Carrier Airconditioning and Refrigeration Ltd., Gurgaon V. Addl. CIT, Gurgaon

ITA 5123/DEL/2010

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 6956 (ITAT-DELHI)
• Duration Of Justice: 5 year(s) 2 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-02-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I1
• Next Hearing Date: 28-01-2016
• Assessment Year: 2006-2007
• Appeal Filed On: 19-11-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AMRENDRA KUMAR
• Keywords: Transfer pricing; International transaction; Wholly owned subsidiary
• Section: 92C; 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I-1 NEW DELHI BEFORE SHRI S.V. MEHROTRA : ACCOUNTANT MEMBER AND SHRI KULDIP SINGH: JUDICIAL MEMBER ITA NO. 5123/DEL/2010 ASSTT. YR: 2006-07 CARRIER AIRCONDITIONING & VS. ADDL. CIT, REFRIGERATION LTD., KHERKI DAULA, GURGAON CIRCLE- 1, GURGAON. PO- NARSINGPUR, GURGAON. PAN: AAACC 8414 B ( APPELLANT ) (RESPONDENT) APPELLANT BY : SHRI DEEPAK CHOPRA ADV. SHRI HARPREET SINGH ADV. SHRI ROHAN KHARE ADV. RESPONDENT BY : SHRI AMRENDRA KUMAR CIT (DR) DATE OF HEARING : 28/01/2015. DATE OF ORDER : 12/02/2016. O R D E R PER S.V. MEHROTRA, A.M: THIS IS ASSESSEES APPEAL AGAINST THE ASSESSMENT OR DER DATED 21.09.2010 PASSED U/S 143(3) IN PURSUANCE TO DRPS DIRECTIONS U/S 144C OF THE ACT, RELATING TO AY 2006-07. 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE E- FILED ITS RETURN OF INCOME ON 30.11.2006 DECLARING INCOME OF RS. 30,17,24,880/ -,WHICH WAS SUBSEQUENTLY REVISED FOR CLAIMING TDS AMOUNT. THE A SSESSEE COMPANY, A 100% SUBSIDIARY OF CARRIER CORPORATION, USA, IN THE RELEVANT ASSESSMENT YEAR WAS INVOLVED IN THE BUSINESS OF MANUFACTURE, A SSEMBLY AND SALE OF 2 ITA 5123/DEL/2010 TRANSPORT, AIR-CONDITIONING COMMERCIAL REFRIGERATIO N EQUIPMENTS. DURING THE YEAR, UNDER A SCHEME OF ARRANGEMENT AND AMALGAMATI ON, CARRIER AIRCON WAS MERGED WITH ERSTWHILE CARRIER REFRIGERATION IND IA AS A GOING CONCERN. THE ASSESSEE ALSO PROVIDED MARKET SUPPORT ACTIVITY IN RESPECT OF DIRECT SALES MADE BY GROUP ENTITIES IN INDIA. 3. LD. TPO NOTICED THAT THE ASSESSEE OPERATES THROU GH THREE DIVISIONS VIZ. TRANSPORT DIVISION, REFRIGERATION DIVISION AND AIR-CONDITIONING DIVISION. THE INTERNATIONAL TRANSACTIONS UNDERTAKEN IN THE THREE DIVISIONS WERE AS UNDER: S. N. NATURE OF TRANSACTION METHOD USED BY ASSESSES VALUE OF TRANSACTION (IN 1NR) METHOD \ PLI RECEIPT PAID TRANSPORT & REFRIGERATION DIVISION 1. IMPORT OF RAW MATERIAL AND COMPONENTS TNMM OP/OR 7,71,16,704/- 2. IMPORT OF FINISHED GOODS TNMM OP/OR 6,10 ; 85,478/- 3. EXPORT OF FINISHED GOODS TNMM OP/OC 49,88,22,575/- AIR-CONDITIONING DIVISION 4, IMPORT OF RAW MATERIAL AND COMPONENTS TNMM OP/OR 34,38,11,214/- 5. IMPORT OF FINISHED GOODS TNMM OP/OR 22,72,36,735/- 6. PAYMENT OF ROYALTY CUP 14,06,790/- 7. MARKETING SUPPORT SERVICES TNMM OP/OC 11,98,77,537/- 8. COST RECHARGE BY CARL 4,82,76,568/- 9. COST RECHARGE TO CARL 1,19,59,347/- 3 ITA 5123/DEL/2010 4. LD. TPO NOTICED THAT IN THE TRANSPORTATION AND R EFRIGERATION DIVISION THE TRANSACTIONS RELATING TO IMPORT OF RAW-MATERIAL AND COMPONENTS AND IMPORT OF FINISHED GOODS HAD BEEN BENCHMARKED, USIN G TNM METHOD WITH OPERATING MARGIN ON OPERATING REVENUE AS PROFIT LEV EL INDICATOR (PLI). IN RESPECT OF EXPORT OF MANUFACTURED FINISHED GOODS IT HAD USED TNM METHOD WITH OPERATING PROFIT EARNED ON OPERATING COST AS T HE PLI. HE OBSERVED THAT THE TRANSACTIONS RELATING TO IMPORT OF RAW MATERIAL AND FINISHED GOODS HAD BEEN COMPARED WITH THE AID OF INTERNAL TRANSACTION AL MARGINS EARNED BY THE ASSESSEE ON SALE OF VARIOUS PRODUCTS USING RAW MATE RIAL PURCHASED FROM UNRELATED ENTITIES. THE ASSESSEES CONTENTION WAS T HAT OPERATING PROFIT MARGIN EARNED ON THE INTERNATIONAL TRANSACTION WAS -6.13% AS AGAINST -9.30% ON THE INTERNAL COMPARABLE TRANSACTION. 5. WITH REGARD TO THE EXPORT OF FINISHED GOODS, LD. TPO NOTICED THAT ASSESSEE HAD EARNED MARGIN OF -4.32% ON COST AND IT HAD COMPARED THE SAME WITH INTERNAL COMPARABLE MARGINS OF -8.51% EARNED O N SALE OF GOODS USING RAW MATERIAL PURCHASED FROM UNRELATED ENTITIES. 6. IN THE CASE OF AIR-CONDITIONING DIVISION, THE TP O NOTICED THAT THE TRANSACTIONS RELATING TO IMPORT OF RAW MATERIAL AND COMPONENTS AND IMPORTS OF FINISHED GOODS HAD BEEN BENCHMARKED USING TNM ME THOD WITH OPERATING MARGIN ON OPERATING REVENUE AS PLI. THE PROFIT MARG IN OF THESE TRANSACTIONS HAD BEEN SHOWN AT 5.17% AND IT HAD BEEN COMPARED WI TH THE MARGINS OF EXTERNAL COMPARABLES AT 0.87% USING THE DATA FOR TH E YEAR ENDING ON MARCH 2006. LD. TPO DID NOT DISPUTE THE ALP IN THIS REGAR D. 4 ITA 5123/DEL/2010 7. LD. TPO FURTHER ACCEPTED THE ALP IN REGARD TO PA YMENT OF ROYALTY, MARKETING SUPPORT SERVICES, COST RECHARGED BY CARL AND COST RECHARGED TO CARL. 8. LD. DRP CONFIRMED THE TPOS ACTION AND, ACCORDIN GLY, THE ASSESSMENT ORDER WAS PASSED BY MAKING ADJUSTMENT OF RS. 5,13,6 9,711/-. THE ASSESSEE, BEING AGGRIEVED, IS IN APPEAL BEFORE US AND HAS TAK EN FOLLOWING GROUNDS OF APPEAL: 1. THAT ON FACTS AND IN LAW THE ORDER/DIRECTIONS P ASSED BY THE LEARNED ASSESSING OFFICER ('AO')/ TRANSFER PRIC ING OFFICER ('TPO')/ DISPUTE RESOLUTION PANEL ('DRP') ARE BAD I N LAW IN AS MUCH AS FAILED TO APPRECIATE THE FACTS INVOLVED AND THE LAW THEREON. 2. THAT ON THE FACTS AND IN LAW THE TPO ERRED IN NO T MENTIONING THE SUB-CLAUSE OF SECTION 92C(3), WHICH HAS BEEN INVOKED TO PROCEED WITH THE DETERMINATION OF ARM'S LENGTH PRICE. 3. THAT THE TPOIDRP ERRED IN NOT GIVING DUE COGNIZA NCE TO THE FACTS OF THE CASE BY REJECTING THE ECONOMIC ANA LYSIS UNDERTAKEN BY THE ASSESSEE USING INTERNAL COMPARABL E TRANSACTIONS LX.' AND CONCLUDING THAT REFRIGERATION (UNRELATED PARTY BUSINESS) BUSINESS IS NOT COMPARABLE TO TRANS PORTATION BUSINESS (RELATED PARTY BUSINESS) OF THE ASSESSEE. 4. THAT THE TPO/DRP ERRED IN FACTS AND CIRCUMSTANCE S AND LAW BY CONSIDERING SUBROS LTD, WHICH IS FUNCTIONALL Y NON COMPARABLE TO TRANSPORTATION DIVISION OF THE ASSESS EE, DETERMINING THE ARM'S LENGTH PRICE. 5. THAT THE TPO/DRP ERRED IN LAW AND FACTS OF THE C ASE BY ACCEPTING SUBROS LIMITED WITH SIGNIFICANT PARTY TRA NSACTIONS AS COMPARABLE TO THE TRANSPORTATION DIVISION OF ASSESS EE. 5 ITA 5123/DEL/2010 6. THAT THE TPO/DRP ERRED IN NOT ALLOWING APPROPRIA TE ADJUSTMENT FOR DIFFERENCES IN ECONOMIC CIRCUMSTANCE S, FUNCTIONS PERFORMED AND RISK ASSUMED BY THE ASSESSEE VIS-A-VI S COMPARABLE COMPANIES. 7. THAT THE TPOIDRP HAVE ERRED IN LAW IN NOT ALLOWI NG THE ASSESSEE THE BENEFIT OF VARIATION OF 5 PERCENT IN D ETERMINING THE ARM'S LENGTH PRICE IN ACCORDANCE WITH THE PROVISO T O SECTION 92C OF THE ACT. 9. GROUND NOS. 1,2 AND 6 ARE GENERAL AND REQUIRE NO ADJUDICATION. GROUND NO.7 WAS NOT PRESSED AT THE TIME OF HEARING AND STANDS DISMISSED ACCORDINGLY. 10. THE MAIN DISPUTE IN THE PRESENT APPEAL IS IN RE GARD TO THE INTERNAL COMPARABLE ADOPTED BY ASSESSEE BEING SEGMENT C - COMMERCIAL REFRIGERATION FOR JUSTIFYING THE PLI OF TRANSPORT D IVISION BEING SEGMENT A. IN ORDER TO APPRECIATE THIS CONTROVERSY, IT IS NECE SSARY TO EXAMINE THE ASSESSEES BUSINESS MODEL. IN ITS TP STUDY, THE ASS ESSEE HAS POINTED OUT THAT IN FY 2005-06 IT OPERATED THROUGH THE FOLLOWING BUS INESS DIVISIONS: (A) TRANSPORT DIVISION, WHICH DEALT IN REFRIGERATION AN D COOLING OF ALL MOVABLE SYSTEMS BUS AIR-CONDITIONING, TRUCK REFRI GERATION AND CONTAINER REFRIGERATION. (B) REFRIGERATION DIVISION DEALT IN INDUSTRIAL AND CO MMERCIAL REFRIGERATION SYSTEMS COLD ROOMS, FREEZERS, VIZI- COOLERS ETC. (C) AIR-CONDITIONING DIVISION- DEALT IN AIR CONDITIONIN G PRODUCTS WINDOW AIR CONDITIONING UNITS FOR RESIDENTIAL AND M ODERATELY SEIZED COMMERCIAL APPLICATIONS, MULTI-SPLIT AIR CON DITIONERS FOR HOTELS, HOSPITALS, SHOPS, RESTAURANTS, OFFICES AND CLOSED-CONTROL APPLICATIONS, NON-DUCTED SPLIT AIR CONDITIONERS FOR RESIDENTIAL USE, 6 ITA 5123/DEL/2010 LIGHTWEIGHT ROTARY COMPRESSORS AND FACTOR-ASSEMBLED , WIRED AND CHARGED WATER-COOLED PACKAGED UNITS. 11. AS NOTED EARLIER, THERE IS NO DISPUTE AS REGARD S AIR-CONDITIONING DIVISION AND, THEREFORE, WE WILL PRIMARILY BE DEALI NG WITH TRANSPORTATION DIVISION BEING SEGMENT A AND REFRIGERATION DIVIS ION BEING FURTHER DIVIDED INTO TWO SEGMENTS VIZ. SEGMENT B - WHICH DEALT IN INDUSTRIAL REFRIGERATION SYSTEMS AND SEGMENT C - WHICH DEALT IN COMMERCIAL REFRIGERATION SYSTEM. THE ASSESSEE IN ITS TP STUDY POINTED OUT THAT PRODUCTS UNDER COMMERCIAL REFRIGERATION SYSTEM OF THE REFRIG ERATION DIVISION (SEGMENT C) WERE ASSEMBLED/ MANUFACTURED FROM RAW-M ATERIAL AND COMPONENTS PROCURED FROM UNRELATED ENTITIES AND NON E OF THIS DIVISIONS REQUIREMENTS WERE MET FROM ITS AES. ACCORDINGLY, T HIS WAS CONSIDERED AS INTERNAL COMPARABLE FOR COMPARING THE SAME WITH SEG MENT A BEING TRANSPORTATION DIVISION AND ALSO SEGMENT B BEING INDUSTRIAL REFRIGERATION SEGMENT. THE MAIN PLEA OF ASSESSEE WAS THAT INTERNA L COMPARABLE TRANSACTIONS WERE LESS INFLUENCED BY CONTRACTUAL AN D FUNCTIONAL DIFFERENCES VIS-A-VIS THE EXTERNAL COMPARABLE DATA. ACCORDINGLY , THIS WAS CONSIDERED FOR BENCHMARKING THE ALP OF TRANSPORTATION DIVISION. T HE ASSESSEE POINTED OUT THAT THE PLI OF TRANSPORTATION DIVISION WAS -6. 13% AS COMPARED TO - 9.30% OF SEGMENT C AND, THEREFORE, THE TRANSACTION S WITH SCHEME A VIS- A-VIS SEGMENT C WERE AT ARMS LENGTH. THE TRANSA CTION OF SCHEME B WERE AT ARMS LENGTH BECAUSE THE ARITHMETICAL MEAN OF THE OPERATING MARGIN OF SUCH COMPARABLE TRANSACTIONS (SEGMENT C), WAS -8.51% AS COMPARED TO THE ASSESSEES MARGIN OF -4.32%. 12. LD. TPO HAS ACCEPTED THE ASSESSEES CONTENTION AS REGARDS ALP OF SEGMENT B OBSERVING THAT EVEN FOR EXISTENCE OF A SM ALL DIFFERENCE IN 7 ITA 5123/DEL/2010 PRODUCTS, THE SCHEMES WERE BROADLY COMPARABLE AS BO TH DEALT WITH THE FUNCTIONS OF MANUFACTURING OF ITEMS. HOWEVER, AS RE GARDS THE COMPARABILITY OF SCHEME A WITH SEGMENT C, LD. TPO OBSERVED THAT T HE WORK IN THIS SCHEME WAS ENTIRELY DIFFERENT FROM SEGMENT C WITH WHICH CO MPARISON HAD BEEN SOUGHT. HE POINTED OUT THAT THE FUNCTION RELATED TO TRANSPORT REFRIGERATION COULD NOT BE COMPARED TO THE REFRIGERATION CONSIDER ED IN SEGMENT C BECAUSE OF THE FACT THAT THE ASSESSEE ITSELF HAD CONSIDERED THESE AS SEPARATE LINES OF BUSINESS VIZ. TRANSPORT AND REFRIGERATION DIVISION S. HE, THEREFORE, CONCLUDED THAT THERE EXISTED NO INTERNAL COMPARABLE FOR THE TRANSPORT DIVISION, WHICH WAS SEGMENT A. ACCORDINGLY, HE CA RRIED OUT SEARCH FOR EXTERNAL COMPARABLE AND SELECTED SUBROS LTD. AND AF TER CONSIDERING THE ASSESSEES SUBMISSIONS ADOPTED THE OPERATING PROFIT MARGIN OF 6.98% AND COMPUTED THE ADJUSTMENT TO BE MADE TO ALP AS UNDER: OPERATING REVENUE EARNED BY THE ASSESSEE : 39,18,4 4,000/- OP. PROFIT AT 6.98% : 2,73,50,711/- LOSS BOOKED BY THE ASSESSEE : 2,40,19,000/- DIFFERENCE : 5,13,69,711/- 13. THESE FINDINGS WERE CONFIRMED BY LD. DRP, INTE R ALIA, OBSERVING AS UNDER: AS HAS BEEN FOUND THAT THE SEGMENT A OF THE ASSESS EE DEALS WITH BUS AND TRUCK REFRIGERATION SYSTEMS AND THE SA ME IS ENTIRELY DIFFERENT FROM THE SEGMENT C, WHICH DEALS IN THE MANUFACTURING FOR UNRELATED PARTIES. THUS, THE TPO HAS RIGHTLY REJECTED THE COMPARABILITY ANALYSIS UNDERTAKEN BY T HE ASSESSEE ON THE BASIS OF INTERNAL UNCONTROLLED COMPARABLES. 14. LD. COUNSEL SUBMITTED THAT THE LD. TPO HAS NOT DISPUTED SEGMENTAL DETAILS FURNISHED BY ASSESSEE. HE TOOK US THROUGH T HE BROAD TP REPORT, WHICH DEALT WITH FUNCTIONAL ANALYSIS OF ASSESSEE. HE SUBM ITTED THAT BOTH THE LOWER 8 ITA 5123/DEL/2010 REVENUE AUTHORITIES HAVE NOT CONSIDERED THE FUNCTIO NAL COMPARABILITY OF SEGMENT A WITH SEGMENT C AND HAVE REJECTED THE ASSE SSEES CONTENTION MERELY ON THE GROUND THAT SEGMENT A DEALS WITH BUS AND TRUCK REFRIGERATION SYSTEM, WHICH WAS ENTIRELY DIFFERENT FROM MANUFACT URING OF COMMERCIAL REFRIGERATION SYSTEMS BY UNRELATED PARTIES. NO DET AILED FUNCTIONAL ANALYSIS WAS CARRIED OUT BY LOWER REVENUE AUTHORITIES BEFORE REJECTING THE ASSESSEES TP ANALYSIS. 15. LD. DR RELIED ON THE ASSESSMENT ORDER AND REFE RRED TO PAGE 77 OF THE PB, WHEREIN THE SEGMENTAL ACCOUNTS OF THE ASSESSEE ARE CONTAINED TO DEMONSTRATE THAT SEGMENT A WAS ENTIRELY DIFFERENT FROM SEGMENT B&C. 16. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND HAVE PERUSED THE RECORD OF THE CASE. THE MAIN ISSUE IN T HE PRESENT APPEAL IS REGARDING THE FUNCTIONAL COMPARABILITY OF SEGMENT A , WHICH WAS DEALING IN ASSEMBLY AND TRADING OF REFRIGERATION AND COOLING O F ALL MOVABLE SYSTEMS BUS AIR-CONDITIONING, TRUCK REFRIGERATION AND CONTA INER REFRIGERATION WITH SEGMENT C WHICH DEALT WITH COMMERCIAL REFRIGERATI ON SYSTEMS OF COLD ROOMS, FREEZERS, VIZI COOLERS ETC. WHERE PURCHASES WERE MADE FROM NON AES AND SALES WERE MADE TO NON AES (DOMESTIC). WE FIND FROM THE ORDERS OF LOWER REVENUE AUTHORITIES THAT THEY HAVE NOT CARRIE D OUT DETAILED FUNCTIONAL COMPARABILITY AND HAVE REJECTED THE ASSESSEES CLAI M ON BROAD PARAMETERS WITHOUT GOING INTO THE ACTUAL SUBSTANCE OF FUNCTIO NS CARRIED OUT BY SEGMENT A AND C. UNDER SUCH CIRCUMSTANCES, WE ARE OF TH E OPINION THAT CONSIDERATION OF FUNCTION PERFORMED BY THESE TWO SE GMENTS REQUIRE TECHNICAL EXPERTISE AND, THEREFORE, KEEPING IN VIEW THE DECIS ION OF HONBLE APEX 9 ITA 5123/DEL/2010 COURT IN THE CASE OF BHARTI CELLULAR, IT WOULD BE PROPER, AS AGREED BY LD. COUNSEL FOR ASSESSEE, TO RESTORE THE MATTER TO LD. TPO WITH LIBERTY TO BOTH THE PARTIES VIZ. ASSESSEE AND LD. TPO TO TAKE THE SERVI CES OF TECHNICAL EXPERTS IN THE FIELD BEFORE COMING TO ANY CONCLUSION. 17. LD. CIT(DR) SUBMITTED THAT IF THE MATTER IS TO BE RESTORED BACK TO THE TPO, THEN DE NOVO EXERCISE SHOULD BE CARRIED OUT AN D THE SEGMENTAL RESULTS OF ASSESSEE SHOULD ALSO BE EXAMINED AFRESH. THIS PL EA OF LD. DR WAS VEHEMENTLY OPPOSED BY LD. COUNSEL FOR THE ASSESSEE POINTING OUT THAT WHEN LD. TPO HAS NOT DISPUTED THE SEGMENTAL DETAILS, THE N AT THIS JUNCTURE THE ENTIRE PROCESS CANNOT BE REVERSED, PARTICULARLY WHE N THE SEGMENTAL DETAILS HAVE BEEN UTILIZED BY LD. TPO WHILE ACCEPTING THE A SSESSEES RESULTS IN REGARD TO SEGMENT B. 18. WE ARE IN AGREEMENT WITH LD. COUNSEL FOR THE AS SESSEE THAT BY SETTING ASIDE THE MATTER TO THE FILE OF LD. TPO, THE CONTRO VERSY CANNOT BE ENLARGED BY ALLOWING LD. TPO TO EXAMINE THE CORRECTNESS OF THE SEGMENTAL DETAILS FURNISHED BY ASSESSEE, WHICH WERE NOT DISPUTED BY T HE LD. TPO, PARTICULARLY WHEN LD. TPO HIMSELF ACCEPTED THE SEGMENTAL DETAILS AND ALSO ACCEPTED THE RESULTS OF SEGMENT B. IF WE ACCEPT THE PLEA OF LD . CIT(DR) THEN IT WOULD IMPLY THAT EVEN SEGMENT B RESULTS WILL HAVE TO B E EXAMINED AFRESH, IF THE SEGMENT C DETAILS ARE NOT FOUND TO BE CORRECT. THE VERY PREMISE OF THE PROCEEDINGS CANNOT BE ALTERED WHILE SETTING ASIDE T HE MATTER BECAUSE IT IS NOT A CASE WHERE ENTIRE ORDER OF LD. TPO IS NOT ACCEPTA BLE TO ASSESSEE. 19. IN VIEW OF ABOVE DISCUSSION THE MATTER IS RESTO RED BACK TO THE FILE OF LD. TPO FOR FRESH ADJUDICATION IN TERMS OF ABOVE OB SERVATIONS. 10 ITA 5123/DEL/2010 20. IN VIEW OF ABOVE OBSERVATIONS, THE ASSESSEES APPEAL IS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCEMENT IN OPEN COURT ON 12/02/2016. SD/- SD/- (KULDIP SINGH) (S.V. MEHROTRA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 12/02/2016. *MP* COPY OF ORDER TO: 1. ASSESSEE 2. AO 3. CIT 4. CIT(A) 5. DR, ITAT, NEW DELHI.