THE INTEREST INCOME CANNOT BE CONSIDE RED TO BE ITS OPERATING INCOME IS ESSENTIALLY A QUESTION OF FACT TO BE GATHERED FR OM THE NATURE OF THE ASSESSEES BUSINESS AND ITS BUSINESS PROFILE. ALL THESE FACTOR S HAVE BEEN RIGHTLY KEPT IN VIEW BY THE TRIBUNAL. WE ARE, THEREFORE, OF THE OPINION THA T THE FIRST THREE QUESTIONS ARE NOT SUBSTANTIAL QUESTIONS OF LAW MERITING SCRUTINY OF T HIS COURT. 12. WE THUS SEE NO REASON TO DISTURB LEARNED CIT(A) S CONCLUSION EXCLUDING ASSESSEES WINDMILL INCOME IN COMPUTING T HE ARMS LENGTH PRICE IN QUESTION. MR. DHINAL SHAH THEN INVITES OUR ATTENTI ON THE ABOVE EXTRACTED PORTION CLAUSE (G) NOT ONLY EXCLUDING THE SAID ASSE SSEES INTEREST INCOME BUT ALSO THE CORRESPONDING INTEREST EXPENDITURE. WE FI ND MERIT IN THIS ALTERNATIVE PLEA AS EVEN THE ABOVE JUDICIAL PRECEDENT HAS ADOPT ED THE VERY COURSE OF ACTION. THE TRANSFER PRICING OFFICER IS ACCORDINGL Y DIRECTED TO RE-FINALIZE ITA NO.1050/AHD/15 WITH CO NO.91/AHD/15 (ADDL.CIT V S. RAJRATNA METAL INDUSTRIES LTD.) A.YS. 2010-2011 - 12 - CONSEQUENTIAL COMPUTATION TREATING BOTH WINDMILL IN COME AND EXPENDITURE AS NON OPERATING FOR COMPUTING THE ARMS LENGTH PRICE IN QUESTION AFTER AFFORDING ADEQUATE OPPORTUNITY OF HEARING TO ASSESSEE. THE I NSTANT CROSS OBJECTION IS PARTLY ACCEPTED FOR STATISTICAL PURPOSES. 13. THE REVENUES APPEAL ITA NO.1050/AHD/2015 IS DI SMISSED WHEREAS ASSESSEES CROSS OBJECTION NO.91/AHD/2015 IS PARTLY ACCEPTED FOR STATISTICAL PURPOSES. [PRONOUNCED IN THE OPEN COURT ON THIS THE 12 TH DAY OF MAY, 2017.] SD/- SD/- (PRAMOD KUMAR ) (S. S. GODAR A) ACCOUNTANT MEMBER JUDICIAL M EMBER AHMEDABAD: DATED /05/2017 PRONOUNCED AT AHMEDABAD ON 12 TH MAY, 2017 SD/- SD/- (MANISH BORAD ) (S. S. GODARA) ACCOUNTANT MEMBER JUDICIAL M EMBER S.K.SINHA / COPY OF ORDER FORWARDED TO:- / REVENUE 2 / ASSESSEE ! / CONCERNED CIT 4 !- / CIT (A) ( )*+ ,--. . /0 / DR, ITAT, AHMEDABAD 1 +23 45 / GUARD FILE. BY ORDER / . // . /0