JCIT, New Delhi V. M/s. Daikin Airconditioning India Pvt. Ltd., New Delhi

ITA 1376/DEL/2017

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 9987 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-04-2019
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2004-2005
• Appeal Filed On: 07-03-2017
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: SANJAY I BARA
• Assessee Lawyers: VISHAL KALRA SH ANKIT SAHANI
• Keywords: Business income; Depreciation; Transfer pricing; International transaction; Bad and doubtful debts
• Section: 32; 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I-1, NEW DELHI BEFORE SH. N. K. BILLAIYA, ACCOUNTANT MEMBER AND SH. SANDEEP GOSAIN,JUDICIAL MEMBER ITA NO.1376/DEL/2017 ASSESSMENT YEAR: 2004-05 JCIT SPECIAL RANGE-03, ROOM NO. G-22B, C. R. BUILDING, I. P. ESTATE, NEW DELHI VS DAIKIN AIRCONDITIONING INDIA PVT. LTD. F-25/2, OKHLA INDUSTRIAL AREA, PHASE-II, NEW DELHI -110020 PAN AABCD0971F (APPELLANT) (RESPONDENT) ITA NO.1525/DEL/2017 ASSESSMENT YEAR: 2004-05 DAIKIN AIRCONDITIONING INDIA PVT. LTD. F-25/2, OKHLA INDUSTRIAL AREA, PHASE-II, NEW DELHI -110020 PAN AABCD0971F VS DCIT CIRCLE 7 (1) ROOM NO.403 4 TH FLOOR, C. R. BUILDING, NEW DELHI -110002 (APPELLANT) (RESPONDENT) ASSESSEE BY SH. VISHAL KALRA, ADVOCATE SH. ANKIT SAHANI, ADVOCATE REVENUE BY SH. SANJAY I. BARA, CIT DR DATE OF HEARING: 14/03/2019 DATE OF PRONOUNCEMENT: 02/04/2019 2 ORDER PER N. K. BILLAIYA, AM: ITA NO.1376/DEL/2017 AND 1525/DEL/2017 ARE CROSS APPEALS BY THE REVENUE AND THE ASSESSEE PREFERRED A GAINST THE ORDER OF THE CIT(A)-44, NEW DELHI DATED 08.09.2016 PERTAINING TO A. Y.2004-05. 2. BOTH THESE APPEALS WERE HEARD TOGETHER AND ARE D ISPOSED OF BY THIS COMMON ORDER. 3. ITA NO.1376/DEL/2017 REVENUES APPEAL. 4. THE SOLE GRIEVANCE OF THE REVENUE IS THAT THE CI T(A) ERRED IN DELETING THE DISALLOWANCE OF RS.1,15,27,735/- MADE BY THE ASSESSING OFFICER ON ACCOUNT OF DEPRECIATION OF EXC LUSIVE BUSINESS RIGHTS (GOOD WILL). AT THE VERY OUTSET TH E LD. COUNSEL FOR THE ASSESSEE STATED THAT THE DISPUTE IS SETTLED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE BY THE TRIBUNAL IN ASSESSEES CASE IN A. Y. 2003-04 IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. THE DR COULD NOT BRING ANY DISTINGUISHING DECISION IN FAVOUR OF THE REVENUE. 5. WE HAVE CAREFULLY CONSIDERED THE ORDERS OF THE A UTHORITIES BELOW QUA THE ISSUE. WE FIND FORCE IN THE CONTENTI ON OF THE COUNSEL A SIMILAR DISPUTE WAS CONSIDERED BY THE COO RDINATE BENCH IN ITA NO.5293/DEL/2011 AND 2922/DEL/2011 FOR A. Y. 2003-04. THE RELEVANT FINDINGS OF THE COORDINATE BE NCH READ :- 3 25. BRIEF FACTS APROPOS GROUND NOS. 2 & 3 ARE THAT ASSESSEE HAD CLAIMED DEPRECIATION AMOUNTING TO RS. 41511312/ - WHICH INCLUDED DEPRECIATION OF RS. 2 500/- ON GOODW ILL AND RS. 1,53,70,313/- ON PATENT AND TRADE MARKS @ A O HAD DISALLOWED THE ASSESSE'S CLAIM IN REGARD TO DEPRECIATION ON ILL OBSERVING THAT THE SAME WAS NOT COVERED UNDER INTANGIBLE ASSETS R THE INCOME-TAX RU LES. AS REGARDS DEPRECIATION ON PATENT AND MARKS, THE AO DENIED THE ASSESSEE'S CLAIM, INTER ALIA, OBSERVING THAT T, TRADE MARKS WERE REQUIRED TO BE REGISTERED UNDER TH E TRADEMARKS ION ACT AND ONLY THE COMPANY IN WHOSE NAME THE SAME HAD BEEN , WAS ENTITLED TO USE THE SAME. 26. LD. CIT(A) NOTED THAT DISALLOWANCE OF DEPRECIAT ION OF RS. 28,12,500/- RESPECT OF WRITTEN DOWN VALUE OF TH E AMOUNT PAID TO USHA AL LTD. FOR ACQUIRING THE BUSINESS AND COMMERCIAL RIGHTS SIN AY SHE NOTED THAT THE ASSESSE E COMPANY VIDE BUSINESS PURCHASE ENTERED ON 8.8.2000, PURCHASED THE BUSINESS OF MANUFACTURE OF ONER/ COOL ER FROM SIEL AIRCON LTD. USHA INTERNATIONAL LTD. CARRIED LU SINESS OF , INTER ALIA, DISTRIBUTION OF AIR-CONDITIONERS AND WA TER ~ANUFACTURED BY SIEL AIRCON LTD. THE ASSESSEE COMPA NY ALSO 'TTO AN AGREEMENT WITH USHA INTERNATIONAL LTD. CALL ED 'BUSINESS AGREEMENT' DATED 1.5.2000 FOR PURCHASE OF SAID BUSINESS AND ITS ASSETS INCLUDING EXCLUSIVE BUSINES S RIGHTS. LD. CIT(A) FURTHER NOTICED THAT AS PER CLAUSE 4 OF THE 4 AGREEMENT WITH USHA INTERNATIONAL LTD. CONSIDERATIO N FOR BUSINESS RIGHT PAYABLE TO USHA INTERNATIONAL LTD. W AS RS.17300000/- AND FOR OTHER BUSINESS AND COMMERCIAL RIGHTS OF RS.27,00,000/- WAS CAPITALIZED AS GOODWILL IN TH E BOOKS OF A/C. SHE NOTED THAT IN A.Y. 2001-02 THE TRIBUNAL HA D ALLOWED THE ASSESSEE'S CLAIM AND FOLLOWING THE SAME SHE ALL OWED THE ASSESSEE'S CLAIM OF RS. 28,12,500/- 27. HAVING HEARD BOTH THE PARTIES, WE FIND THAT THE ISSUE RELATING TO DEPRECIATION ON WDV OF GOODWILL PAID TO USHA INTERNATIONAL LTD., IS COVERED IN FAVOUR OF THE ASS ESSEE BY EARLIER DECISIONS OF THE TRIBUNAL. WE FIND THAT THE ITAT DELHI BENCH B' VIDE ITS ORDER DATED 23.12.2011 RENDERED I N ITA NO. 1346/DEL/2010 & 1404/DEL/2010 HAS DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE BY OBSERVING AS UNDER: 4. IN THE GROUND NO.2 OF REVENUE'S APPEAL, THE ISSUE INVOLVED IS DELETING THE ADDITION OF RS.37,50,000/- MADE BY THE ASSESSING OFFICER CLAIMED AS 'GOODWILL' BY THE ASSESSEE ON ACCOUNT OF DEPRECIATION ON WDV PAID TO USHA INTE RNATIONAL LTD. FOR ACQUIRING BUSINESS AND COMMERCIAL RIGHTS. 5. LD. DR RELIED ON THE ORDER OF THE ASSESSING OFFICE R. ON THE OTHER HAND, THE LEARNED AR SUBMITTED THAT THE A SSESSEE COMPANY HAS PURCHASED MARKETING , RIGHTS ALONG WITH EMPLOYEES AND PREMISES AND ALSO TRADE NAMES ETC. FR OM 'USHA INTERNATIONAL LTD UNDER THE BUSINESS AGREEMEN T DATED 1ST MAY, 2000. AS PER THE AGREEMENT, THE USHA INTERNATIONAL LTD. WAS NOT TO COMPETE WITH THE ASSESSEE COMPANY FOR 20 YEA RS IN THE MARKETING OF AIR-CONDITIONERS AND WATER COOLERS OF M/S. SI EL AIRCON LTD. THE LEARNED AR SUBMITTED THAT THIS AGRE EMENT WAS FOR BUSINESS RIGHTS, THEREFORE, ELIGIBLE FOR DE PRECIATION 5 UNDER SECTION 32 OF THE INCOME-TAX ACT AS INTANGIBL E ASSETS. HE FURTHER PLEADED THAT THE EXCLUSIVE BUSINESS RIGH TS AS DEFINED IN THE AGREEMENT WERE REPRESENTED AS CARRYI NG ON THE BUSINESS AS SUCCESSOR TO USHA INTERNATIONAL LTD. WH ICH INCLUDE ALL RECORDS OF BUSINESS INCLUDING RECORDS O F SUPPLIERS AND CUSTOMERS; THE BENEFIT OF THE CURRENT ORDERS; T HE BENEFIT OF ALL BIDS AND PROPOSALS THAT HAVE BEEN MADE BY USHA INTERNATIONAL LTD. AND ALL RIGHTS TO USHA INTERNATI ONAL LTD. DISTRIBUTION NETWORK FOR THE BUSINESS EXCLUDING USH A INTERNATIONAL LTD.'S COMPANY SHOP. THE CONSIDERATION FOR EXCLUSIVE BUSINESS RIGHTS WAS PAYABLE OF RS.L,73,00,000/-. FOR OTHER BUSINESS AND COMMERC IAL RIGHTS RS.27,00,000/- WAS PAID. THESE AMOUNTS WERE CAPITAL IZED AS GOODWILL IN BOOKS OF ACCOUNTS. THESE AMOUNTS WER E PAID TO USHA INTERNATIONAL LTD. DURING THE PERIOD RELEVA NT TO ASSESSMENT YEAR 2001-02. THESE AMOUNTS WERE CAPITAL IZED AS GOODWILL IN THE BOOKS OF ACCOUNT. F OR COMPUTING THE TAXABLE INCOME, DEPRECIATION WAS CLAIMED @ 250/0 AS PRESCRIBED IN SCHEDULE OF DEPRECIATION RATES IN RES PECT OF THE INTANGIBLE ASSETS. THE DEPRECIATION IN THE YEAR 200 1-02 WAS CLAIMED AT RS.50,00,000/- AND IN ASSESSMENT YEAR 20 02-03 AT RS.37,50,000/-. FOR THE ASSESSMENT YEAR 2001-02, THE CIT (A) GRANTED THE RELIEF. THE REVENUE WENT IN APPEAL BEFORE THE IT AT WHEREIN THE ITAT HAD DISMISSED THE REVENUE'S APPEAL BY UPHOLDING THE ORDER OF THE CIT (A). THE ITAT HAS HELD AS UNDER 'A PERUSAL OF THE BUSINESS PURCHASE AGREEMENT ALSO CLEARLY SHOWS THAT UIL AS AGREED TO SELL TO THE ASSESSEE AN D. THE ASSESSEE AGREED TO PURCHASE THE BUSINESS AND THE GO ODWILL AND THE OTHER ASSETS THEREOF. A PERUSAL OF THE CONS IDERATION ALSO CLEARLY SHOWS THAT THE AGREEMENT IS FOR SELLIN G S ITEMS, FIRST ONE BEING THE BUSINESS, SECOND GOODWILL AND T HIRD OTHER ASSETS. THE PURCHASE CONSIDERATION ALSO SHOWS THE COMPUTATION OF SUCH 3 ITEMS BEING THE EXCLUSIVE BUS INESS RIGHTS FOR A CONSIDERATION OF RS.1,73,00,000/-, 27, 00,000/- WITHOUT ANY SPECIFICATIONS AND (C) THE TRANSFERABLE DEPOSITS WHICH VYOULD HAVE TO BE CONSIDERED AS OTHER ASSETS. THIS BEING AS THE AMOUNT OF RS.27,00,000/- AS SHOWN IN THE 6 PURCHASE PRICE HAS NOT BEEN SHOWN TO BE IN RELATION TO EITHER EXCLUSIVE BUSINESS RIGHTS OR FOR TRANSFERABLE DEPOS ITS. THE SAME WOULD HAVE TO BE TREATED AS BEING TOWARDS 'GOO DWILL'. THIS BEING SO, WE ARE OF, THE VIEW THAT THE AMOUNT OFRS.27,00,0001- AS PAID BY THE ASSESSEE WOULD HAVE TO BE TREATED AS GOODWILL. IN REGARD TO THE BALANCE OF 1. 73 CRORES, IT IS FOR THE EXCLUSIVE BUSINESS RIGHTS.' THE ITAT VIDE PARA 7 OF THEIR ORDER HELD AS UNDER: 'IN THESE CIRCUMSTANCES, WE ARE OF THE VIEW THAT TH E ID. CIT(A) WAS RIGHT IN HOLDING THAT THE ASSESSEE WAS ENTITLED TO THE DEPRECIATION IN REGARD TO THE PURCHASE OF THE EXCLU SIVE BUSINESS RIGHTS TO THE EXTENT OF RS.1,73,00,000 AND DIRECTING THE AO TO GRANT DEPRECIATION ON THE SAME. IN REGARD TO THE AMOUNT OF RS.27,00,000 AS PAID BY THE ASSESSEE, AS IT HAS NOT BEEN SHOWN THAT THIS AMOUNT HAD BEEN PAID FOR A NY SPECIFIC RIGHTS, THE SAME WOULD HAVE TO BE TREATED AS GOODWILL AND THE DEPRECIATION ON THE SAME CANNOT BE GRANTED. IN THE CIRCUMSTANCES, THE FINDINGS OF THE LD. CIT(A ) ON THIS ISSUE IS MODIFIED TO THE EXTENT THAT THE AO IS DIRE CTED TO GRANT THE DEPRECIATION ON THE CONSIDERATION OF RS.173,00, 000/- PAID TO UIL FOR THE PURCHASE OF THE EXCLUSIVE BUSINESS R IGHTS WHICH ARE TO BE TREATED AS INTANGIBLE ASSETS. THE ACTION OF THE AO IN DISALLOWING THE DEPRECIATION ON THE GOODWILL TO THE EXTENT OF RS.27,00,000 IS CONFIRMED.' LD. AR PLEADED THAT THE FACTS ARE SAME AND THERE IS NO CHANGE IN THE CIRCUMSTANCES, THEREFORE, THE ORDER O F THE CIT (A) MAY BE UPHELD: 6. WE HAVE HEARD BOTH SIDES AND PERUSED THE MATERIAL O N RECORD. SINCE THE ASSESSEE HAS GOT THE RELIEF F FRO M ITAT IN THE PRECEDING YEAR, ON THE SAME FACTS. THE ISSUE REMAIN S THE SAME, THEREFORE, RESPECTFULLY FOLLOWING THE DECISION OF I TA'T, WE DISMISS THIS GROUND OF REVENUE'S APPEAL.' 28. NO CHANGE IN FACTS, FOR THE ASSESSMENT YEAR IN QUESTION, HAVE BEEN BROUGHT TO OUR NOTICE. THEREFORE, RESPECT FULLY FOLLOWING THE EARLIER ORDERS OF THE TRIBUNAL IN ASS ESSEE'S OWN CASE, WE UPHOLD THE ORDER OF CIT(A). GROUND IS DISM ISSED. 7 29. AS REGARDS DEPRECIATION ON WDV OF PATENT, TRADEMARK AND INTELLECTUAL PROPERTY RIGHTS PAID TO CYEL AIRCON LT D. IS CONCERNED, ID. CIT(A) NOTED THAT ASSESSEE COMPANY V IDE BUSINESS PURCHASE AGREEMENT ENTERED ON 8.8.2000 PURCHASED THE MANUFACTURING BUSINESS OF SIEL AIRCON LTD. AND THE CONSIDERATION FOR THE INTELLECTUAL PROPERTY RIGHTS, PAID BY THE ASSESSEE WAS RS. 109,300,000 TO SAL. TH E ASSESSEE POINTED OUT THAT AS PER PROVISION OF TRADE MARK ACT, 1999, A PERSON IS ENTITLED TO ASSIGN USE OF TRADEMA RK. IN THIS REGARD REFERENCE WAS MADE TO SECTIONS 37 & 38 OF TH E TRADEMARKS ACT, 1999. IT WAS FURTHER POINTED OUT TH AT THERE WAS NO STATUTORY REQUIREMENT UNDER THE LAW TO GET T HE TRADEMARK REGISTERED UNDER THE TRADEMARKS ACT, 1999 SO AS TO ENJOY THE LEGAL OWNERSHIP THEREOF. IT WAS POINTE D OUT THAT REGISTRATION OF TRADEMARKS WAS DESIRABLE BUT NOT A STATUTORY COMPULSION. THE ASSESSEE HAD RELIED ON VARIOUS JUDI CIAL PRONOUNCEMENTS WHEREIN IT WAS HELD THAT THE REGISTR ATION OF AN ASSET IN THE NAME OF PURCHASER WAS NOT NECESSARY FOR THE PURPOSE OF CLAIMING DEPRECIATION. FOLLOWING THE TRI BUNAL'S DECISION FOR AY 2001-02 THE ID. CIT(A) ALLOWED THE ASSESSEE'S APPEAL. 30. HAVING HEARD BOTH THE PARTIES WE FIND THAT WE FIND THAT THE ISSUE RELATING TO DEPRECIATION ON PATENTS, TRADEMARKS 8 AND INTELLECTUAL PROPERTY RIGHTS ACQUIRED BY THE AS SESSEE FROM SIEL AIRCON LTD. IS COVERED IN FAVOUR OF THE A SSESSEE BY EARLIER DECISIONS OF THE TRIBUNAL. THE ITAT DELHI B ENCH 'B' VIDE ITS ORDER DATED 23.12.2011 RENDERED IN ITA NO. 1346/DEL/2010 & 1404/DEL/2010 HAS DECIDED THE ISSUE IN FAVOAUR OF THE ASSESSEE BY OBSERVING AS UNDER: '8. THE ASSESSEE COMPANY HAS PURCHASED MANUFACTURIN G BUSINESS OF M/S. SIEL AIRCON LTD. AS A GOING CONCER N VIDE AGREEMENT DATED 08.08.2000. AS A PART OF THIS AGREE MENT, THE ASSESSEE COMPANY ALSO ACQUIRED INTELLECTUAL PRO PERTY RIGHTS WHICH INCLUDE PATENTS, TRADEMARKS, ETC. ETC. AND PAID RS.10,93,00,000/-. THE AMOUNT WAS CAPITALIZED IN BO OKS AS PAT FIT AND TRADEMARK AND THE SAME IS TREATED AS' I NTANGIBLE ASSETS. THESE INTELLECTUAL PROPERTY RIGHTS HAVE NOT BEEN RE GISTERED IN THE NAME OF ASSESSEE COMPANY. THE ASSESSEE COMPANY CLAIMED DEPRECIATION AS PER SECTION 32 OF INCOME-TA X ACT READ WITH SCHEDULE FOR DEPRECIATION @ 25%. THE ASSESSING OFFICER DISALLOWED THE SAME BY FOLLOWING THE ORDER OF EARLI ER YEAR. THE CIT (A) HAS GRANTED THE RELIEF TO THE ASSESSEE BY FOLLOWING THE DECISION OF ITAT IN ASSESSEE'S OWN CA SE FOR ASSESSMENT YEAR 2001-02 WHERE THE ITAT HAS HELD AS UNDER:- 'A PERUSAL OF THE PURCHASE PRICE CONSIDERATION AS P ER THE BUSINESS PURCHASE AGREEMENT ENTERED INTO BETWEEN TH E ASSESSEE AND SAL SHOWS THAT THE CONSIDERATION HAS B EEN 'PAID FOR THE INTELLECTUAL PROPERTY RIGHTS. INTELLE CTUAL PROPERTY RIGHTS ARE IMMOVABLE ASSET. IT IS ALSO AN INTANGIBL E ASSET AS PER THE PROVISIONS OF SECTION 32 (1) (II) OF THE AC T. IT IS ALSO UNDISPUTED THAT THE 'ASSESSEE HAS USED T HE INTELLECTUAL PROPERTY RIGHTS IN ITS BUSINESS AND TH ERE HAS BEEN NO CLAIM AGAINST THE ASSESSEE FOR THE USE OF THE SA ID TRADEMARKS. IN FACT AS PER THE AGREEMENT IN CLAUSE 8.1 (A)(I) IT HAS BEEN SPECIFICALLY AGREED THAT ON COMPLETION DUL Y EXECUTED INSTRUMENTS OF TRANSFER, ASSIGNMENT ETC. A S THE ASSESSEE MAY REASONABLY BE REQUIRED TO COMPLETE THE 9 TRANSFER, ASSIGNMENT AND CONVEYANCE OF THE ASSET IN ACCORDANCE WITH THE PROVISIONS OF THIS AGREEMENT SH ALL BE DELIVERED TO THE ASSESSEE AT A PLACE NOMINATED BY T HE ASSESSEE. THIS CLEARLY SHOWS THAT ONCE THE COMPLETI ON OF THE AGREEMENT IS DONE BY PAYMENT OF THE CONSIDERATION A S ON THE COMPLETION DATE SPECIFIED IN THE AGREEMENT THE ASSE SSEE WOULD BE IN POSSESSION OF THE DULY EXECUTED INSTRUM ENTS OF TRANSFER, ASSIGNMENT AND CONVEYANCES OF THE ASSETS AS SPECIFIED IN THE AGREEMENT WHICH ARE BASICALLY THE INTELLECTUAL PROPERTY' RIGHTS AND THE FIXED ASSETS. THIS BEING S O, AS ALSO THE PRINCIPLES AS LAID DOWN BY THE HON'BLE SUPREME COURT IN THE CASE OF MYSORE MINERALS LTD. REFERRED TO SUPRA AND REAFFIRMED THE DECISION OF DALMIA CEMENTS' IT WOULD HAVE TO BE HELD THAT THE ASSESSEE WAS THE OWNER OF THE PROP ERTY AND THE ASSESSEE HAVING USED THE SAME IN ITS BUSINESS W AS ENTITLED TO DEPRECIATION ON THE SAME. IN THE CIRCUM STANCES THE FINDING OF THE LD. CIT(A) ON THIS ISSUE STANDS CONF IRMED.' SINCE THE REVENUE HAS FAILED TO BROUGHT ON RECORD A NY DISTINCTION OF FACTS FROM THE EARLIER YEAR, I.E., 2 001-02, THEREFORE, RESPECTFULLY FOLLOWING THE DECISION OF I TAT, WE DISMISS THIS GROUND OF REVENUE'S APPEAL ALSO. 31. THERE BEING NO CHANGE IN FACTS AND CIRCUMSTANCES O F THE CASE AND THE ORDER OF ID. CIT(A) BEING IN CONFO RMITY WITH THE EARLIER ORDER OF THE TRIBUNAL IN ASSESSEE'S OWN CASE, WE UPHOLD THE ORDER OF CIT(A) ON THE ISSUE IN QUESTION . GROUND IS DISMISSED. 6. RESPECTFULLY FOLLOWING THE FINDINGS OF THE COORD INATE BENCH WE DECLINE TO INTERFERENCE WITH THE FINDINGS OF THE CIT(A), APPEAL FILED BY THE REVENUE IS ACCORDINGLY DISMISSED. 7. ITA NO.1525/DEL/2017 ASSESSEES APPEAL. 10 8. THE SUBSTANTIVE GRIEVANCE OF THE ASSESSEE READ : - 2. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) HAS ERRED IN REJECTING THE BENCHMAR KING ANALYSIS CONDUCTED BY THE APPELLANT WHEREIN RESALE PRICE METHOD (RPM) WAS ADOPTED AS THE MOST APPROPRIATE METHOD (MAM) TO BENCHMARK THE INTERNATIONAL TRANSACTION OF PURCHASE OF FINISHED GOODS FOR RESALE. THE CIT(A) F URTHER ERRED IN UPHOLDING TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MAM IN DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTION FOR PURCHASE OF FINISHED GOODS FOR RESALE AND AN ENTITY LEVEL. 2.1 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) HAS ERRED IN REJECTING RPM AS THE M AM FOR BENCHMARKING THE INTERNATIONAL TRANSACTION OF PURCH ASE OF FINISHED GOODS FOR RESALE, BY ARBITRARILY HOLDING T HAT THE DATA REGARDING THE COMPARABLE COMPANIES WAS NOT AVAILABL E, DISREGARDING THE SUBMISSIONS FILED PROVIDING THE GR OSS TRADING MARGINS FOR THE SAID COMPARABLE COMPANIES. 2.2 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) HAS ERRED ARBITRARILY HOLDING THAT THE COMPARABLE COMPANIES CHOSEN BY THE APPELLANT WERE N OT FUNCTIONALLY COMPARABLE FOR THE PURPOSES OF BENCHMA RKING RPM AS THE MAM, DISREGARDING THE TRADING SEGMENTAL DATA SPECIFICALLY PROVIDED FOR SUCH COMPARISON. 2.3 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) HAS ERRED IN NOT APPRECIATING THAT THE COMPARABLE COMPANIES HELD TO BE NOT FUNCTIONALLY COMPARABLEFOR THE PURPOSES OF RPM, WERE ON THE CONT RARY FUNCTIONALLY NOT COMPARABLE AT AN ENTITY LEVEL FOR BENCHMARKING USING TNMM, BEING ENGAGED IN THE BUSIN ESS OF MANUFACTURING AND TRADING OF ELECTRICAL GOODS. NOTWITHSTANDING AND WITHOUT PREJUDICE: 3 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) HAS ERRED IN NOT ADJUDICATING THE G ROUNDS RAISED IN THE APPEAL MEMO IN RELATION TO REDUCTION OF NON- OPERATING EXTRA ORDINARY EXPENSES, NAMELY, EXPENSES INCURRED ON DISCONTINUATION OF ASSEMBLING / MANUFAC TURING; INTEREST ON WORKING CAPITAL LOAN; FOREX LOSS; AND P ROVISION FOR DOUBTFUL DEBTS, DOUBTFUL RECEIVABLES, DOUBTFUL ADVA NCES AND ADVANCES WRITTEN OFF. 11 3.1 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) HAS ERRED IN UPHOLDING THE ACTION O F THE AO / TPO AND FURTHER ERRED IN NOT DIRECTING TO REDUCE TH E FOLLOWING EXTRA ORDINARY NON-OPERATIVE EXPENSES WHILE COMPUTI NG THE MARGIN USING TNMM: EXTRAORDINARY EXPENSES INCURRED FOR DISCONTINUATION OF ASSEMBLY / MANUFACTURING FUNCTION AMOUNTING TO INR 4,70,30,905; INTEREST ON WORKING CAPITAL LOAN AMOUN TING TO INR 4,54,69,460; FOREIGN EXCHANGE LOSS (NET) OF INR 1,18,65,964; AND PROVISION OF DOUBTFUL DEBT AMOUNTI NG TO INR 95,47,008, PROVISION OF DOUBTFUL RECEIVABLES AMOUNT ING TO INR 13,28,212, PROVISION FOR DOUBTFUL ADVANCES AMOU NTING TO INR 26,51,567 AND ADVANCES WRITTEN OFF AMOUNTING TO INR 60,00,000. 3.2 THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) HAS ERRED IN NOT APPRECIATING THAT THE LOSSES INCURRED BY THE APPELLANT WERE DUE TO EXTRA ORDINAR Y COMMERCIAL, UNFORESEEN CIRCUMSTANCES AND WERE NOT I N RELATION TO IMPORT OF FINISHED GOODS FROM AES. 9. REPRESENTATIVES OF BOTH THE SIDES WERE HEARD AT LENGTH. CASE RECORDS CAREFULLY PERUSED. FACTS ON RECORD SH OW THAT DURING THE YEAR THE INTERNATIONAL TRANSACTION ENTER ED INTO BY THE ASSESSEE ARE AS UNDER :- S. NO. DESCRIPTION OF TRANSACTION METHOD VALUE (IN RS.) 1 IMPORT OF FINISHED GOODS RPM 56,32,80,873 2 COMMISSION RECEIVED TNMM 1,12,24,717 3 REIMBURSEMENT RECEIVED - 2,32,73,202 4 IMPORT OF SPARE PARTS - 61,86,952 5 ROYALTY CUP 40,762 12 6 SERVICE WARRANTY COST TO - COS T 65,22,714/ - 10. AS EXPLAINED BY THE COUNSEL THE ASSESSEE IS HAV ING THREE SEGMENTS THE FIRST SEGMENT RELATES TO THE DISTRIBUT ION OF AIRCONDITIONERS IMPORTED FROM AE. THE ASSESSEE IS ALSO DOING MARKETING AND ATTENDING WARRANTY CLAIMS FOR ITS AE. HOWEVER, WHILE BENCH MARKING THE INTERNATIONAL TRANSACTION T HE TPO HAS ERRONEOUSLY CLUBBED MANUFACTURING ACTIVITIES WHILE CONSIDERING THE TOTAL SALES OF THE ASSESSEE. THE COUNSEL FURTH ER POINTED OUT THAT WHILE BENCH MARKING THE TPO HAS ADOPTED TNMM A S THE MOST APPROPRIATE METHOD AND WHILE DOING SO ONCE AGA IN IN THE AGGREGATION THE TPO HAS INCLUDED THE MANUFACTURING ACTIVITIES OF THE ASSESSEE. 11. THIS FACT IS EVIDENT FROM COMPUTATION OF OPERAT ING PROFIT TO SALES WHICH IS AS UNDER :- INCOME SALES 1,244,769, 306 EXCISE DUTY 1 26,579,143 1,218,190,163 NET SALES OTHER INCOME OTHER INCOME MISC. INCOME 21,347,801 13 ACC. IN INV 51,110,344 72,458,145 OPER. INCOME 1,290,648,308 EXPENDITURE CCOST OF MATL 984,923,549 MAN. EXP 47,030,905 EMPL OYEE COST 81,531,513 ADMN & ORS 125,041,751 SELLING & DIST 150,459,432 INTT ON WC 45,469,460/ - DEPRECIATION 142,762,316 MISC. EXP 76,116,961 TOTAL (A) 1,653,335,887 LESS : EXTRAORDINARY EXPENDITURE GOODWILL W/ OFF 20,000,000 PATENTS W/ OFF 109,300,000 MISC EXP W/OFF 53,770,131 LOSS ON FIXED ASSETS 901,084 FIXED ASSETS SCRAPPED 3,322,911 14 TOTAL (B) 187,294,126 OPERATIONAL EXPENDITURE (A-B) 1,466,041,761/ - OPERATING LOSS - 175,393,453/ - OP/ SALES - 13.59% 12. THE BIFURCATION OF THE SALES CAN BE UNDERSTOOD FROM THE FOLLOWING CHART:- 15 13. FROM THE ABOVE CHART ONLY AIRCONDITIONERS ARE I MPORTED FROM AE AND WATER COOLER PLUS AIR CLEANERS ARE MANU FACTURED AND NO SALES ARE MADE TO THE AE. 14. WE ARE OF THE CONSIDERED VIEW THAT THE BENCH M ARKING DONE BY THE TPO IS ON ERRONEOUS FACTS. UNLESS A PROPER B ENCH MARKING IS DONE THE DISPUTE CANNOT BE DECIDED. 15. MOREOVER, WE FIND THAT THE TPO HAS ADOPTED TNMM AS THE MOST APPROPRIATE METHOD BY SAYING THAT THE COMPARAB LES ARE NOT CLEAR AND THEIR OPERATING PROFIT MARGIN IS NOT CAPA BLE OF APPLYING RPM AS MOST APPROPRIATE METHOD THOUGH THE SAME COMP ARABLES HAVE BEEN USED FOR BENCH MARKING BY APPLYING TNMM. THIS CONTRADICTION NEEDS TO BE EXAMINED ONCE AGAIN. 16. IN THE INTEREST OF JUSTICE WE RESTORE THIS ISSU E TO THE FILES OF THE AO/ TPO WITH A DIRECTION THAT THE MANUFACTURING ACTIVITY SHOULD NOT BE CONSIDERED AS PART OF INTERNATIONAL T RANSACTION. EXPENSES DIRECTLY ATTRIBUTABLE TO THE MANUFACTURING ACTIVITY SHOULD BE IGNORED AND THE COMPARABLES SHOULD BE ONC E AGAIN EXAMINED TO DECIDE WHETHER RPM IS THE MOST APPROPRI ATE METHOD. THE ASSESSEE IS FREE TO RAISE ANY OTHER IS SUE RELATING TO THE BENCH MARKING AND THE TPO IS ALSO FREE TO DECID E THE ISSUE AFTER GIVING A REASONABLE OPPORTUNITY OF BEING HEAR D TO THE ASSESSEE. 17. IN THE RESULT ALL THE GROUNDS UNDER DISPUTE WIT H SUB GROUNDS ARE TREATED AS ALLOWED FOR STATISTICAL PURP OSE. 16 ORDER PRONOUNCED IN THE OPEN COURT ON 02.04.2019. SD/- SD/- (SANDEEP GOSAIN) ( N. K. BILLAIYA) JUDICIAL MEMBER ACCOUNT ANT MEMBER *NEHA* DATE:- 02.04.2019 COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGI STRAR ITAT NEW DELHI DATE OF DICTATION 18.03.2019 DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER 19.03.2019 DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE OTHER MEMBER DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR.PS/PS DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR. PS/ PS 02.04.2019 DATE ON WHICH THE FINAL ORDER IS UPLOADED ON THE WEBSITE OF ITAT 02.04.2019 DATE ON WHICH THE FILE GOES TO THE BENCH CLERK DATE ON WHICH FILE GOES TO THE HEAD CLERK. THE DATE ON WHICH FILE GOES TO THE ASSISTANT REGIST RAR FOR SIGNATURE ON THE ORDER DATE OF DISPATCH OF THE ORDER