DCIT (LTU), New Delhi V. M/s Whirlpool Of India Ltd., Gurgaon

ITA 1609/DEL/2013

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 2727 (ITAT-DELHI)
• Duration Of Justice: 5 year(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-03-2018
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: I1
• Next Hearing Date: 30-05-2017
• Assessment Year: 2004-2005
• Appeal Filed On: 19-03-2013
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I - 1 , NEW DELHI BEFORE SH. N. K. SAINI, AM AND SMT. BEENA A. PILLAI , JM ITA NO. 1609/DEL/2013 : ASSTT. YEAR : 2004 - 05 DEPUTY COMMISSIONER OF INCOME TAX(LTU) , NEW DELHI - 110017 VS M/S WHIRPOOL OF INDIA LTD., WHIRLPOOL HOUSE, PLOT NO. 40, SECTOR - 44, GURGAON - 122003 (APPELLANT) (RESPONDENT) PAN NO. AA DCG2938H ASSESSEE BY : SH. NEERAJ JAIN , ADV. SH. RAMIT KATYAL, ADV. REVENUE B Y : SH. KUMAR PRANAV, SR. DR DATE OF HEARING : 22 .03 .201 8 DATE OF PRONOUNCE MENT : 28 .03 .201 8 ORDER PER N. K. SAINI, AM : THIS IS AN APPEAL BY THE DEPARTMENT AGAINST THE ORDER DATED 17.12.2012 OF LD. CIT(A) - XXIX, N EW DELHI. 2. THE ONLY EFFECTIVE GROUND RAISED IN THIS APPEAL READS AS UNDER: 1. ON THE FACT S AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(APPEALS) HAS ERRED IN DELETING THE ADDITION OF RS.79,67,93,400/ - MADE BY THE TPO/AO ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT. 3 . FACTS RELATED TO THE ISSUE UNDER CONSIDERATION ARE THAT THE ASSESSEE IS A LISTE D INDIAN PUBLIC LIMITED COMPANY. I T WAS ENGAGED IN THE BUSINESS OF MANUFACTURING/SALE OF CONSUMER DURABLES/HOME APPLIANCES NAMELY, REFRIGERATORS, WASHIN G MACHINES, MICRO WAVE, AIR CONDITIONERS ETC. THE ASSESSEE FILED THE RETURN OF INCOME ON 29.10.2004 DECLARING A LOSS OF RS.63,36,09,640/ - . LATER ON, THE CASE WAS SELECTED FOR SCRUTINY. THE ASSESSEE IN FORM NO. 3CEB REPORTED ITA NO . 1609 /DE L/201 3 WHIRLPOOL OF INDIA LTD. 2 12 DIFFERENT INTERNATIONAL TRANS ACTIONS UNDERTAKEN WITH ITS ASSOCIATED ENTERPRISES (AE) AND THE PRICING METHODS ADOPTED TO DETERMINE AND BENCHMARK THE ARM S LENGTH PRICE (ALP) OF SUCH INTERNATIONAL TRANSACTIONS WERE AS UNDER: S . N O . PARTICULARS SEGMENTS METHOD AMOUNT (RS.) 1 IMPORT OF RAW MATERIALS, COMPONENTS, SPARES AND PACKING MATERIAL MANUFACTURING SEGMENTS TNMM 3,11,51,034 2 EXPORT OF COMPONENTS AND SPARES 28,05,120 3 EXPORT OF FINISHED GOODS 46,70,58,334 4 IMPORT OF FINISHED GOO DS TRADING SEGMENTS TNMM 48,74,99,750 5 INTEREST ON ECB LOAN FROM PARENT COMPANY. - CUP 2,13,31,147 6 GUARANTEE COMMISSION - CUP 3,75,000 7 RECEIPT FOR R&D EXPENSES CONTRACT R & D AT COST / TRANSACTION VALUE 6,97,50,774 8 REIMBURSEME NTS PAID FOR PRODUCT DEVELOPMENT COST REIMBURSEMENT AT TRANSACTION VALUE 7,92,842 9 ECB LOAN RECEIVED FROM PARENT COMPANY. LOAN TRANSACTIONS CUP 18,88,52,25,000 10 ADVANCE RECEIVED FOR CAPITAL GRANTS CAPITAL GRANTS - AT TRANSA CTION VALUE 8,28,36,323 11 REIMBURSEMENT RECEIVED COST REIMBURSEMENT - AT TRANSACTION VALUE 2,93,26,998 12 REIMBURSEMENT OF MISCELLANEOUS EXPENSES COST REIMBURSEMENT - AT TRANSACTION VALUE 29,810 ITA NO . 1609 /DE L/201 3 WHIRLPOOL OF INDIA LTD. 3 4 . IN THE PRESENT CASE, FOR BENCHMARKING OF INTE RNATIONAL TRANSACTIONS, THE ASSESSEE HAD CARRIED OUT TP ANALYSIS BY SEGREGATING ITS OPERATION IN MANUFACTURING AND TRADING SEGMENT. THE AO REFERRED THE MATTER TO THE TPO U/S 92CA(3) OF THE INCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT). THE TPO VIDE ITS ORDER DATED 13.12.2006 RECOMMENDED ADDITIONS OF RS.79,67,93,400/ - BEING DIFFERENCE BETWEEN THE MARGIN FROM ALP FROM INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE COMPANY WITH ITS ASSOCIATED ENTERPRISES. 5. THE AO ASKED THE ASSESSEE TO SHOW CAUSE AS TO WHY THE ADDITION RECOMMENDED BY THE TPO SHOULD NOT BE ADDED TO ITS INCOME. IN RESPONSE, THE ASSESSEE SUBMITTED THAT THE TPO FAILED TO UNDERSTAND AND APPRECIATE THE DIVERSE NATURE OF BUSINESS OF THE ASSESSEE AND HAD AGGREGATED THE MANUFACTU RING AND TRADING FUNCTION TOGETHER TO DETERMINE THE ARM S LENGTH PRICE FROM THE INTERNATIONAL TRANSACTIONS. IT WAS FURTHER STATED THAT THE TPO S ORDER WAS BASED ON THE PRECEDING ASSESSMENT YEAR S TRANSFER PRICING ORDER , WITHOUT CONSIDERING THE SUBMISSIONS MADE BY THE ASSESSEE. IT WAS ALSO STATED THAT THE ORDER OF THE TPO SUFFERED FROM ARITHMETIC ERRORS SINCE IT WAS BASED ON INACCURATE FIGURES AND DATA. 6. THE AO AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE OBSERVED THAT THE TPO HAD GIVEN DETAILED REA SONS FOR HIS DECISION TO CLUB MANUFACTURING AND TRADING FUNCTIONS FOR COMPUTATION OF THE MARGINS FROM INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE. THE AO, ACCORDINGLY, MADE THE ADDITION OF RS.79,67,93,400/ - . ITA NO . 1609 /DE L/201 3 WHIRLPOOL OF INDIA LTD. 4 7 . BEING AGGRIEVED THE ASSESSEE CAR RIED THE MATTER TO THE LD. CIT(A) WHO INCORPORATED THE ASSESSEE S SUBMISSIONS IN PARAS 8 TO 10.3 OF THE IMPUGNED ORDER, FOR THE COST OF REPETITION, THE SAME ARE NOT REPRODUCED HEREIN. THE LD. CIT(A) REJECTED THE CLAIM OF THE ASSESSEE FOR SEPARATE BENCHMARK ING OF THE MANUFACTURING AND TRADING FUNCTIONS BY FOLLOWING THE ORDER DATED 08.10.200 9 OF HIS PREDECESSOR. HOWEVER, O N MERIT, THE LD. CIT(A) HELD THAT AFTER MAKING THE ADJUSTMENT ON ACCOUNT OF U TILIZATION OF THE CAPACITY, THE OPERATING MARGINS OF THE ASSES SEE INCREASED TO 2.36% WHICH WAS HIGHER THAN THAT OF THE COMPARABLE COMPANIES. HE ALSO OBSERVED THAT THE TPO HAD NOT CONSIDERED THE CLAIM OF THE ASSESSEE FOR WORKING CAPITAL ADJUSTMENT IN THE ASSESS MENT YEAR UNDER CONSIDERATION, H OWEVER, FOR THE PRECEDING ASSESSMENT YEAR I.E. ASSESSMENT YEAR 2003 - 04, THE THEN LD. CIT(A) HAD ADMITTED THAT THEIR EXISTED DIFFERENCE IN THE LEVEL OF WORKING CAPITAL DEPLOYED BY THE ASSESSEE VIS - - VIS THE COMPARABLE COMPANIES AND ACCORDINGLY, 0.5% ADJUSTMENT OF PROFIT WAS ALLOWED ON AD - HOC BASIS TOWARDS WORKING CAPITAL ADJUSTMENT S . IT WAS ALSO OBSERVED THAT IN THE SUBSEQUENT ASSES SMENT YEARS 2005 - 06 AND 2006 - 07, T HE TPO HAD ALLOWED WORKING CAPITAL ADJUSTMENT S CLAIMED BY THE ASSESSEE AND SINCE THE DEPARTMENT HAD ACCEPTED THE ALLOWAN CE OF DIFFERENCE IN THE LEVEL OF WORKING CAPITAL AND ADJUSTMENT THEREOF , IT WOULD BE APPROPRIATE TO ALLOW THE SAME TO THE ASSESSEE. THE LD. CIT(A) REPRODUCED THE COMPUTATION OF ADJUSTED MARGINS OF THE COMPARABLE S AS FURNISHED BY THE ASSESSEE AS UNDER: S NO . NAME OF THE COMPANIES BASIS OP/OR (%) BEFORE WC ADJUSTMENT WC ADJUSTED OP/OR(%) ITA NO . 1609 /DE L/201 3 WHIRLPOOL OF INDIA LTD. 5 1 BLUE STAR LTD SEGMENT RESULT - 1.52 - 1.52 2 SALORA INTERNATIONAL LTD SEGMENT RESULT - 4.06 - 4.06 3 HITACHI HOME & LIFE SOLUTIONS LTD WC ADJUSTED - 5.09 - 8.18 4 VI DEOCON COMMUNICATION LTD. WC ADJUSTED 5.27 2.16 5 VIDEOCON INTERNATIONAL LTD. SEGMENT RESULT 4.91 4.91 6 VIDEOCON APPLIANCES LTD. WC ADJUSTED 9.01 5.49 AVERAGE - 0.31 8 . THE LD. CIT(A) HELD THAT THE AVERAGE PROFIT MARGINS OF THE COMPARABLES O F - 0.31% AFTER WORKING CAPITAL ADJUSTMENT WAS TO BE CONSIDERED FOR BENCHMARKING OF THE PROFIT OF THE ASSESSEE. ACCORDINGLY, THE AFORESAID REASONS, THE LD. CIT(A) DELETED THE ADDITION MADE BY THE AO. 9 . NOW THE DEPARTMENT IS IN APPEAL. DURING THE COURSE OF HEARING, THE LD. COUNSEL FOR THE ASSESSEE AT THE VERY OUTSET STATED THAT IF ONLY WORKING CAPITAL ADJUSTMENT IS TO BE DONE THEN THE AVERAGE PROFIT MARGINS OF THE COMPARABLES VIS - - VIS OPERATING PROFIT MARGINS OF THE ASSESSEE W OULD BE IN THE RANGE OF 5% A ND NO ADJUSTMENT IS REQUIRED. IT WAS ALSO STATED THAT IN THE SUBSEQUENT YEARS, THE TPO HAD HIMSELF ALLOWED THE WORKING CAPITAL ADJUSTMENT WHILE WORKING OUT THE AVERAGE PROFIT MARGINS OF THE COMPARABLES. 10 . IN HIS RIVAL SUBMISSIONS, THE LD. SR. DR SUBMITT ED THAT THE MATTER MAY BE RESTORED TO THE TPO FOR VERIFICATION OF THE CALCULATIONS FURNISHED BY THE ASSESSEE FOR THE WORKING CAPITAL ADJUSTMENT. THE LD. COUNSEL FOR THE ASSESSEE DID NOT OBJECT IF THE ITA NO . 1609 /DE L/201 3 WHIRLPOOL OF INDIA LTD. 6 MATTER BE RESTORED TO THE TPO/AO FOR VERIFICATION OF THE WORKING CAPITAL ADJUSTMENT AND TO ALLOW THE SAME AS HAS BEEN DONE BY THE TPO IN SUBSEQUENT ASSESSMENT YEARS. 11. WE, THEREFORE, AFTER CONSIDERING THE AFORESAID SUBMISSIONS OF BOTH THE PARTIES, SET ASIDE THIS ISSUE BACK TO THE FILE OF THE TPO/AO FOR VERI FICATION OF THE CALCULATIONS GIVEN BY THE ASSESSEE FOR THE WORKING CAPITAL ADJUSTMENT AND DECIDE THE ISSUE FOR CLAIM OF THE ASSESSEE ON ACCOUNT OF WORKING CAPITAL ADJUSTMENT ON THE SAME LINE AS HAS BEEN DONE IN THE SUBSEQUENT ASSESSMENT YEARS. 12 . IN THE RESULT, THE APPEAL OF THE DEPARTMENT IS ALLOWED FOR STATISTICAL PURPOSES . (ORDER P RONOUNCED IN THE COURT ON 28 /03 /2018 ) SD/ - SD/ - ( BEENA A. PILLAI ) (N. K. SAINI) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 28 /03 /2018 *SUBODH* COPY FORWARDED TO: 1 . APPELLANT 2 . RESPONDENT 3 . CIT 4 . CIT(APPEALS) 5 . 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