Assessing Officer's Appeal Dismissed, Assessee's Appeal Allowed. Tribunal Upholds CIT(A)'s Decisions.

The Assessing Officer's appeal was dismissed, and the assessee's appeal was allowed. The Tribunal upheld the CIT(A)'s decisions on all grounds, following precedents set by co-ordinate benches and relevant judicial decisions. The judgment was pronounced on 31st March 2016.

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Issues Involved:
1. Deletion of disallowance of proportionate interest on capital work-in-progress under section 36(1)(iii) of the Income Tax Act.
2. Deduction under section 10AA for profits arising from trading activity.
3. Arm’s length price adjustment for delayed export payments received from Associated Enterprises (AEs).

Detailed Analysis:

1. Deletion of Disallowance of Proportionate Interest on Capital Work-in-Progress:
The Assessing Officer (AO) contested the CIT(A)’s decision to delete the disallowance of proportionate interest on capital work-in-progress under section 36(1)(iii) of the Income Tax Act. The AO argued that the assessee had not established the availability of interest-free funds for making advances for the purchase of units at Bharat Diamond Bourse and Gujarat Hira Bourse. However, the Tribunal noted that this issue was directly covered by decisions of the co-ordinate benches in the assessee’s own case for the assessment years 2006-07 and 2007-08. The CIT(A) had followed these decisions, directing the AO to delete the disallowance. Respectfully following the co-ordinate bench's views, the Tribunal upheld the CIT(A)’s conclusions and dismissed the AO’s ground.

2. Deduction Under Section 10AA for Profits Arising from Trading Activity:
The AO argued that the CIT(A) erred in allowing the claim of deduction under section 10AA for profits arising from trading activities, asserting that trading does not fall within the definition of 'services' under the SEZ Rule. The CIT(A) had allowed the deduction following the decisions of the co-ordinate bench in the assessee’s own case for the assessment years 2006-07 and 2007-08. The Tribunal, respecting the views taken by the co-ordinate bench, saw no reason to take a different view and upheld the CIT(A)’s decision, directing the AO to delete the disallowances after due verification. Consequently, the AO’s appeal on this ground was dismissed.

3. Arm’s Length Price Adjustment for Delayed Export Payments:
The assessee contested the arm’s length price adjustment of Rs. 1,17,00,000 made by the AO for delayed export payments received from AEs beyond 180 days. The Transfer Pricing Officer (TPO) had proposed this adjustment, treating the extra credit period as a loan given to the AE and computed the adjustment based on 18% per annum interest. The Tribunal noted that the assessee did not charge interest on delayed realization from non-AEs, which was an uncontroverted stand. Citing the Delhi High Court’s decision in CIT Vs EKL Appliances Limited, the Tribunal stated that recharacterization of a transaction is permissible only when the economic substance differs from its form or the arrangements would differ from those adopted by independent enterprises behaving in a commercially rational manner. Neither condition was satisfied in this case. The Tribunal also referred to its own decision in the case of Rusabh Diamonds Vs. ACIT, where it held that no separate adjustment for delay in realization of debts is warranted when the sale is benchmarked on TNMM basis. The Tribunal concluded that the TPO’s adjustment was unsustainable in law and directed the AO to delete the impugned ALP adjustment of Rs. 1,17,00,000. Consequently, the assessee’s appeal was allowed.

Conclusion:
The appeal filed by the Assessing Officer was dismissed, and the appeal filed by the assessee was allowed. The Tribunal upheld the CIT(A)’s decisions on all grounds, following the precedents set by co-ordinate benches and relevant judicial decisions. The judgment was pronounced in the open court on 31st March 2016.

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