UTTAM GALVA STEEL LTD, MUMBAI V. ADDL CIT CIR 7(3), MUMBAI

ITA 7180/MUM/2013

• Counselvise Citation: 718019914 RSA 2013
• Duration Of Justice: 1 year(s) 8 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-08-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Next Hearing Date: 13-04-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 06-12-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: N K CHAND
• Assessee Lawyers: RAHUL R SARDA
• Keywords: Depreciation; Transfer pricing; Opportunity of being heard; Principle of natural justice; International transaction; Cost of acquisition; Commercial expediency; Unabsorbed depreciation; Revenue expenditure; Capital expenditure
• Section: 92

Judgement Text

, INCOME TAX APPELLATE TRIBUNAL,MUMBAI K BENCH . . , , , BEFORE S/SH. A.D. JAIN,JUDICIAL MEMBER & RA JENDRA,ACCOUNTANT MEMBER /. ITA NO. 7180 /MUM/201 3 , / ASSESSMENT YEAR - 200 8 - 09 M/S. UTTAM GALVA STEEL LTD. UTTAM HOUSE, 69 P.DMELLO ROAD, CARNAC BUNDER MUMBAI - 400 009. PAN: A A ACU 1710 C VS ACIT - CIRCLE - 7(3) ASSESSEE YAKAR BHAVAN, M.K. MARG MUMBAI. ( / APPELLANT ) ( / RESPONDENT ) /ASSESSEE BY : SHRI RAHUL R. SARDA / REVENUE BY : SH RI N.K. CHAND / DATE OF HEARING :05.08. 2015 / DATE OF PRONOUNCEMENT : 31 . 08.2015 , 1961 254 ( 1 ) ORDER U/S.254(1)OF THE INCOME - TAX ACT,1961(ACT) PER RAJENDRA, AM - CHALLENGING THE ORDER DATED 04.09.2013 OF THE CIT(A) - 15,MUMBAI,THE ASSESSEE HAS RAISED FOLLOWING GROUNDS OF APPEAL: ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE LEARNED CIT (APPEALS) ERRED IN CONFIRMING ADJUSTMENT MADE BY THE LEARNED AO / TRANSFER PRICING OFFICER ('TPO') IN ARRIVING AT THE ARM'S LENGTH PRICE OF INTERNATIONAL TRANSACTION RELATING FOLLOWING A. REIMBURSEMENT OF INTEREST AND OTH ER FINANCE COST AND AT NLL AS AGAINST RS. 22,11,05,000 PURSUANT TO THE TRANSFER PRICING ADJUSTMENT AS PER THE ORDER PASSED UNDER SECTION 92CA(3) OF THE ACT. B. GUARANTEE COMMISSION OF RS 4,63,65,200 PURSUANT TO THE TRANSFER PRICING ADJUSTMENT AS P ER THE ORDER PASSED UNDER SECTION 92CA(3) OF THE ACT. REIMBURSEMENT OF INTEREST AND OTHER FINANCE COST 2.1. THE LEARNED CIT (APPEALS) ERRED IN OBSERVING THAT THERE WAS NO JUSTIFICATION FOR THE APPELLANT TO REIMBURSE THE INTEREST AND FINANCE COST TO ITS ASSOCIATED ENTERPRISE (AE), WHICH WAS IN FACT THE LIABILITY OF THE AE ITSELF. 2.1 THE LEARNED CIT (APPEALS) ERRED IN OBSERVING THAT THE ESSENCE OF THE TRANSACTION OF IMPORTS BETWEEN THE APPELLANT AND ITS AE WAS PRIMARILY OF PURCHASE OF GOODS AND NOT ONE OF FINANCING/FUNDING ARRANGEMENT. 2.2 THE LEARNED CIT (APPEALS) ERRED IN OBSERVING THAT SUCH REIMBURSEMENT OF INTEREST AND FINANCE COST HAS REDUCED THE APPELLANT'S PROFITS IN INDIA TO THAT EXTENT AND IT HAS SHIFTED ITS PROFITS TO A TAX HAVEN ABROAD. 2.3 THE LD. CIT(A) FAILED TO UNDERSTAND THAT THE AE WAS SET UP FOR THE PURPOSE OF IMPORTING RAW MATERIAL FROM THE INTERNATIONAL MARKETS BY PROCURING FINANCE FROM OVERSEAS BANKS AT LOWER COST AND LOW RATES OF INTEREST, AS THE APPELLANT HAD EXHAUSTED THE CREDIT FACILITIES AVAILABLE FOR ITS WORKING CAPITAL REQUIREMENT FORM DOMESTIC BANKS. 2.4 THE LEARNED CIT (APPEALS) ERRED IN NOT APPRECIATING THAT THE AE HAD INCURRED INTEREST AND FINANCE COST ON BEHALF OF THE APPELLANT AND THE SA ME WERE RECOVERED BY THE AE FROM THE APPELLANT AT ACTUAL COST, WITHOUT LEVYING ANY MARK - UP THEREON. THUS, THE SAID INTERNATIONAL TRANSACTIONS BETWEEN THE APPELLANT AND AE DID NOT RESULT IN ANY INCOME OR EXPENDITURE IN THE HANDS OF AE. FURTHER, THE PR IMARY LIABILITY FOR MAKING THE PAYMENT WAS WITH THE APPELLANT AND IT WAS PURELY FOR COMMERCIAL AND PRACTICAL REASONS THAT THE PAYMENT WAS MADE BY THE AE. 2.5 THE LEARNED CIT (APPEALS), ERRED IN NOT APPRECIATING THAT THE REIMBURSEMENT OF EXPENSES WER E INHERENTLY AT ARM'S LENGTH AS PROVIDED UNDER SECTION 92 OF THE ACT. 7180/13 UTTAM 2 GUARANTEE COMMISSION. 2.6 THE LEARNED CIT (APPEALS) ERRED IN CONSIDERING CORPORATE GUARANTEE GIVEN BY THE APPELLANT TO DEUTSCHE BANK IS AN INTERNATIONAL TRANSACTION COVERED U/S 92B( 1) OF THE INCOME TAX ACT 1961. 2.7 THE LEARNED CIT (APPEALS) ERRED IN CONSIDERING THAT THE APPELLANT HAS NOT INCURRED ANY COST TO PROVIDE CORPORATE GUARANTEE TO BANK. 2.8 THE LEARNED CIT (APPEALS) HAS NOT CONSIDERED THE FACT THAT THE BENEFICIARY OF THE GUARANTEE WAS APPELLANT ONLY AND NOT OTHER UNRELATED PARTIES. ANY ADDITIONAL CHARGE BY THE APPELLANT TO THE AE IN THE FORM OF GUARANTEE COMMISSION WOULD HAVE INCREASED THE COST OF IMPORT BY THE APPELLANT FROM THE AE AND HENCE, THE TRANSACTION WOULD HAVE BEEN REVENUE NEUTRAL FOR THE APPELLANT. GROUNDS ON OTHER DISALLOWANCES 3.THE LEARNED CIT (APPEALS) ERRED IN MAKING CONFIRMING AD - HOC DISALLOWANCE OF 20% OF TOTAL EXPENDITURE INCURRED ON REPAIRS AND MAINTENANCE AS THE SAME ARE IN THE NA TURE OF CAPITAL EXPENDITURE. 4.THE LEARNED CIT (APPEALS) ERRED IN CONFIRMING FOR INITIATING PENALTY PROCEEDINGS UNDER SECTION 271(1)(C) OF THE ACT BY THE AO . 5.EACH ONE OF THE ABOVE GROUNDS OF APPEAL IS WITHOUT PREJUDICE TO THE OTHER. 6 . THE APPELLANT RESERVES THE RIGHT TO ADD, ALTER OR AMEND TO THE ABOVE GROUNDS OF APPEAL. DURING THE COURSE OF HEARING BEFORE US THE AUTHROISED REPRESENTATIVE (AR) OF THE ASSESSEE STATED THAT GROUND NOS.2A.,2B 2.6, 2.7 AND 2.8 WERE TO BE ADJUDICATED, THAT REST OF THE GROUNDS WERE IN SUPPORT OF THESE EFFECTIVE GROUNDS. ASSESSEE - COMPANY,ENGAGED IN THE BUSINESS OF MANUFACTURING AND SALE OF COLD ROLLED COILS , FILED ITS RETU R N OF INCOME ON 29.09.2008 DECLARING TOTAL INCOME AT RS.NIL.T HE ASSESSING OFFICER( AO ) COMPLETED THE ASSESSMENT ON 13 . 0 1.201 2, U/S.143(3) R.W.S.144(3)OF THE ACT, DETERMINING THE INCOME OF THE ASSESSEE AT RS. 28 . 36 CRORES. 2. DURING THE ASSESSMENT PROCEEDINGS,THE AO FOUND THAT THE ASSESSEE HAD ENTERED IN TO VARIOUS INTERNATIONAL TRANSACTI ONS WITH ITS ASSOCIATED ENTERPRISES(AE)AND ACCORDINGLY HE MADE A REFERENCE TO THE TRANSFER PRICING OFFICER(TPO)U/S.92CA(1)OF THE ACT FOR DETERMI - NATION OF THE ARMS LENGTH PRICE(ALP) IN RELATION TO THE INTERNATIONAL TRANSACTIONS. THE TPO,VIDE HIS ORDER DT. 28.9.2011, RECOMMENDED A TOTAL ADJUSTMENT OF 26.74 CRORES. 2.1 . DURING THE COURSE OF HEARING BEFORE US,IT WAS BROUGHT TO OUR NOTICE THAT THE TRIBUNAL WHILE DECIDING IN APPEAL FOR THE AY. (ITA/ 3438/M.2012 ,DATED 18.12.2013) HAD DEALT WITH THE SIMILAR ISSU E WI TH REGARD TO TP ADJUSTMENT, THAT THE MATTER WAS SENT BACK TO THE FILE OF THE AO/TPO FOR FRESH ADJUDICATION .W E FIND THAT ASSESSEE HAD RAISED FOLLOWING GROUNDS : '1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN THE LAW,LD. CIT(A) ERRED IN CONFIRM ING THE ADJUSTMENT MADE BY THE LD AO /TRANSFER PRICING OFFICER (TPO) IN ARRIVING AT THE ARMS LENGTH PRICE (ALP) F INTERNATIONAL TRANSACTION RELATING TO REIMBURSEMENT OF INTEREST AND OTHER FINANCE COST AT NIL AS AGAINST RS.17,81,06,522/ - PURSUANT TO THE TRANSFER PRICING ADJUSTMENT AS PER THE ORDER PASSED UNDER SECTION 92CA(3) OF ACT. 2. THE LD. CIT(A) ERRED IN OBSERVING THAT THE ESSENCE OF THE TRANSACTION OF IMPORTS BETWEEN THE APPELLANT AND ITS AE WAS PRIMARILY THE PURCHASE OF GOODS AND NOT ONE OF FINANC ING/FUNDING ARRANGEMENT. 3. THE LD CIT (A) FAILED TO UNDERSTAND THAT THE AE WAS SET UP FOR THE PURPOSE OF IMPORTING RAW MATERIALS FROM THE INTERNATIONAL MARKET BY PROCURING FINANCE FROM OVERSEAS BANKS AT LOWER COST AND LOW RATES OF INTEREST, AS THE APPEL LANT HAD EXHAUSTED THE CREDIT FACILITIES AVAILABLE FOR ITS WORKING CAPITAL REQUIREMENT FROM DOMESTIC BANKS. 7180/13 UTTAM 3 4. THE LD CIT(A) ERRED IN NOT APPRECIATING THAT THE REIMBURSEMENT OF EXPENSES WEREINHERENTLY AT RMS LENGTH AS PROVIDED UNDER SECTION 92 OF THE ACT 5. THE LD CIT (A) FURTHER ERRED IN NOT APPRECIATING THAT THE AE HAS A FACILITATOR AND FUNCTIONED AS A PROCUREMENT AGENCY AS WELL AS A FINANCER TO THE IMPORT TRANSACTION OF THE APPELLANT. THEREFORE, THE EXPENSES LIKE INTEREST AND FINANCE COST INCUR RED BY THE AE TO FACILITATE THE IMPORT OF RAW MATERIAL BY THE APPELLANT HAD TO BE CHARGED BACK TO THE APPELLANT, BESIDES THE SMALL MARK - UP CHARGED BY THE AE ON IMPORTS MADE BY THE APPELLANT, FOR RECOVERING THE PROCUREMENT COSTS INCURRED BY THE AE. CONSID ERING THE RISK ASSUMED AND THE FUNCTIONS CARRIED OUT BY THE AE, THE REIMBURSEMENT OF INTEREST AND FINANCE COST OUGHT TO HAVE BEEN ACCEPTED AT COST BY THE LD. CIT(A). THE TRIBUNAL DECIDED THE ISSUE AS UNDER : 10.WE HAVE HEARD BOTH THE PARTIES AND PERUSED TH E ORDERS OF THE REVENUE AUTHORITIES AS WELL AS THE DECISIONS PLACED BEFORE US. WE HAVE CONSULTED, WHEREVER REQUIRED, THE PAPER BOOK,THE CORRESPONDENCE BETWEEN THE ASSESSEE AND THE REVENUE AT VARIOUS STAGES OF THE PROCEEDINGS AS WELL AS THE FACTS SHEET WITH PROPOSITIONS MENTIONED BY LD COUNSEL. ON PERUSAL, WE FIND THAT THE CASE OF THE ASSESSEE IS THAT THE PAYMENT OF RS. 17.81 CRS, EQUIVALENT TO 40 MILLION US$ IS THE FINANCE COST AND THE INTEREST CHARGED BY THE DEUTSCHE BANK TO THE MRK - AE OF THE ASSESSEE. IT IS THE CASE OF THE ASSESSEE AEMRK HAS NOT COLLECTED SAID SUM OF RS. 17.81 CRS EITHER FROM EUROPA INTERNATIONAL LTD OR FROM THE ASSESSEE WHILE RAISING THE INVOICES ON THE ASSESSEE WHILE 10 SUPPLYING THE RAW MATERIALS TO THE ASSESSEE. THE MARK UP CHARGED @ 2 TO 3% IS ONLY TO MEET THE ADMINISTRATIVE EXPENSES, THEREFORE,THE IMPUGNED REIMBURSEMENTS ARE SEPARATELY RECOVERED FROM THE ASSESSEE AND THE SAME IS FULLY JUSTIFIED. IN OTHER WORDS, WHATEVER IS REIMBURSED BY THE ASSESSEE TO MRK GOES TO THE DEUTSCHE BANK A CCOUNT AND THE MRK IS NOT THE BENEFICIARY OF ANY INCOME IN ANY FORM. THEREFORE, THE PROVISIONS OF SECTION 92(1) SHOULD NOT APPLY TO SUCH REIMBURSEMENTS OF FINANCE COST.ADDITION MADE BY THE AO / TPO BY COMPLETELY DISALLOWING THE CLAIM OF THE ASSESSEE IS NO WAY OF DETERMINING THE ARM S LENGTH PRICE APPLYING THE PRINCIPLES OF TRANSFER PRICING. THE REVENUE HAS NOT PICKED UP ANY METHOD OR ANY COMPARABLES FOR COMING TO THE CONCLUSION THAT THE SAID PAYMENT IS AT ARM S LENGTH. AS PER THE ASSESSEE, IF THE FINANCE CO ST OF RS 17.81 CR, ADMINISTRATIVE COST @ 2 TO 3% MARK UP OVER THE PURCHASE VALUE OF RAW MATERIALS IS ADDED TO THE COST OF THE RAW MATERIAL PURCHASE COST FROM THE EUROPA INTERNATIONAL (FROM WHOM THE MKR MADE PURCHASES), THE PRICE IN THE HANDS OF THE ASSESSE E IS COMPETITIVE IN OPEN MARKET. THEREFORE, THERE IS NO SHIFTING OF THE PROFITS ABROAD AND HENCE THE PRICE CONSTITUTES ALP. 11. PER CONTRA, THE CASE OF THE REVENUE IS THAT THE MRK IS MERELY A RAW MATERIAL SUPPLIER TO THE ASSESSEE. EXPENDITURE OF RS 17.81 CRORES IS THE EXPENDITURE OF THE MKR AND NOT OF THE ASSESSEE. THEREFORE, WHATEVER IS REIMBURSED BY THE ASSESSEE CONSTITUTES SHIFTING OF THE PROFITS TO ITS AE ABROAD, WHICH SHOULD NOT BE PERMITTED UNDER THE PRINCIPLES OF TRANSFER PRICING. AS PER THE REVENUE , PRINCIPLES OF COMMERCIAL EXPEDIENCY HAVE NO RELEVANCE TO THE TP PROVISIONS WHICH ARE AIMED AT MERELY TO PLUG THE TRANSFER OF PROFITS FROM THE COUNTRY TO ABROAD. IN THE ABSENCE OF TP STUDIES ON THE COMPARABLES, THE AO HAS NO CHOICE BUT TO DECIDE THE ALP O F THE INTERNATIONAL TRANSACTIONS IN THE MANNER DECIDED BY THE AO / TPO. IN THIS CASE, NOTHING IS REIMBURSED TO MRK AND THEREFORE, THE NIL VALUE IS TAKEN AS ALP WHICH SHOULD BE SUSTAINED. 12. WE HAVE CONSIDERED THE ABOVE DIVERGENT POSITIONS OF THE PARTIES IN THE DISPUTE. UNDISPUTEDLY, THE ASSESSEE IMPORTED LARGE PERCENTAGE OF THE REQUISITE RAW MATERIAL FROM ABROAD USING THE MKR - AE. IN TURN, MKR - AE PURCHASED THE SAID MATERIAL FROM M/S EUROPA INTERNATIONAL ABROAD AND IN THE PROCESS, MKR USED THE BANK FINANCIN G FACILITIES FROM THE DEUTSCHE BANK. WHILE RAISING THE INVOICE ON THE ASSESSEE, THE MKR ADDED IN THE INVOICE THE MARK UP OF 2 TO 3% PRESUMABLY TOWARDS ADMINISTRATIVE COST ONLY AND NOT TOWARDS THE IMPUGNED FINANCE /INTEREST COST. MKR - AE RECOVERED THE FINANC E COST SEPARATELY AND THEREFORE, THE PRESENT LITIGATION. FOR ASSESSEE, IT IS THE CASE OF REIMBURSEMENT. BUT AO/TPO REJECTED THE SAME AND HELD THAT ASSESSEE IS NOT REQUIRED TO MAKE ANY PAYMENT ON THIS ACCOUNT AS LIABILITY TO MAKE THE IMPUGNED REIMBURSEMENT IS ON THE MKR - AE AND NOT ON THE ASSESSEE. FOR RESOLVING THE ISSUE, WE HAVE EXAMINED THE ROLE OF THE MKR QUA THE ASSESSEE. 7180/13 UTTAM 4 13. COMPOSITE FUNCTIONS OF MKR: GROUND NO.5 REFERS TO THE CLAIM THAT MKR PERFORMED CERTAIN COMPOSITE FUNCTIONS OF RAW MATERIAL SUPPLI ER AND FINANCE FACILITATOR WITH THE PURPOSE OF SERVING THE ASSESSEE. AS PART OF THE ASSESSEE S PREFERENCE FOR OFFSHORE FINANCING MODEL, ASSESSEE PROCEEDED TO ENTER INTO THE INTERNATIONAL TRANSACTIONS BY SPLITTING THE SAID FUNCTIONS AND MADE MKR TO RAISE INVOICES TO SUIT THE ASSESSEE. THIS IS EVIDENT FROM THE FACT THE MKR RAISED INVOICES (I) WHEN HE SUPPLIED RAW MATERIAL TO THE ASSESSEE WITH MARK UP OF 2% TO 3% AND (II) WHEN MKR HAD TO RECOVER THE IMPUGNED 17.81 CR. FURTHER, IT IS A FACT THAT THE ASSESSEE HAS NOT RAISED ANY INVOICE TOWARDS CORPORATE GUARANTEE COMMISSION ON MKR WHEN HE GAVE CORPORATE GUARANTEE TO THE DEUTSCHE BANK WHO GRANTED FINANCING FACILITY TO MKR. IN PRINCIPLE, WE CANNOT APPRECIATE THAT THE WHOLE GAMUT OF TRANSACTIONS ARE DONE AS PE R THE SET PRINCIPLES OF ALP. WHEN THE ASSESSEE SUBMITS THAT MKR SERVICES ARE REQUIRED TO BE CONSIDERED AS COMPOSITE IN NATURE FOR ALP STUDY PURPOSES, BUT THE INVOICES ARE FUNCTION SPECIFIC, THIS APPROACH DOES NOT PROVIDE PROPER TP STUDIES OF THE RAW MATER IAL PURCHASES PRICE IN THE HANDS OF THE ASSESSEE. ASSESSEE SHOULD BE SPLIT THE SERVICES AS DISCUSSED ABOVE. WHEN THE SERVICES RENDERED BY THE MKR IS INSEPARABLE AND COMPOSITE IE FPF, THE TP STUDIES SHOULD ALSO BE DONE AFTER CONSIDERING ALL THE 12 PRICE CO MPONENTS OF THE SAID SERVICES. IN ALP STUDIES, THE ASSESSEE NEEDS TO TRAVEL EXTRA MAIL TO DEMONSTRATE THAT THE RAW MATERIAL PURCHASE PRICE OF THE ASSESSEE IS AT ARM S LENGTH AFTER CONSIDERING THE ENTIRE COST ATTRIBUTABLE TO THE SAID PURCHASES BY THE ASSE SSEE. AO/TPO NEEDS TO GRANT APPROPRIATE ADJUSTMENTS TOO. SINCE THE ASSESSEE ARGUED BEFORE US THAT THE SAID PURCHASE PRICE IS AT ARM S LENGTH, THE SAME MUST BE DEMONSTRATED USING THE TP STUDIES USING THE SUSTAINABLE COMPARABLES AND APPROPRIATE METHODS. FOR THIS, CONSIDERING THE ASSESSEE S ARGUMENT OF COMPOSITE FUNCTIONS (IE AS A FINANCIER, FACILITATOR, PROCUREMENT AGENCY, RAW MATERIAL SUPPLIER ETC) BY THE MKR, THE ASSESSEE MUST MERGE ALL THE RELEVANT COST SPENT BY THE ASSESSEE AND THE MKR TILL THE RAW MATERI AL REACHED THE PREMISES OF THE ASSESSEE. ASSESSEE IS UNDER OBLIGATION TO DEMONSTRATE WITH THE SUSTAINABLE COMPARABLES UNDER THE APPROPRIATE METHOD USING TP STUDIES THAT THE PURCHASE PRICE OF RAW MATERIAL AFTER INCLUDING THE ADMINISTRATIVE AND FINANCE COST/ INTEREST, IS AT ARM S LENGTH. UNDER THE SAID PECULIAR KIND OF SUBMISSIONS OF THE ASSESSEE, TPO CANNOT RESTRICT HIS TP STUDIES TO ONLY TO THE INTERNATIONAL TRANSACTION OF REIMBURSEMENTS. IN THE FRESH TP STUDIES, THE ASSESSEE, IF HE PERSISTS ON THE ABOVE SUB MISSIONS, NEEDS TO CONSIDER THE COMPOSITE TRANSACTIONS IE PURCHASE COST INCURRED BY THE MKR, FINANCE COST INCURRED BY THE MKR, ADMINISTRATIVE COST INCURRED BY MKR, CORPORATE GUARANTEE COMMISSION ETC. 14. THE FOLLOWING QUESTIONS ARE RELEVANT IN THE PROCESS AND THEY ARE: 1. WHETHER THE MKR IS CAPTIVE SUPPLIER OF THE RAW MATERIAL TO THE ASSESSEE AND IT DOES NOT SUPPLY TO ANY OTHER PERSONAL? 2. WHETHER THE MKR INCURRED THE SAID SUM OF RS 17.81 CRORES EXCLUSIVELY FOR THE RAW MATERIAL SUPPLIED TO THE ASSESSEE? 3 . WHETHER THE MARK UP OF 2 - 3% CHARGED ON THE ASSESSEE INCLUDES AN ELEMENT OF FINANCE/FUNDING COST OF US$40 MILLIONS? 4. WHETHER THE FINAL PRICE OF RAW MATERIAL PER UNIT (RAW MATERIAL PURCHASED FROM THE MKR AND AFTER INCLUDING THE REIMBURSED SUM OF RS 17.81 CR)) IS COMPETITIVE IN THE OPEN MARKET AND NECESSITATES NO ADJUSTMENTS? 5. WHETHER THE MKR S IS INCORPORATED SOLELY FOR THE PURPOSE OF THE ASSESSEE AND HAS RENDERED SERVICES TO THE OTHER PARTIES? THE ABOVE QUESTIONS NEEDS SPECIFIC ANSWERS IF THE ISSUES RAISED ARE TO BE ADJUDICATED MEANINGFULLY. 15. TPO FAILED TO ADDRESS TO THESE ISSUES: TH E PERUSAL OF THE ORDERS OF THE REVENUE AS WELL AS THE DOCUMENTS SUPPLIED TO US REVEALED THAT THERE IS NO CLARITY ON THE ABOVE ISSUES. AO/TPO HAS NOT EXAMINED IF THE MKR RENDERED SERVICES DIRECTLY OR INDIRECTLY TO ANY OTHER PARTY ALSO USING THE SAID FINANCI NG FACILITY WITH THE DEUTSCHE BANK, TO WHICH THE ASSESSEE GAVE THE GUARANTEE FREE OF CHARGE. IF THERE IS LIKELY FLUCTUATION IN PURCHASE PRICE PER TON OF THE RAW MATERIAL IF THE SAID IS SAID RS 17.81 CR IS CONSIDERED QUA THE RATES IN THE OPEN MARKET, IF THE RE IS REALLY ANY COST SAVINGS IN THE PRESENT OFFSHORE MODEL FINANCING AS CLAIMED BY THE ASSSESSEE. THE ASSESSEE S CLAIM OF EXHAUSTING OF THE DOMESTIC FINANCING FACILITIES IS BONAFIDE OR OTHERWISE ETC, NEEDS THOROUGH PROBE TOO. TPO SHOULD HAVE DETERMINED IF THE INTERNATIONAL TRANSACTION IS AT ARM S LENGTH ONLY AFTER EXAMINING THE ABOVE ISSUES QUA THE PURCHASE PRICE OF THE RAW MATERIAL AFTER CONSIDERING ALL THE FACTORS SUCH AS THE COST OF THE RAW MATERIAL, 7180/13 UTTAM 5 ADMINISTRATIVE COST AND THE RELEVANT AND RELATABLE FINANCE/INTEREST COST IN THE HANDS OF THE MKR PROVIDED THE MKR IS THE DEDICATED SUPPLIER OF THE RAW MATERIAL TO THE ASSESSEE. IN THE TP STUDIES, THE DUTY OF THE TPO IS DETERMINE THE ALP AND NOT TO DETERMINE THE JUSTIFICATION OF THE SAID PAYMENTS CLAIMED BY THE ASSESSEE. IN THE INSTANT CASE, THE TPO IS GONE INTO THE JUSTIFICATION ISSUES IE IF THE SAID REIMBURSEMENT IS RIGHTLY PAID OR NOT BY THE ASSESSEE. MORE SO WHEN THERE IS NO FINDING OF FACT BY THE AO THAT THE SAID AMOUNT OF RS 17.81 CR IS INCURRED ALSO O N THE RAW MATERIALS SUPPLIED TO PARTIES OTHER THAN THE ASSESSEE. THEREFORE, THERE IS DEFINITE NEED FOR EXAMINING THE ALP BASED ON THE FACTS AND FIGURES. WE LOOK FOR THE FACT IF THE PER UNIT PURCHASE PRICE OF THE RAW MATERIAL IS AT ARMS LENGTH AFTER CONS IDERING THE COST OF THE RAW MATERIAL, ADMINISTRATIVE COST AND THE IMPUGNED FINANCE/INTEREST COST OF RS 17.81 CR. IT IS THE CLAIM OF THE ASSESSEE THAT THE SAID PER UNIT PRICE IS AT ALP QUA THE DOMESTIC COMPARABLES. 16. MKR AS THE FPF (FACILITATOR CUM PROCU REMENT AGENCY CUM FINANCIER): IT IS THE CLAIM OF THE ASSESSEE THAT THE ASSESSEE SHIFTED TO OFF - SHORE FUNDING MODEL AS HE EXHAUSTED THE SAME LOCALLY. AS PER THE ASSESSEE, MKR IS INCORPORATED WITH THE SOLE PURPOSE OF PROCURING THE RAW MATERIAL WITH CHEAPER P RICE USING THE CHEAPER FUNDING CHANNELS ABROAD. ADMITTEDLY, THE ASSOCIATE ENTERPRISE - MKR IS SUBSIDIARY OF THE ASSESSEE AND SAID TO BE RENDERING CAPTIVE SERVICES TO THE ASSESSEE. IF THAT IS THE FACT, FOR THE PURPOSE OF THE TP STUDIES, TPO MUST TRAVEL BEYON D WHAT IS ACCOUNTED IN THE BOOKS OF THE ASSESSEE AND THE MKR AND DETERMINE THE ALP. CONSIDERING THE SPECIAL FACTS OF THE PRESENT CASE, WHERE THE MKR, THE ASSESSEE - AE, IS CAPTIVE SUPPLIER WITH DEDICATED IMPORTER IE ASSESSEE, THE TPO IS NOT JUSTIFIED IN SEG REGATING ALL THE THREE SEGMENTS OF THE PRICE IE RAW MATERIAL PRICE + ADMINISTRATIVE COST + FINANCE COST. WE DO NOT APPROVE THE OBSERVATION OF THE TPO THAT THE MKR IS MERE RAW MATERIAL SUPPLIER TO THE ASSESSEE. PRIMA FACIE, WE ARE OF THE OPINION, MKR SEEMS TO BE THE BODY AND SOUL OF THE ASSESSEE ABROAD FUNCTIONALLY AND FINANCIALLY. TPO MUST CONSIDER THE SAME IN HIS TP STUDIES. THEREFORE, IN TP STUDIES OF THIS CASE, TPO MUST DETERMINE THE ALP AFTER MERGING ALL THE RELEVANT COST SEGMENTS. HIS AIM SHOULD BE TO DETERMINE AFTER MAKING REQUISITE AND APPROPRIATE ADJUSTMENTS, IF THE IMPORT PRICE OF THE RAW MATERIAL IN THE HANDS ASSESSEE IS COMPETITIVE IN THE OPEN MARKET AND PROVIDE ALL THE ALLOWABLE ADJUSTMENTS IN ACCORDANCE WITH THE PROVISIONS OF THE LAW AND RULES. AS SUCH, THE MKR SUPPLIES CONSTITUTE ONLY 36% OF THE TOTAL RAW MATERIAL OF THE ASSESSEE. THIS INDICATES THAT THE ASSESSEE HAD PURCHASES FROM OTHER SOURCES AS WELL. THIS FACT SHOULD ALSO HELP TPO IN HIS COMPARATIVE STUDIES OF THE RAW MATERIAL PRICE. SUBJECT ED TO THE FACTS OF THE CASE, IN THE ALP STUDIES, TPO MAY ALSO CONSIDER THE FACT THAT THE ASSESSEE IS ENTITLED TO COMMISSION FOR GRANTING THE CORPORATE GUARANTEE. ASSESSEE MUST PROVIDE ALL RELEVANT DATA INVOLVING ALL THE ABOVE ISSUES TO THE TPO. OTHERWISE, TPO MAY GARNER HIS OWN COMPARABLES IN ACCORDANCE WITH THE LAW. 17. THEREFORE, TO SUM UP, WE FIND MERIT IN THE ASSESSEE S CONTENTION THAT THE MKR IS NOT JUST A MATERIAL SELLER TO THE ASSESSEE. THEREFORE, IN PRINCIPLE, WE CANNOT APPRECIATE THE APPROACH OF THE TPO IN ACCEPTING (I) THE INTERNATIONAL 15 TRANSACTIONS INVO LVING THE PAYMENT OF COST FOR IMPORT OF THE RAW MATERIALS AND (II) REJECTING THE REIMBURSEMENT OF THE FINANCE COST, INTEREST COST ETC AMOUNTING TO RS 17.81 CR AND (III) NOT CHARGING OF THE CORPORATE GUARANTEE COMMISSION ON THE MKR. THE TPO MUST DETERMINE ALP OF THE PURCHASE PRICE OF THE RAW MATERIAL AS A WHOLE AFTER CONSIDERING ALL THE RELEVANT SEGMENTS OF THE PRICE IE PURCHASE COST, ADMINISTRATIVE COST AND THE FINANCE COST AND INTEREST COST, GUARANTEE COMMISSION ETC. IN THE REMAND PROCEEDINGS, AFTER CONS IDERING ALL THESE SEGMENTS OF THE PRICING, IF TPO FINDS THAT THE UNIT PRICE OF THE RAW MATERIAL IS AT ALP, IN THAT CASE, THERE IS NO NEED FOR ANY TP ADDITIONS. 18. CONSEQUENTLY, THE LEGAL DISPUTE ON IF THE IMPUGNED REIMBURSEMENT FALLS WITHIN THE AMBIT OF SECTION 92(1) OF THE ACT BECOMES AN ACADEMIC EXERCISE. OTHERWISE ALSO, WE DO NOT APPRECIATE THE ARGUMENTS OF LD COUNSEL ON THIS ISSUE AND FOR THIS, WE RELY ON THE AMENDED PROVISO TO THE SAID SECTION AND THE DECISIONS CITED BY THE LD DR. 19. REGARDING OTHE R ARGUMENTS RELATING TO THE PRINCIPLE OF COMMERCIAL EXPEDIENCY , IT IS THE REVENUE S STAND THAT THE SAME ARE NOT RELEVANT FOR THE TP STUDIES. ON THE CONTRARY, THE ASSESSEE RELIES HEAVILY ON THE SC S JUDGMENT IN THE CASE OF THE SA BUILDERS (SUPRA). IN THE REMAND MATTERS, AO/TPO IS DIRECTED TO CONSIDER THE SAME AND PASS A SPEAKING ORDER ON THIS ISSUE TOO. 7180/13 UTTAM 6 20. THUS, WE SET ASIDE THE ORDER OF THE CIT (A) AS ABOVE AND REMAND ALL THE GROUNDS TO THE FILE OF THE AO/TPO FOR WANT OF FRESH ASSESSMENT AFTER CONSIDERI NG THE DIRECTIONS INDICATED ABOVE. ASSESSEE SHALL BE GIVEN REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE IN ACCORDANCE WITH THE PRINCIPLES OF THE NATURAL JUSTICE. ACCORDINGLY, THE GROUNDS RAISED IN THE APPEAL ARE ALLOWED FOR STATISTICAL PURPOSE. RE SPECTFULLY, FOLLOWING THE ABOVE ORDER OF THE TRIBUNAL WE REMIT BACK THE MATTER TO THE FILE OF AO/ TPO WITH THE SAME DIR ECTION GIVEN BY THE TRIBUNAL IN THE ABOVE ORDER. GROUNDS OF APPEAL RAISED BY THE ASSESSEE PERTAINING TO TP ADJUSTMENT ARE ALLOWED IN FAVOUR OF THE ASSESSEE IN PART. 3 . GROUND NO.3 DEALS WITH ADHOC DISALLOWANCE OF 20% OF TOTAL EXPENDITURE INCURRED ON REPAIRS AND MAINTENANCE AND TREATING THE SAME AS CAPITAL EXPENDITURE. DURING THE ASSESSMENT PROCEEDINGS THE AO FOUND THAT THE ASSESSEE HAD CLAIMED AN EXPENDITURE OF RS.10.84 CRORES UNDER THE HEAD REPAIR AND MA INTENANCE(PLANT AND MACHINERY RS.7.99 CRORES+ BUILDING RS. 1.90 CRORES + OTHERS RS. 94.67 LACS). HE OBSERVED THAT SOME OF THE PAYMENTS TOWARDS REPAIR AND MAINTENANCE WERE IN THE NATURE OF CAPITAL. H E REFERRED TO INVOICE NO.72 AND 220 OF ESHAN ENTERPRISES PVT. LTD. AND BLUE STAR LTD. DT.28.05.2007 AND 3.5.2007 RESPECTIVELY, THAT THE ASSESSEE HAD PURCHASED MS SHELL ROLLS AND UNIVERSAL TESTING MACHINES FOR RS.63,395/ - AND RS . 2.11 LACS RESPECTIVE LY FROM T HE ABOVE TWO PARTIES.H E ASKED THE ASSESSEE TO EXPLAIN AS TO WHY 20% OF REPAIRS AND MAINTENANCE SHOULD NOT BE TREATED AS CAPITAL EXPENDITURE. VIDE ITS LETTER DATED 16.12.2011 THE ASSESSEE CONTENDED THAT THE TOTAL BOOK VALUE OF PLANT AND MACHINERY AND BUILD ING WAS RS.1375.71 AND RS.301.74 CRORES RESPECTIVELY, AGAINST THE SAID ASSETS THE ASSESSEE HAD INCURRED RS.7. 99 CRORES AND RS.1.90 CRORES, THAT THE EXPENDITURE WAS HARDLY R S.0.58 CRORES AND RS. 0.68 CRORES RESPECTIVELY OF THE TOTAL BOOK VALUE OF THE ASSETS , THAT WHATEVER EXPENSES WERE INCURRED ON ACCOUNT OF REPAIR AND MAINTENANCE WERE IN THE NATURE OF REVENUE ONLY. AFTER CONSIDERING THE EXPLANATION OF THE ASSESSEE , THE AO HELD THAT THE ASSESSEE COULD NOT SUBSTANTIATE THE CONTENTION IN RELATION TO THE REVEN UE NATURE OF THE EXPENDITURE , THAT THE SPECIFIC BILLS POINTED OUT DURING THE COURSE OF ASSESSMENT PROCEEDINGS REVEALED THAT THE ASSETS IN QUESTION WERE LIKELY TO PROVIDE ENDURING BENEFIT TO THE ASSESSEE WHICH WAS IN THE NATURE OF CAPITAL EXPENDITURE. FINAL LY HE MADE DISALLOWANCE OF 2.16 CR. ( AT THE RATE OF 20% OF 10. 84CR.) TO THE INCOME OF THE ASSESSEE AS CAPITAL EXPENDITURE.HE ALLOWED DEPRECIATION AS PER LAW. AFTER CONSIDERING THE DEPRECIATION NET ADDITION OF RS. 1.89 CRORES WAS MADE TO THE TOTAL INCOME OF THE ASSESSEE . 3.1 . AGGRIEVED BY THE ORDER OF THE AO THE ASSESSEE PREFERRED AN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY( FAA ) .B EFORE HIM, IT WAS CONTENDED THA T THE DETAILS OF EXPENSES UNDER THE HEAD REPAIRS AND MAINTENANCE ALONGWITH VOUCHERS/BILL E TC.W ERE PRODUCED BEFORE THE AO, THAT THE EXPENDITURE WAS INCURRED FOR PRESERVING AND MAINTAINING THE EXISTING ASSETS THAT NO NEW AS S ETS CAME INTO EXISTENCE, THAT THE ADHOC DISALLOWANCE MADE BY THE AO WAS NOT JUSTIFIED. AFTER CONSIDERING THE SUBMISSION OF THE ASSESSE E, HE HELD THAT IT HAD NOT BROUGHT ANY ADDITIONAL FACT OR EVIDENCE ON RECORD DU RING THE APPELLATE PROCEEDINGS. HE UPHELD THE ADDITION MADE BY THE AO. 3.2 . DURING THE COURSE OF HEARING THE AR SUBMITTED THAT ON THE BASIS OF TWO BILLS ADDITION OF R S.1.89 CR ORES WAS MADE WITHOUT ANY BASIS , THAT AO HAD NOT DISCUSSED AS TO HOW EXPENDITURE WAS CAPITAL IN NATURE, HE REFERRED TO THE ORDER OF THE TRIBUNAL FOR AY 06 - 07 ITA 2280/MUM/2011 DT.5.10.2012. DR SUPPORTED THE ORDER OF THE FAA . 3.3. WE HAVE HEARD THE RIVAL SUBMISS IONS AND PERUSED THE MATERIAL ON RECORD. WE FIND THAT WHILE DECIDING THE APPEAL FOR AY 06 - 07 THE TRIBUNAL HAD DECIDE THE IDENTICAL ISSUE AS UNDER : - 7180/13 UTTAM 7 2. THE ISSUE IN THE APPEAL IS WITH REFERENCE TO DISALLOWANCE OF 20% OF THE EXPENDITURE INCURRED ON REPAIR S AND MAINTENANCE OF PLANT AND BUILDING CLAIMED BY ASSE SSEE. ASSESSEE HAS FURNISHED ALL THE NECESSARY DETAILS AND VOUCHERS AND ASSESSEE WAS OF THE VIEW THAT IT IS NOT POSSIBLE TO VERIFY WHETHER THE EXPENDITURE INCURRED IS TOWARDS REPAIRS OR CREATION OF NEW ASSETS.THEREFORE, AN AMOUNT OF 20% WAS CONSIDERED AS CAPITAL EXPENDITURE AND DISALLOWED. WHILE DOING SO AO HOWEVER, LEFT A NOTE THAT ASSESSEE SHALL BE ELIGIBLE TO CLAIM DEPRECIATION ON THIS AMOUNT AS APPLICABLE ON BUILDING AND PLANT & MACHINERY, EVEN THOUGH NO SUCH WORKING WAS AVAILABLE IN THE COMPUTATION OF TOTAL INCOME MADE BY AO. THE CIT (A) TESTED SOME OF THE VOUCHERS AND AFTER RECORDING THAT ASSESSEE TREATED SOME OF THE EXPENDITURE AS CAPITAL EXPENDITURE IN THE BOOKS OF ACCOUNT, HOW EVER, CONFIRMED THE ORDER OF AO ON THE REASON THAT THERE IS NO CLEAR CUT DIFFERENCE IN CLAIMING THE EXPENDITURE AS CAPITAL OR REVENUE EXPENDITURE. 3. AT THE OUTSET THE LEARNED COUNSEL SUBMITTED THAT THIS ISSUE IS A RECURRING ISSUE AND REFERRED TO THE ORDERS OF THE ITAT IN ASSESSEE'S OWN CASE IN ASSESSMENT YEAR 2004 - 05. IT WAS SUBMITTED THAT SIMILAR DISALLOWANCE MADE IN ASSESSMENT YEAR 2005 - 06 WAS CANCELLED BY THE CIT (A) AND THE REVENUE DID NOT COME IN APPEAL. HE ALSO PLACED ON RECORD THE COMP ARATIVE CHART OF PERCENTAGE OF EXPENDITURE OVER TURNOVER WHICH IS AS UNDER: ASSESSMENT YEAR REPAIRS OF PLANT &MACHINERY REPAIRS OF FACTORY BUILDING 2004 - 05 0.87% 0. 59% 2005 - 06 0.97% 0.31% - 2006 - 07 0.85% 0.31% 4. IT WAS SUBMITTED THAT ASSESSEE HAS VAST TURNOVER AND LARGE ASSETS UNDER FACTORY BUILDING, PLANT & MACHINERY AND THEREFORE, THE CLAIM OF EXPENDITURE IS REASONABLE COMPARED TO THE TOTAL TURNOVER OF ASSESSEE. THE TOTAL TURNOVER OF ASSESSEE BEING 1799.29 CRORES AND THE PROFIT DECLARED IS RS.81.66 CRORES UNDER SECTION 115JB. IT WAS SUBMITTED THAT SINCE AO HAS NOT CLE ARLY UNDERSTOOD THE RE PAIRS AND MAINTENANCE OF EXPENDITURE, HE ON ADHOC BASIS DISALLOWED 20% AS CAPITAL EXPENDITURE WITHOUT IDENTIFYING THE EXPENDITURE OR ASSETS CREATED. 5. THE LEARNED DR HOWEVER, RELIED ON THE ORDERS OF AO AND THE CIT (A) TO SUBMIT THAT IN THE ABSENCE O F ANY DETAILS, THE ORDER OF AO TO BE SUSTAINED. 6. WE HAVE EXAMINED THE ISSUE. THERE IS NO DISPUTE TO THE FACT THAT ASSESSEE HAS INCURRED EXPEND ITURE AND ALSO THE FACT THAT OU T OF THE TOTAL EXPENDITURE INCURRED DURING THE YEAR, ASSESSEE ITSELF SEGREGATED THE CAPITAL AND REVENUE EXPENDITURE. CLAIM OF REPAIR AND MAINTENANCE TO PLANT IS RS 6,86,35,438/ - AND REPAIR AND MAINTENANCE TO BUILDING IS RS 46,59,035/ - TOTALING TO 7 ,32,94,473/ - . 7. ASSESSEE IS A LARGE INDUSTRIAL UNIT AND ITS TURNOV ER IS TO AN EXTENT OF N 799.29 CRORES. CONSIDERING THE BIG VOLUME OF BUSINESS BEING UNDERTAKEN BY ASSESSEE, THE REPAIRS TO THE PLANT & MACHINERY AND BUILDING IS A REASONABLE AN D IS COMPARABLE TO OTHER YEARS. IN ASSESSMENT YEAR 2005 - 06 THE REVENUE D ID NOT PREFER ANY APPEAL WHEN THE EXPENDITURE WAS ALLOWED BY THE CIT (A). IN ASSESSMENT YEAR 2004 - 05 ON SIMILAR DISALLOWANCE OF 25% OF TOTAL MAINTENANCE AND REPAIRS EXPENSES, THE ITAT HAS CONSIDERED THE DELETION MADE BY THE CIT (A) AND HELD AS UNDER: '4.1. GROUND NO.1 PERTAINS TO DELETION OF ADDITION OF RS.1,03,09,31. AO MADE THIS ADDITION ON THE GROUND THAT THE SAME IS IN THE CAPITAL FIELD. THE EXPENDITURE IN QUESTION PERTAINS TO REPAIRS AND MAINTENANCE EXPENSES. AO DISALLOWED 20% OF THE TOTAL EXPENDITURE INCURRED ON THE GROUND THAT MANY OF THE EXPENSES COULD NOT BE TREATED AS REVENUE IN NATURE, THE DETAILS OF WHICH WERE PRODUCED BEFORE HER ALONG WITH COPIES OF BILLS AND VOUCHERS. ON THE OTHER HAND, THE FIRST APPELLATE AUTHORITY DELETED THE DISALLOWANCE WITH THE FOLLOWING OBSERVATIONS: 7180/13 UTTAM 8 '10. I HAVE VERY CAREFULLY CONSIDERED THE ARGUMENTS. I AM CONVINCED THAT AO HAD VERY MECHANICALLY AND PERFUNCTORILY DISALLOWED 20%. ON THE ONE HAND, SHE HAS MENTIONED THAT ALL THE RELEVANT DETAILS, BILLS AND VOUCHERS HAD BEEN PRODUCED BEFORE HER, ON THE OTHER HAND, SHE HAD MERELY DOUBTED THAT 'MANY' OF THE SAME WERE NOT OF REVENUE NATURE. THUS, THE ALLEGATION WAS VAGUE.SHE HAS NOT SINGLED OUT A SINGLE BILL OR VOUCHER TO JUSTIFY THAT IT HAD BEEN AN EXPENDITURE OF CAPITAL NATURE. AO HAD OBVIOUSLY WANTED THE APPELLANT TO PROVE WRONG WHAT SHE HAD HERSELF DOUBTED. BESIDES, IT IS SEEN THAT AO HAD IGNORED THE FACTS THAT THE APPELLANT COMPANY HAD ITSELF CAPITALIZED ON ITS OWN AN AMOU NT OF (73.36 CRORES)TO THE BUILDING AND A HUGE AMOUNT OF (239.80 CRORE) TOWARDS PLANT AND MACHINERY DURING THE YEAR UNDER CONSIDERATION. THUS, MERE SUSPICION OF AO WAS MISPLACED. BESIDES, L DO NOT FIND THAT THERE HAD BEEN ANY PARTICULAR INCENTIVE FOR T HE APPELLANT COMPANY TO DEBIT ANY HIGHER AMOUNT WHEN IT HAD AN UNABSORBED DEPRECIATION OF MORE THAN (175 CRORE). THUS, I AM CONVINCED THAT WITHOUT A SINGLE DETECTION OF EXPENDITURE ALLEGEDLY OF CAPITAL NATURE, AO WAS NOT ENTITLED TO AN ARBITRARILY DIS ALLOWANCE OF 20% OF THE DEBITED AMOUNT I DELETE THE ADDITION MADE'. 4.2 WE ARE FULLY CONVINCED WITH THE ABOVE FINDINGS OF THE LEARNED CI T (A ) THE TOTAL BOOK VALUE OF PLANT & MACHINERY WA S (525.54 ) CRORES AND OF BUILDING IT WAS(94.80 ) CRORES. THE EXPENSES IN QUESTION WERE INCURRED FOR GENERAL REPAIRS AND MAINTENANCE OF BOTH PLANT & MACHINERY AND FACTORY BUILDING. THE PERCENTAGE OF EXPENDITURE WAS 0.87% IN RESPECT OF PLANT AND MACHINERY AND 0.59% IN RESPECTIVE FACTORY BUILDING OF THE TOTAL BOOK VALUE OF ASSETS. THE GENUINENESS OF THE EXPENDITURE WAS NOT DOUBTED NOR DID AO CARRY OUT ANY EXERCISE TO IDENTIFY ANY ITEM OF SUCH EXPENDITURE SO AS TO CLASSIFY IT AS THAT INCURRED IN THE CAPITAL FIELD. ON THE CONTRARY, AO ESTIMATED 20% OF THE EXPEND ITURE IN QUESTION AS INCURRED IN THE CAPITAL FIELD. SUCH ADHOC ALLOCATION OF EXPENDITURE TOWARDS THE CAPITAL FIELD, IN OUR CONSIDERED O PINION, IS UTTERLY UNWARRANTED. T HUS, WE UPHOLD THE FINDINGS OF THE FIRST APPELLATE AUTHORITY AND REJECT GROUND 1 OF TH E REVENUE'. 8. IN THIS YEAR, HOWEVER, THE CIT (A) SURPRISINGLY ON THE BASIS OF SOME TEST CHECK OF VOUCHERS AFFIRMED THE ORDER OF AO BY DIFFERING FROM THE FINDINGS IN EARLIER TWO YEARS. WE ARE NOT FULLY CONVINCED WITH THE TEST CONDUCTED BY THE CIT (A) AS HE HIMSELF RECORDED THAT ASSESSEE OUT OF THE EXPENDITURE CLAIM WITH REFERENCE TO M/ S SUNNY CONSTRUCTIONS/ S.R. CONTAINERS TREATED PART OF THE EXPENDITURE AS CAPITAL AND PART HAS BEEN CLAIMED AS REVENUE EXPENDITURE. IT INDICATES THAT ASSESSEE H AS CONSCIOUSLY SEGREGATED THE CAPITAL EXPENDITURE AND REVENUE EXPENDITURE FOR WHICH NO FAULT CAN BE FOUND. MOREOVER, AO ALSO RECORDED THAT ALL THE NECESSARY DETAILS AND VOUCHERS HAVE BEEN PLACED BEFORE THE AUTHORITIES. THEREFORE, WE ARE CONVINCED THAT AO V ERY MECHANICALLY AND PERFUNCTORILY DISALLOWED 20% ON ADHOC BASIS WITHOUT ESTABLISHING ANY EXPENDITURE AS CAPITAL EXPENDITURE. THERE CANNOT BE ANY ADHOC DISALLOWANCE OUT OF THE REVENUE EXPENDITURE AS WAS DONE BY AO. THEREFORE, WE REVERSE THE ORDER OF THE CIT (A) AND DIRECT AO TO ALLOW THE CLAIM AS SUCH. IN CASE ANY DEPRECIATION WAS ALLOWED ON THE DISALLOWED AMOUNT, AO IS DIRECTED TO WITHDRAW THE SAME. WITH THESE DIRECTIONS, THE GROUND IS ALLOWED. 9. IN THE RESULT APPEAL FILED BY ASSESSEE IS ALLOWED. RESPECTFULLY, FOLLOWING THE ABOVE WE DECIDE GROUND NO.3 IN FAVOUR OF THE ASSESSEE . AS A RESULT APPEAL FILED BY THE ASSESSEE S T ANDS PARTLY ALLOWED. . ORDER PRONOUNCED IN THE OPEN COURT ON 31 ST AUGUST,2015. 31 ST , 2015 7180/13 UTTAM 9 SD/ - SD/ - ( . . /A.D. JAIN) ( / RAJENDRA) / JUDICIAL MEMBER / ACCOUNTANT MEMBER / MUMBAI, /DATE: 31 .8. 2015 . . . JV . SR .PS. / COPY OF THE ORDER FORWARDED TO : 1. APPELLANT / 2. RESPONDENT / 3. THE CONCERNED CIT(A)/ , 4. THE CONCERNED CIT / 5. DR A BENCH, ITAT, MUMBAI / , , . . . 6. GUARD FILE/ //TRUE COPY// / BY ORDER, / DY./ASST. REGISTRAR , / ITAT, MUMBAI.