Notional interest disallowance u/s. 36(1)(vii) quashed as interest on borrowed fund allowable as revenue expense

Joyalukkas (India)Pvt. Ltd Vs ACIT (ITAT Cochin)

ITAT Cochin held that disallowance of notional interest u/s. 36(1)(viii) of the Income tax Act set aside since borrowed funds were used for renovation of leasehold premises and the same is allowed as revenue expense and hence interest on such borrowing is allowed as revenue expense.

Facts- The appellant is engaged in the business of manufacturing and trading gold ornaments, textiles, life style products etc. TPO rejecting the TP study submitted by the appellant and proceeded with the benchmarking the international transaction by rejecting the internal TNMM as adopted by the appellant. The TPO also treated another entity called ‘Joy Alukkas Jewellery LLC, Dubai’ as AE of the appellant-company and proceeded with benchmarking the transaction by adopting the operating profit margin on cost as PLI and computed the PLI domestic segment at 6.89% and the export segment at 0.08% and proceeded to compare with the export segment with domestic segment. Further, the TPO had proceeded with identification of the comparables and adopted the adjustment margin of the appellant non-AE jewellery segment at 7.81%. Accordingly, suggested to compute the TP adjustment of Rs.6,32,43,154/-. The TPO also suggested the TP adjustment of Rs. 1,54,18,632/- on account of expenses towards fee for brand utilization expenditure by adopting the Bright Line test method vide order dated 30/01/2015 passed u/s. 92CA (3) of the Act.