DCIT, New Delhi V. M/s. Panasonic AVC Networks India Co. Ltd., New Delhi

ITA 4620/DEL/2011

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 5451 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 4 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-02-2014
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: I
• Next Hearing Date: 24-12-2013
• Assessment Year: 2004-2005
• Appeal Filed On: 19-10-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: PEEYUSH JAIN; Y K VERMA
• Keywords: Related party transaction; Depreciation; Transfer pricing; International transaction
• Section: 143(3)

Judgement Text

I.T.A. NO.: 4620/DEL/2011 ASSESSMENT YEAR: 2004-05 PAGE 1 OF 7 IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI I BENCH, NEW DELHI [CORAM : PRAMOD KUMAR AM AND RAJPAL YADAV JM] I.T.A. NO.: 4620/DEL/2011 ASSESSMENT YEAR: 2004-05 DY COMMISSIONER OF INCOME TAX CIRCLE 14(1), NEW DELHI .APPELLANT VS. PANASONIC AVC NETWORKS INDIA CO LTD .RESPONDENT D 13/4, OKHLA INDUSTRIAL AREA PHASE II NEW DELHI 110 020 [ PAN: AAACM6492M] APPEARANCES BY: PEEYUSH JAIN AND Y K VERMA , FOR THE APPELLANT DEEPAK CHOPRA, FOR THE RESPONDENT DATE OF CONCLUDING THE HEARING : DECEMBER 24,2013 DATE OF PRONOUNCING THE ORDER : FEBRUARY 21,2014 O R D E R PER PRAMOD KUMAR: 1. BY WAY OF THIS APPEAL, THE ASSESSING OFFICER HAS CHALLENGED THE CORRECTNESS OF LEARNED COMMISSIONER (APPEALS)S ORDER DATED 11 TH AUGUST 2011, IN THE MATTER OF ASSESSMENT UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1961 ( HEREINAFTER REFERRED TO AS THE ACT) FOR THE ASSESSMENT YEAR 2008-09. 2. THE APPEAL IS TIME BARRED BY 2 DAYS BUT THE ASSE SSING OFFICER HAS MOVED A PETITION PRAYING THAT THE DELAY BE CONDONED. LEARNE D COUNSEL FOR THE ASSESSEE DOES NOT OPPOSE THIS MARGINAL DELAY IN FILING OF TH E APPEAL. HAVING PERUSED THE PETITION, AND HAVING HEARD RIVAL CONTENTIONS ON THE SAME, WE DEEM IT FIT AND PROPER TO CONDONE THE DELAY AND TAKE UP APPEAL FOR DISPOSAL ON MERITS. 3. GRIEVANCES OF THE ASSESSING OFFICER, RELATE TO L EARNED CIT(A) S DELETING THE ARMS LENGTH PRICE (ALP) ADJUSTMENT AMOUNTING TO RS 5,72,16,360, AND ARE AS SET OUT BELOW: I.T.A. NO.: 4620/DEL/2011 ASSESSMENT YEAR: 2004-05 PAGE 2 OF 7 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS ERRED IN USING THE MARGINS OF THE ASSESSEE AFTER ALLOWING FOR ADJUSTMENT FOR CAPACITY UTILIZATION. AS PER A.O., THE CAPACITY UTILIZATION WAS DUE TO EXTRAORDINARY BUSINESS CIRCUMSTANCES AND NOT BEEN EXPLAINED ON FACTS. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS ERRED IN ALLOWING THE USE OF TWO COMPARABLES VIS. CARRIER AIRCON LTD. AND WHIRPOOL OF INDIA LTD. WHICH WERE NOT USED BY THE A.O. AND ONE COMPARABLE VIDEOCON INTERNATIONAL HAS BEEN EXCLUDED ON THE BASIS OF FUNCTIONAL PROFILE. 4. SO FAR AS FIRST GROUND OF APPEAL IS CONCERNED, T HE ISSUE IN APPEAL LIES IN A VERY NARROW COMPASS OF MATERIAL FACTS. THE ASSESSE E IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND SALE OF COLOUR TELEVISION SETS . DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE INTERNATIONAL TRANSACTI ONS ENTERED INTO BY THE ASSESSEE WITH ITS AES WERE REFERRED TO THE TRANSFER PRICING OFFICER FOR DETERMINATION OF ARMS LENGTH PRICE. THE ASSESSEE HAD USED THE TNMM WITH NET PROFIT MARGIN ON SALES AS PROFIT LEVEL INDICATOR. WHILE THIS METHOD WAS ACCEPTED BY THE TPO AS WELL, ONE OF THE ISSUES ON WHICH TPO DID NOT AGREE WITH THE ASSESSEE WAS ADJUSTMENTS FOR CAPACITY UTILIZATION. THE TPO REJECTED THE ASSESSEES CLAIM FOR CAPACITY UTILIZATION ON THE GR OUND THAT, ALL THE COMPARABLES ARE ALSO OPERATING IN SAME ECONOMIC ENVIRONMENT AND ALL ARE PLAYING SAME GAME OF PRICE CUTTING AND VOLUME GENERATION AND THEREF ORE, ANY ADJUSTMENT ON ACCOUNT OF THESE TWO FACTORS ( I.E. CAPACITY ADJUSTMENT AND RISK ADJUSTMENT) WILL CHANGE THE LEVEL PLAYING FIELD AND BENCHMARKING OF INTERNATIONAL TRANSACTION WILL NOT BE CORRECT REFLECTION OF ECONOMIC ACTIVITI ES UNDERTAKEN BY THE ASSESSEE. THE ASSESSEE WAS NOT SATISFIED WITH THE STAND SO TA KEN BY THE TPO AND THE MATTER WAS CARRIED IN APPEAL BEFORE THE CIT(A). LE ARNED CIT(A TOOK NOTE OF ASSESSEES SUBMISSION THAT THE ASSESSEES PRODUCTIO N IN THE RELEVANT PREVIOUS YEAR WAS MUCH BELOW THE INSTALLED CAPACITY, THAT SU CH CAPACITY UNDERUTILIZATION EXPLAINED HIGHER FIXED COSTS AND LOWER PROFITS, AND T HAT THE ASSESSEES BRANDS, I.E. NATIONAL AND PANASONIC, WERE PREMIUM BRAND S WITH HIGH END PRICES WHEREAS INDIAN TELEVISION MARKET WAS DOMINATED BY C ERTAIN KOREAN BRANDS I.T.A. NO.: 4620/DEL/2011 ASSESSMENT YEAR: 2004-05 PAGE 3 OF 7 WHICH WERE PRODUCING HIGH VOLUMES ON THE BASIS OF L OW PROFITS. LEARNED CIT(A) WAS OF THE VIEW THAT IN CASE A REASONABLY ACCURATE METHOD OF MAKING ADJUSTMENT FOR SUCH LOW CAPACITY UTILIZATION CAN INDEED BE MAD E, SUCH AN ADJUSTMENT WILL MEET ENDS OF JUSTICE PARTICULARLY AS THE ASSESSEE H AD UTILIZED ONLY 31.75% OF ITS INSTALLED CAPACITY. LEARNED CIT(A) ALSO NOTED THAT THE DETAILS OF INSTALLED CAPACITY AND UTILIZED CAPACITY ARE AVAILABLE IN THE FINANCIAL STATEMENTS OF THE COMPANIES, AND IS IN PUBLIC DOMAIN. IT WAS IN THIS BACKDROP THAT HE DIRECTED THE CAPACITY UNDERUTILIZATION ADJUSTMENT IN DEPRECIATIO N ALLOWANCE, BY MAKING ADJUSTMENTS IN DEPRECIATION FIGURES OF THE TESTED P ARTY AS ALSO OF THE COMPARABLES, AS THE FIGURES OF DEPRECIATION AS ALSO OF CAPACITY UTILIZATION WERE AVAILABLE IN RESPECT OF THE COMPARABLES. IT WAS ALS O DIRECTED THAT IN THE CASE OF COMPANIES WITH MULTI PRODUCT PROFILE, WEIGHTED AVER AGE OF CAPACITY UTILIZED FOR EACH PRODUCT, USING PER UNIT SALE PRICE AS WEIGHT, BE USED TO COMPUTE THE CAPACITY UTILIZED. REVENUE IS AGGRIEVED OF THE DIRE CTIONS SO GIVEN BY THE CIT(A) AND IS IN APPEAL BEFORE US. 5. HAVING HEARD THE RIVAL CONTENTIONS AND HAVING PE RUSED THE MATERIAL ON RECORD, WE SEE NO REASONS TO INTERFERE IN VERY WELL REASONED FINDINGS AND DIRECTIONS OF THE LEARNED CIT (A). RULE 10 B (1)(E )(II) OF THE INCOME TAX RULES 1962 DOES INDEED PROVIDE THAT THE NET PROFIT MARGI N REALIZED IN A COMPARABLE UNCONTROLLED TRANSACTION IS ADJUSTED, INTER ALIA, F OR DIFFERENCES IN ENTERPRISE ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERI ALLY AFFECT THE NET PROFIT MARGIN IN OPEN MARKET. CAPACITY UNDERUTILIZATION BY ENTERPRISES IS CERTAINLY AN IMPORTANT FACTOR AFFECTING NET PROFIT MARGIN IN THE OPEN MARKET BECAUSE LOWER CAPACITY UTILIZATION RESULTS IN HIGHER PER UNIT COS TS, WHICH, IN TURN, RESULTS IN LOWER PROFITS. OF COURSE, THE FUNDAMENTAL ISSUE, S O FAR AS ACCEPTABILITY OF SUCH ADJUSTMENTS IS CONCERTED, IS REASONABLE ACCURACY EM BEDDED IN THE MECHANISM FOR SUCH ADJUSTMENTS, AND AS LONG AS SUCH AN ADJUST MENT MECHANISM CAN BE FOUND, NO OBJECTION CAN BE TAKEN TO THE ADJUSTMENT. IN OUR CONSIDERED VIEW, THE LEARNED CIT(A)S APPROACH IS REASONABLE IN THIS REG ARD AND THE ADJUSTMENTS ARE ON A CONCEPTUALLY SOUND BASIS. IN ANY CASE, AS POIN TED OUT BY THE LEARNED I.T.A. NO.: 4620/DEL/2011 ASSESSMENT YEAR: 2004-05 PAGE 4 OF 7 COUNSEL, THE ADJUSTMENTS SO DIRECTED BY THE LEARNED CIT(A) HAVE DULY BEEN MADE BY THE ASSESSING OFFICER, AND THERE HAVE BEEN NO IS SUES REGARDING IMPLEMENTING THESE ADJUSTMENTS. WE APPROVE THE CONCLUSIONS ARRIV ED BY THE CIT(A) ON THIS ISSUE AND DECLINE TO INTERFERE IN THE MATTER. 6. GROUND NO. 1 IS THUS DISMISSED. 7. COMING TO THE SECOND GROUND OF APPEAL, WE FIND T HAT THIS GRIEVANCE HAS TWO FACETS FIRST, AGAINST THE ADMISSION OF TWO NEW COMPARABLE S BY THE CIT(A) AND SECOND, AGAINST CIT(A)S EXCLUSION OF A COMPARABLE WHICH WAS USED BY THE TRANSFER PRICING OFFICER IN HIS DETERMINATION OF ARMS LENGTH PRICE UNDER THE TRANSACTIONAL NET MARGIN METHOD. SO FAR AS ACCEPTAN CE OF THE ADDITIONAL COMPARABLES IS CONCERNED, THE CIT(A) HAS DONE SO AF TER CALLING FOR A REMAND REPORT AND IN THE LIGHT OF SPECIAL BENCH DECISION O F THIS TRIBUNAL IN THE CASE OF DCIT VS QUARK SYSTEMS PVT LTD (132 TTJ 1 SB). THE O NLY OBJECTION TAKEN BY THE ASSESSING OFFICE IN THE REMAND REPORT WAS THAT THES E COMPARABLES WERE REJECTED BY THE ASSESSEE IN ITS OWN TP STUDY REPORT. THE AS SESSEE DOES NOT DISPUTE IT. THE SUBMISSION OF THE ASSESSEE IS THAT THESE COMPAR ABLES WERE REJECTED BY THE ASSESSEE ON THE PRESUMPTION THAT SINCE THESE COMPAR ABLES HAVE SIGNIFICANT SHARE CAPITAL HOLDINGS ABROAD, IT COULD BE PRESUMED THAT THESE COMPARABLES HAD SIGNIFICANT RELATED PARTY DEALINGS. HOWEVER, AS SUB SEQUENT JUDICIAL PRECEDENTS RULED, IT WAS NOT APPROPRIATE TO REJECT SUCH COMPAN IES ON THE PRESUMPTION OF RELATED PARTY TRANSACTIONS. IT WAS FOR THIS REASON THAT THE ASSESSEE, AT THE APPELLATE STAGE, PRAYED FOR ADMISSION OF THESE COMP ARABLES. LEARNED CIT(A), RELYING UPON SPECIAL BENCH DECISION IN THE CASE OF QUARK SYSTEMS (SUPRA), HAS HELD THAT THERE CANNOT BE ANY ESTOPPEL AGAINST POIN TING OUT ASSESSEES OWN ERRORS IN SELECTION OF COMPARABLES AND THAT ASPECT OF THE MATTER IS TO BE DECIDED ON MERITS, AND ON MERITS AS ALSO SINCE THE AO HAS NOT MADE ANY SUBMISSIONS AGAINST THE SAME IN REMAND REPORT, THESE ADDITIONAL COMPARABLES CAN BE ACCEPTED. SO FAR AS SECOND FACET OF THIS DISPUTE, I.E. EXCLUSION OF VIDEOCON I.T.A. NO.: 4620/DEL/2011 ASSESSMENT YEAR: 2004-05 PAGE 5 OF 7 INTERNATIONAL, IS CONCERNED, THE REASONING ADOPTED BY THE CIT(A) IN THE EXCLUSION IS THIS. IT IS OBSERVED THAT VIDEOCON IS NOT A COMPARABLE COMPANY BECAUSE ITS TURNOVER IS SUBSTANTIALLY HIGHER AT RS 4,000 CRORES, BECAUSE IT HAS DONE THE BACKWARD INTEGRATION, BECAUSE IT ALSO PROD UCES DIFFERENT PRODUCT PROFILE ITEMS, BECAUSE IT HAS MADE SIGNIFICANT INVE STMENT IN RESEARCH AND DEVELOPMENT AND BECAUSE IT IS ENJOYING SEVERAL TAX EXEMPTIONS DUE TO ITS LOCATION IN BACKWARD AREAS. THE ASSESSING OFFICER I S AGGRIEVED OF THE STAND SO TAKEN BY THE CIT(A) AND IS IN APPEAL BEFORE US. 8. WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED THE MATERIAL ON RECORD AND DULY CONSIDERED FACTUAL MATRIX OF THE CASE IN THE L IGHT OF THE APPLICABLE LEGAL POSITION. 9. SO FAR AS THE ADMISSION OF ADDITIONAL COMPARABLE S IS CONCERNED, WE HAVE NOTED THAT THE ONLY OBJECTION OF THE ASSESSING OFFI CER IS THAT WHEN ASSESSEE HIMSELF HAS DISCARDED THESE COMPARABLES AT THE STAG E OF ASSESSMENT, IT SHOULD NOT BE OPEN TO HIM TO PICK THE SAME COMPARABLES AT THE APPELLATE STAGE. HOWEVER, AS LEARNED REPRESENTATIVES AGREE, THIS ISS UE IS NOW COVERED, IN FAVOUR OF THE ASSESSEE, BY A SPECIAL BENCH DECISION IN THE CASE OF QUARK SYSTEMS (SUPRA). IN THIS VIEW OF THE MATTER, AND HAVING REGARD TO T HE ENTIRETY OF THE CASE, WE APPROVE THE STAND OF THE CIT(A) AND DECLINE TO I NTERFERE IN THE MATTER. THAT TAKES US TO ASSESSING OFFICERS GRIEVANCE AGAINST C IT(A)S EXCLUDING THE ONE COMPARABLE, I.E. VIDEOCON INTERNATIONAL, ON THE GRO UND THAT THERE ARE MAJOR DISSIMILARITIES BETWEEN THE TESTED PARTY AND THIS C OMPARABLES. DURING THE COURSE OF HEARING, THE ASSESSEE WAS ASKED TO DEMONS TRATE THAT THIS KIND OF AN ANALYSIS, AS WAS DONE TO ARGUE ON UNSUITABILITY OF VIDEOCON INTERNATIONAL, WAS ALSO DONE ON THE OTHER COMPARABLES. LEARNED COUNSEL ADMITTEDLY HIS INABILITY TO DO SO BUT FAIRLY ACCEPTED THAT THE MATTER CAN BE RE MITTED TO THE FILE OF THE LEARNED CIT(A) FOR FRESH ADJUDICATION BY APPLYING U NIFORM NORMS ON THE ANALYSIS OF ALL THE ENTITIES PICKED UP AS COMPARABLES. LEARN ED DEPARTMENTAL I.T.A. NO.: 4620/DEL/2011 ASSESSMENT YEAR: 2004-05 PAGE 6 OF 7 REPRESENTATIVE WAS ALSO SATISFIED WITH THIS COURSE OF ACTION. IN OUR CONSIDERED VIEW ALSO, THERE CANNOT BE A CHERRY PICKING FOR DEC IDING PARAMETERS OF REJECTION OF A COMPARABLE, AND THE PARAMETERS HAVE TO BE BROA D ENOUGH OF BEING GENERAL APPLICATION. IN THE SCHEME OF THINGS ENVISAGED UNDE R THE TNMM, IT IS INEVITABLE THAT THERE WILL BE SOME DIFFERENCES BETWEEN THE COM PARABLES AND THE TESTED PARTY BUT THE IMPACT OF THESE DIFFERENCES IS SUBSTA NTIALLY MITIGATED BY THE AVERAGING. IF A COMPARABLE IS BEING SOUGHT TO BE RE JECTED ON THE GROUND OF ITS DIFFERENCES VIS--VIS THE TESTED PARTY, SIMILAR CRI TERIA MUST BE ADOPTED FOR DECIDING SUITABILITY OF OTHER COMPARABLES AS WELL. IT CANNOT BE OPEN TO ANY JUDICIAL AUTHORITY TO REJECT A COMPARABLE ON THE GR OUND THAT THE COMPARABLE HAS SIGNIFICANT DIFFERENCES VIS--VIS THE TESTED PARTY, UNLESS THE DIFFERENCES ARE BROAD ENOUGH OF GENERAL APPLICATION, ARE SUCH AS MA TERIALLY AFFECTING THE PROFITABILITY, AS NOT BEING CAPABLE OF REASONABLY A CCURATE ADJUSTMENTS TO ELIMINATE THE IMPACT OF SUCH DIFFERENCES, AND AS AR E ALSO NOT FOUND IN OTHER COMPARABLES. ALL THE COMPARABLES MUST FACE THE SAME TEST ON WHICH COMPARABILITY OF A PARTICULAR COMPARABLE IS BEING S OUGHT TO BE REJECTED. ACCORDINGLY, IN OUR CONSIDERED VIEW, THE MATTER SHO ULD BE RESTORED TO THE FILE OF THE CIT(A) FOR ADJUDICATION DE NOVO, ON THE ISSUES OF REJECTION OF VIDEOCON INTERNATIONAL AS A COMPARABLE, IN ACCORDANCE WITH T HE LAW, IN THE LIGHT OF, INTER ALIA, OUR ABOVE OBSERVATIONS, BY WAY OF A SPEAKING ORDER AND AFTER GIVING A FAIR AND REASONABLE OPPORTUNITY OF HEARING TO THE ASSESS EE. WE ORDER SO. 10. GROUND NO. 2 IS THUS ALLOWED FOR STATISTICAL PU RPOSES. 11. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED FOR STATISTICAL PURPOSES IN THE TERMS INDICATED ABOVE. PRONOUNCED IN THE OPEN COURT TODAY ON 21 ST DAY OF FEBRUARY, 2014. SD/XX SD/XX RAJPAL YADAV PRAMOD KUMAR (JUDICIAL MEMBER) (ACCOUNTANT M EMBER) NEW DELHI, THE 21 ST DAY OF FEBRUARY, 2014 I.T.A. NO.: 4620/DEL/2011 ASSESSMENT YEAR: 2004-05 PAGE 7 OF 7 COPIES TO : (1) THE APPELLANT (2) THE RESPONDENT (3) C I T (4) CIT(A) (5) DEPARTMENTAL REPRESENTATIVE (6) GUARD FILE BY ORDER ETC ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES, NEW DELHI