Revenue expenditure and arm's length pricing must be judged on substance: temporary shed costs and adjusted purchase margins justified deletion of additions.

Expenditure on a temporary weather shed in rented premises was held to be revenue in nature because it did not create a permanent asset or enduring advantage, and the temporary character of the structure was consistent with depreciation treatment for such assets. The resulting disallowance was therefore not justified. In transfer pricing, an arm's length comparison had to be made on correctly adjusted profits; where excess purchase provision was later reversed and the adjusted margin matched the comparable, the adjustment could not survive. The transfer pricing addition was therefore unsustainable and had to be deleted.

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Issues: (i) Whether expenditure incurred on construction of a temporary weather shed in rented was capital expenditure or revenue expenditure. (ii) Whether adjustment to the arm's length price of purchases from an associated enterprise could survive when excess purchase provision booked in the year was later reversed and the correct profitability was comparable.

Issue (i): Whether expenditure incurred on construction of a temporary weather shed in rented premises was capital expenditure or revenue expenditure.

Analysis: The expenditure was for a temporary weather shed and not for acquisition of a permanent asset or enduring advantage. The fact that temporary structures are entitled to 100% depreciation under the relevant depreciation schedule supported the assessee's case that the outlay was of revenue character. The Revenue did not dispute the temporary nature of the structure.

Conclusion: The expenditure was revenue expenditure and the disallowance was not justified.

Issue (ii): Whether adjustment to the arm's length price of purchases from an associated enterprise could survive when excess purchase provision booked in the year was later reversed and the correct profitability was comparable.

Analysis: The assessee showed that purchases were provisionally booked because invoices had not been received, that excess provision was later reversed in the succeeding year, and that the adjusted profitability, after excluding the excess amount, matched the comparable entity. The authorities below did not dislodge this factual reconciliation. In a transfer pricing exercise, profits must be compared after making necessary corrections so that the comparison reflects true results.

Conclusion: The transfer pricing adjustment was unsustainable and required deletion.

Final Conclusion: The assessee succeeded on both substantive issues, resulting in deletion of the impugned additions and adjustment.

Ratio Decidendi: Expenditure on a temporary structure that does not create an enduring asset is revenue in nature, and an arm's length price comparison must be based on correctly adjusted profits, including reversal of excess purchases or provisions affecting the tested margin.

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