Tecumseh Products India pvt.Ltd., Hyd, Hyderabad V. ACIT, Circle-2(2), Hyd, Hyderabad

ITA 494/HYD/2015

• Counselvise Citation: [2019] 118 COUNSELVISE.COM (IT) 7471 (ITAT-HYDERABAD)
• Duration Of Justice: 3 year(s) 8 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-01-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB-A
• Next Hearing Date: 17-10-2018
• Assessment Year: 2010-2011
• Appeal Filed On: 30-04-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: C SRINIVAS REDDY
• Assessee Lawyers: ABHIROOP BHARGAV
• Keywords: Transfer pricing; International transaction
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES A : HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER I.T.A. NO. 494/HYD/2015 ASSESSMENT YEAR: 2010-11 TECUMSEH PRODUCTS INDIA PRIVATE LIMITED, HYDERABAD [PAN: AABCT6893J] VS ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-2(2) HYDERABAD (APPELLANT) (RESPONDENT) FOR ASSESSEE : SHRI ABHIROOP BHARGAV, AR FOR REVENUE : SHRI C. SRINIVAS REDDY, DR DATE OF HEARING : 17-10-2018 DATE OF PRONOUNCEMENT : 15-01-2019 O R D E R PER SMT. P. MADHAVI DEVI, J.M. : THIS IS AN APPEAL BY THE ASSESSEE FOR THE AY. 2010-11 AGAINST THE ASSESSMENT ORDER U/S. 143(3) R.W.S. 92CA( 4) R.W.S. 144C(13) OF THE INCOME TAX ACT [ACT], DATED 27-02-2015 . ASSESSEE HAS RAISED THE FOLLOWING REVISED GROUNDS OF APPEAL: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LD. TRANSFER PRICING OFFICER (LD. TPO), WHILE G IVING EFFECT TO THE DIRECTIONS OF THE LD. DRP, ERRED IN MAKING A TOTAL ADJUSTMENT OF RS. 7,98,50,850 TO THE APPELLANT'S INTERNATIONAL TRANSA CTIONS OF SALE OF AK KITS AND COMPONENTS, PURCHASE OF COMPONENTS, TOOLS AND ACCESSORIES, PURCHASE OF COMPRESSORS AND SALE OF COMPRESSORS. INTERNATIONAL TRANSACTION OF SALE OF AK KITS AND CO MPONENTS: I.T.A. NO. 494/HYD/2015 :- 2 -: 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. TPO ERRED IN MAKING AN ADJUSTMENT OF RS. 2, 72,53,775 TO THE APPELLANTS' INTERNATIONAL TRANSACTION OF SALE OF AK KITS AND COMPONENTS TO ITS AE. 3. WHILE BENCHMARKING THE AFORESAID INTERNATIONAL T RANSACTION, THE LD. TPO ERRED IN INCLUDING CERTAIN COMPANIES WH ICH ARE NOT COMPARABLE TO THE APPELLANT IN TERMS OF FUNCTIONS P ERFORMED, ASSETS EMPLOYED AND RISKS ASSUMED. INTERNATIONAL TRANSACTION OF PURCHASE OF COMPONENTS TOOLS AND ACCESSORIES, PURCHASE OF COMPRESSORS AND SALE OF CO MPRESSORS 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. TPO ERRED IN MAKING AN ADJUSTMENT OF RS. 5, 25,97,075 TO THE APPELLANTS' INTERNATIONAL TRANSACTION OF PURCHASE O F COMPONENTS TOOLS AND ACCESSORIES, PURCHASE OF COMPRESSORS AND SALE O F COMPRESSORS. 5. WHILE BENCHMARKING THE AFORESAID INTERNATIONAL T RANSACTIONS, THE LD. TPO ERRED IN REJECTING THE COMPARABLE UNCON TROLLED PRICE ('CUP') AS THE MOST APPROPRIATE METHOD, THEREBY AGG REGATING ALL THE INTERNATIONAL TRANSACTIONS UNDER CONSIDERATION AND APPLYING TRANSACTIONAL NET MARGIN METHOD ('TNMM'). 6. WITHOUT PREJUDICE TO THE GROUND NO. 5, ON THE FA CTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. TPO E RRED IN APPLYING AN INCORRECT PROFIT LEVEL INDICATOR ('PU') OF OPERA TING PROFIT/OPERATING COST ('OP/OC') WHILE BENCHMARKING THE PURCHASE TRAN SACTIONS. 7. WITHOUT PREJUDICE TO THE GROUND NO. 5, ON THE FA CTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. TPO E RRED IN APPLYING THE SAME SET OF COMPARABLE COMPANIES FOR THE PURPOS E OF BENCHMARKING THE INTERNATIONAL TRANSACTIONS OF PURC HASE OF TOOLS AND ACCESSORIES AND PURCHASE AND SALE OF COMPRESSORS AS USED FOR BENCHMARKING THE INTERNATIONAL TRANSACTION OF SALE OF AK KITS AND COMPONENTS. 2. BRIEF FACTS OF THE CASE ARE THAT ASSESSEE- COMPANY, DERIVING INCOME FROM MANUFACTURING AND SALE OF AIR- CONDITIONER AND REFRIGERATOR COMPRESSORS, FILED ITS R ETURN OF INCOME FOR THE AY. 2010-11, DECLARING TOTAL LOSS OF RS . 11,67,68,784/-. DURING THE ASSESSMENT PROCEEDINGS U/S . I.T.A. NO. 494/HYD/2015 :- 3 -: 143(3) OF THE ACT, ASSESSING OFFICER OBSERVED THAT ASS ESSEE HAS ENTERED INTO INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATE D ENTERPRISE [AE] AND DETERMINATION OF THE ARMS LENGTH P RICE [ALP] OF THE INTERNATIONAL TRANSACTION WAS REFERRED TO T HE TRANSFER PRICING OFFICER [TPO] U/S. 92CA OF THE ACT. THE TPO OBSERVED THAT THE ASSESSEE-COMPANY MANUFACTURES COMPRESSORS FOR AIR-CONDITIONER EQUIPMENTS AND EXPO RTS COMPRESSORS SUB-ASSEMBLY AND COMPONENTS [PUMP KITS AND CRANKSHAFTS ETC.,] TO AE. HE ALSO OBSERVED THAT CERTAIN PARTS AND COMPONENTS REQUIRED TO MANUFACTURE COMPRESSORS ARE IMPORTED FROM AE. HE TOOK INTO CONSIDERATION THE FACT TH AT THE ASSESSEE HAS TWO MANUFACTURING FACILITIES AT HYDERABA D AND BALLABGARH (HARYANA). HYDERABAD FACILITY MANUFACTURE S COMPRESSORS FOR AIR-CONDITIONER EQUIPMENTS, WHEREAS BALLABGARH (HARYANA) FACILITY MAKES COMPRESSORS FOR REFRIGERATION EQUIPMENTS. HE CONSIDERED THAT ASSESSEE H AS ADOPTED TRANSACTIONAL NET MARGIN METHOD [TNMM] AS THE M OST APPROPRIATE METHOD FOR BENCHMARKING THE MANUFACTURING ACTIVITY, WHEREAS FOR THE OTHER TRANSACTION OF SALE, I T HAS ADOPTED COMPARABLE UN-CONTROLLED PRICE [CUP] METHOD. T HE TPO, HOWEVER, AGGREGATED BOTH THE TRANSACTIONS AND ADO PTED TNMM AS THE MOST APPROPRIATE METHOD. THEREAFTER, HE PROCEEDED TO CONSIDER THE COMPARABLES SELECTED BY THE ASSESSEE, WHICH ARE BOTH INTO MANUFACTURING AS WELL A S SALE OF COMPONENTS. OBSERVING THAT VARIOUS SHORTCOMINGS ARE TH ERE IN THE COMPARABLES SELECTED BY THE ASSESSEE, HE REJEC TED THE SAID COMPARABLES AND PROPOSED 8 (EIGHT) COMPANIES AS COMPARABLES, WHOSE AVERAGE MARGIN WAS 26.56%. ASSES SEE SUBMITTED ITS OBJECTIONS TO THE COMPARABLES SELECTED BY TH E I.T.A. NO. 494/HYD/2015 :- 4 -: TPO. HOWEVER, TPO REJECTED THE ASSESSEES OBJECTIONS AND ADOPTED 17 (SEVENTEEN) COMPANIES AS COMPARABLES, THE ARITHMETIC MEAN OF THE PLI [OP/OC] OF THE COMPARABLES BEING 21.88%. THUS, HE PROPOSED AN ADJUSTMENT OF RS. 5,80,01,717/-. ACCORDINGLY, DRAFT ASSESSMENT ORDER W AS PROPOSED BY THE ASSESSING OFFICER, AGAINST WHICH ASSE SSEE PREFERRED ITS OBJECTIONS TO THE DISPUTE RESOLUTION PANE L [DRP]. ONE OF THE OBJECTIONS TAKEN BY ASSESSEE TO THE DRP WAS TH AT THE TPO WAS NOT CORRECT IN IGNORING THAT THERE ARE TWO DI FFERENT ACTIVITIES UNDERTAKEN BY THE ASSESSEE AND THAT ASSESSEE I S MAINTAINING SEPARATE BOOKS OF ACCOUNT FOR THE EOU UNI T AND IN NOT CONSIDERING THE SEGMENTAL RESULTS REPORTED IN THE F INANCIAL STATEMENTS. IT WAS CONTENDED THAT THE TPO HAS ERRONEOUSLY COMPUTED THE OPERATING COST ON A PROPORTIONATE BASIS, WHI CH IS INCORRECT. THE DRP BY FOLLOWING THE DECISION OF THE CO -ORDINATE BENCH OF THE ITAT IN ASSESSEES OWN CASE FOR THE AY . 2007-08 IN ITA NO. 2228/H/2011, DT. 28-05-2014, DIRECTED THE ASSESSING OFFICER TO EXAMINE THE CORRECTNESS OF THE CLA IM OF ASSESSEE AND IF FOUND TO BE CORRECT, THEN TO CONSIDER TH E SEGMENTAL FINANCIAL STATEMENTS AND ARRIVE AT THE OPERA TING COST ACCORDINGLY. IT WAS ALSO DIRECTED THAT CERTAIN COMMON EXPENSES WHICH ARE DIRECTLY ATTRIBUTABLE TO EOU UNIT LIKE DIRECTORS SALARY ETC., MAY BE ESTIMATED AT A PERCENTA GE TO BE ALLOCATED FOR THE PURPOSE OF CALCULATION. 3. LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT INSPITE OF SUCH A DIRECTION, THE ASSESSING OFFICER HAS NOT FOLLOWED THE DIRECTIONS OF THE DRP AND HAS INCORRECTLY COMPUTED THE OP/OC. HOWEVER, AT THE TIME OF HEARING, A COPY I.T.A. NO. 494/HYD/2015 :- 5 -: OF THE ORDER GIVING EFFECT TO DRP, DT. 28-02-2015 WAS F ILED BEFORE US, WHEREIN THE TPO HAS DETERMINED THE ARMS LENGTH PRICE [ALP] ON PURCHASE OF COMPONENTS, TOOLS, ACCESSO RIES AND SPARES SEPARATELY FROM SALE OF COMPRESSORS. HOWEVER , LD. COUNSEL SUBMITTED THAT EVEN THOUGH THE ASSESSEE IS INVOLV ED IN TWO DIFFERENT ACTIVITIES OF MANUFACTURE AND SALE, THE TPO HAS TAKEN THE SAME SET OF COMPARABLES FOR BOTH THE TRANSACTI ONS AND HAS ARRIVED AT THE ADJUSTMENT, WHICH IS NOT CORRECT. 4. WE HAVE GONE THROUGH THE ORDERS OF THE LOWER AUTHORITIES. WE FIND THAT THE ASSESSEE IS INTO MANUFA CTURE OF COMPRESSORS AND ALSO SALE OF COMPRESSORS AND BOTH THE ACTIVITIES ARE DIFFERENT AND THEREFORE, THEY REQUIRE DIF FERENT SET OF COMPARABLES. THEREFORE, WE DEEM IT FIT AND PROPER TO REMIT THE ISSUE TO THE FILE OF AO/TPO FOR FRESH ANALYSIS AND FRESH DETERMINATION OF ALP IN ACCORDANCE WITH LAW. ASSESS EE SHALL BE ALLOWED TO RAISE ANY CONTENTIONS ON ACCOUNT OF COMPA RABLES AND ALSO THE METHOD TO BE ADOPTED FOR DETERMINATION O F THE ALP. GROUNDS ARE THUS CONSIDERED AS ALLOWED FOR STA TISTICAL PURPOSES. 5. IN THE RESULT, THE APPEAL OF ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 15 TH JANUARY, 2019 SD/- SD/- (S. RIFAUR RAHMAN) (P. MADHAVI DEVI) ACCOUNTANT MEMBER JUDICIAL MEMB ER HYDERABAD, DATED 15 TH JANUARY, 2019 TNMM I.T.A. NO. 494/HYD/2015 :- 6 -: COPY TO : 1. TECUMSEH PRODUCTS INDIA PRIVATE LIMITED, BALANAG AR TOWNSHIP, HYDERABAD. 2. THE ASST. COMMISSIONER OF INCOME TAX, CIRCLE-2(2 ), HYDERABAD. 3. DISPUTE RESOLUTION PANEL (DRP), HYDERABAD. 4. DIRECTOR OF INCOME TAX (IT & TP), HYDERABAD. 5. ADDL. COMMISSIONER OF INCOME TAX (TRANSFER PRICI NG), HYDERABAD. 6. D.R. ITAT, HYDERABAD. 7. GUARD FILE.