M/S.JOY ALUKKAS INDIA P LTD,COCHIN vs. THE ACIT, COCHIN

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.

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 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.

I.T.A. Nos.151 & 190/C/2015

143(3) of the Act dated 16/01/2015. The Assessing Officer made the following

disallowances:

Upward revision towards TP 4,58,99,641 adjustment with Associated Enterprises Notional interest on borrowings for 92,28,405 capital work in progress

Tribunal:

I.T.A. Nos.151 & 190/C/2015

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

Rs.92,28,405/- on working capital loans availed from banks as incurred for

acquisition of assets and the same was disallowed u/s. 36(1)(iii) of the Act.

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.

I.T.A. Nos.151 & 190/C/2015

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 had not taken any loan for acquisition of capital asset. It was

submitted that the interest paid on the loan raised for running a business for day

to day requirement is a revenue expenditure and proviso to section 36(1)(iii) is

not applicable. Further, it was submitted that the addition to work in progress is

out of the profits of the assessee and not out of the borrowings.

4.1 The Ld. AR drew our attention to the earlier order of the Tribunal in

assessee’s own case in IT(TP)A No. 06/Coch/2013 dated 09/05/2014 wherein it

was observed as under:

I.T.A. Nos.151 & 190/C/2015

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 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.

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.

I.T.A. Nos.151 & 190/C/2015

the assessee’s counsel main plea is that the interest expenditure was revenue in

nature as the amount was spent on capital work in progress and according to

him, it is renovation of leasehold premises as it is revenue expenditure for

income tax purposes, though it was treated as capital work in progress in the

books of account. It was submitted that actually it was revenue expenditure in

view of the judgment of the Jurisdictional High Court in the assessee’s own case

in ITA No. 230/2013 dated 20/01/2014 for the assessment year 2007-08.

However, the assessee has not placed any evidence that the capital work in

progress actually was related to the renovation of the leasehold building which

was allowed as a business expenditure in the assessment year under

consideration. In the absence of any evidence to show that the said capital work

in progress was claimed and allowed as deduction in the nature of business

expenditure in the assessment year under consideration, we are not in a position

to appreciate the said argument of the Ld. AR. Notwithstanding the above

argument, the Ld. AR made a plea that the assessee is having enough non

interest bearing funds and reserves to spend on capital work in progress and no

interest bearing 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.

I.T.A. Nos.151 & 190/C/2015

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. Rs.37,16,36,584/- which was only because the assessee-company

had availed a huge loan of Rs.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 Rs.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 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/-

I.T.A. Nos.151 & 190/C/2015

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 contrary to this. In view of this, we are not in a

position to appreciate the argument of the Ld. AR. Thus this ground of appeal is

dismissed. Accordingly, the appeal of the assessee in ITA No. 190/Coch/2015 is

dismissed.

ITA No. 151/Coch/2015 : Revenue’s appeal

Rs.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 Rs.369,19,518/- out of

I.T.A. Nos.151 & 190/C/2015

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 Rs. 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 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/- and operating margin was arrived at (-)

3.62%. The TPO further selected MD Overseas Ltd as comparable which

qualified all filters with a PLI (Operating Revenue/Operating Cost) of (-) 1.14%,

and compared with operating margin of NON-AE (domestic) 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.

I.T.A. Nos.151 & 190/C/2015

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 section 92C (3) of the Act. The TPO rejected the TP study of

the assessee on the grounds of inappropriate method (TNMM) in the facts of the

case considering the FAR profile of the assessee, use of multiple year data for

benchmarking the ALP, and inappropriate filters.

8.3 While doing so, the TPO considered the mark-up earned by the non-AE

jewellery segment at ALP as follows:

I.T.A. Nos.151 & 190/C/2015

ASSESSEE TPO

A COMPOSITE MARGIN OF NON-AE 6.36 6.36 SEGMENT

B DISTRIBUTION MARGIN OF NON- 2.18 (-) 1.14 AE SEGMENT

C MANUFATURING MARGIN OF 4.18 7.5 NON-AE SEGMENT (A-B)

D MANUFACTURING MARGIN OF 1.01 1.01 AE SEGMENT

E ADJUSTMENT (C-D) NIL 6.49

8.4 The mark up determined by the 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.”

I.T.A. Nos.151 & 190/C/2015

considered the mark up of MD Overseas Ltd. as comparable and PLI was worked

out at (-)1.14%. Since non AE jewellery segment margin was computed by the

assessee at 6.36%, the assessee had to get the non AE jewellery segment

margin at 6.36%. Hence by balancing the figure by adding (-)1.14% of the

above, the Assessing Officer got the adjusted margin of assessee’s non AE

jewellery segment at 7.5% and made the addition on that basis. In our opinion,

it is not appropriate to balance 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.

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

I.T.A. Nos.151 & 190/C/2015

High Court (supra), we decide the issue in favour of the assessee. This ground

of appeal of the Revenue is dismissed.

Revenue is partly allowed for statistical purposes. Order pronounced in the open Court on this 10th April, 2018.

sd/- sd/- ( GEORGE GEORGE K.) (CHANDRA POOJARI) JUDICIAL MEMBER ACCOUNTANT MEMBER

Place: Dated: 10th April, 2018 GJ Copy to: 1. M/s. Joy Alukkas (India) Ltd., Marine Drive, Shanmugham Road, Kochi-682 031. 2. The Assistant Commissioner of Income-tax, Corporate Circle-1(2), Kochi. 3. Dispute Resolution Panel-1, HMT Bhavan, 59, Ganganagar (3rd Floor), Bellary Road, Bengaluru-560 001. 4. The Pr. Commissioner of Income-tax, Kochi 5. D.R., I.T.A.T., Cochin Bench, Cochin. 6. Guard File. By Order

(ASSISTANT REGISTRAR) I.T.A.T., Cochin