M/s Whirlpool of India Ltd., Gurgaon V. DCIT, LTU, New Delhi

ITA 5338/DEL/2013

• Counselvise Citation: [2022] 104 COUNSELVISE.COM (IT) 1229 (ITAT-DELHI)
• Duration Of Justice: 9 year(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-10-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Next Hearing Date: 03-10-2022
• Assessment Year: 2005-2006
• Appeal Filed On: 29-09-2013
• Result in Favour of: Matter Remanded
• Court: TRIBUNAL
• Keywords: Business income; Depreciation; Transfer pricing; Opportunity of being heard; International transaction

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI ‘I’ BENCH, NEW DELHI BEFORE SHRI CHANDRA MOHAN GARG, JUDICIAL MEMBER, AND SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER ITA No. 5338/DEL/2013 [A.Y 2005-06) Whirlpool of India Ltd. Whirlpool House, Plot No. 40, Sector – 44, Gurgaon, Haryana. PAN: AAACW 1336 L Vs. The Dy. C.I.T, Large Taxpayers Unit, New Delhi ITA No. 5472/DEL/2013 [A.Y 2005-06) The Dy. C.I.T, Large Taxpayers Unit, New Delhi Vs. Whirlpool of India Ltd. Whirlpool House, Plot No. 40, Sector – 44, Gurgaon, Haryana. PAN: AAACW 1336 L (Applicant) (Respondent) Assessee By : Shri Ajay Vohra, Sr. Adv Shri Neeraj Jain, Adv Shri Ramit Katyal, CA Department By : Shri Bhaskar Goswami, CIT- DR Date of Hearing : 04.10.2022 Date of Pronouncement : 11.10.2022 2 ORDER PER N.K. BILLAIYA, ACCOUNTANT MEMBER:- These two cross appeals by the assessee and Revenue are preferred against the order of the ld. CIT(A) – 29, New Delhi dated 26.07.2013 pertaining to Assessment Year 2005-06. 2. The assessee has raised the following grounds of appeal: “1. That on the facts and in the circumstances of the case, the ld. CIT(A) erred on facts and in law in not deleting the addition of Rs. 97,34,49,822/- u/s 92CA(3) of in the Income tax Act, 1961 ("the Act") in its entirety. 2. That the CIT (A) erred on facts and in law in confirming the Transfer Pricing Officer's (TPO) action in combining the manufacturing and trading segments for bench marking. 3. That the CIT (A) erred on facts and in law in rejecting the appellant's claim for making adjustment for extraordinary items such as Loss of sale due to reduction in prices, cash discounts and additional discounts on account of FALCON Project cost affecting the operating profit of the appellant. 4. The appellant craves leave to add to, alter, amend or vary from the aforesaid grounds of appeal at or before the time of hearing.” 3 3. Ground No. 2 of the assessee has been modified as under: “That the ld. CIT(A) erred on facts and in law in confirming the TPO action in combining the manufacturing and trading segment for bench marking and instead erred in not undertaking bench marking of international transactions of manufacturing export segment, domestic manufacturing segment and trading segment separately, applying TNMM considering operating profit margin of the respective segments.” 4. The grievances of the Revenue read as under: “1. On the facts and in the circumstances of the case, the ld. CIT(A) erred on facts and in reducing the addition of Rs. 97,34,49,822/- made by the TPO/Assessing Officer on account of transfer pricing adjustment of Rs. 4,06,71,820/-. 2. The appellant craves leave to add to, alter, amend or vary from the aforesaid grounds of appeal at or before the time of hearing.”” 5. The representatives of both the sides were heard at length, the case records carefully perused and with the assistance of the ld. Counsel, we have considered the documentary evidences brought on record in the form of Paper Book in light of Rule 18(6) of ITAT Rules. 4 6. Briefly stated, the facts of the case are that the assessee, a subsidiary of Whirlpool USA, is engaged in the business of production, sales and distribution of Whirlpool appliances. During the year under consideration, the assessee has entered into the following international transactions with its AEs. Sl. No 1. 2. Particulars Amount (Rs) Segment Method Import of raw material 4,88,96,695 Manufacturing TNMM Export of components and spares 190,14,787 TNMM 3. Export of finished goods 63,47,94,496 TNMM 4 Import of finished goods 24,70,65,066 Trading TNMM 5. Interest on ECB 5,06,98,226 TNMM 6. 7. Back office and contract R&D 15,69,22,174 GTech and GIS TNMM/CPM ECB loan received 45,20,00,000 - 8. Advance received 4,44,69,760 - 9. Reimbursement received 6,07,32,333 CUP 10. Other payments - cost reimbursements 25,99,988 CUP 5 7. As can be seen from the above, there are three components in the manufacturing segment, namely, import of raw material, export of components and spares and export of finished goods and there is a trading segment of import of finished goods. 8. Since the adjusted operating margin of the assessee in the manufacturing segment at 5% was higher than that of the comparable companies at 3.03%, the international transactions in the manufacturing segment were considered to be at arm’s length. For the purpose of applying TNMM, the operating margins were computed after making the following comparability adjustments: (i) Loss of revenue due to reduction in prices - Rs. 83.89 crores (ii) VRS expenses - Rs. 12.32 crores (iii) Cash discounts in the nature of interest Cost and other discount offered under The FALCON project - Rs 30.06 crores (iv) Adjustment on account of change in accounting standard - Rs. 7.75 crores 6 9. In so far as trading segment is concerned, operating margin of the assessee at 3.86% was higher than those of the comparable companies at 3.80%, the international transactions in the trading segment were considered to be at arm’s length. 10. The afore-stated margin comparisons were not accepted by the TPO who relied upon the order for the preceding year and rejected the segmental analysis undertaken by the assessee and instead, considered the entity level operating margin of the assessee holding that the assessee has international transactions in both the segments and the marketing chain of the assessee is common for both the segments. 11. The TPO further rejected the claim of the assessee towards adjustment on account of reduction in sales of Rs 83.89 crores and discount of Rs 30.06 crores stating that such adjustments relate to general market conditions and there is nothing extra-ordinary in the expenses incurred towards discount and it is a common practice in the market to provide discount on old models. 12. The TPO accordingly, computed the operating margin of the assessee at (-) 5.009% as under: 7 Re- Working of Segmental profitability of WOIL for the financial year ended 31 March 2005 (With Adj.) Combined Particulars , Mfg. & Trading Rs. In Lacs Income Sales (net of return & including excise duty paid Rs. 9714.78) 105090.89 Income from other services 2744.775111 Other Income 4047.594705 Total Income 111883.2598 Expenditure Material & Manufacturing Expenses 51958.24108 Purchase of finished goods 12497.26 Employees Remuneration & benefits 8082.1878 Administrative & selling Expenses 32792.72122 Interest & Finance Charges 2496.621506 Miscellaneous Expenditure Written off 1232.54 Excise Duty paid 9714.78 Depreciation 3186.879666 Total Expenses 121961.2308 Net Profit Margin (without Adj.) -10077.97094 Less: VRS Expenses 1232 Less: Interest & Financial Charges 2496.621506 Less: Extra Warranty Provision 744.61 Total Expenses (after adjustment for VRS and Extra Warranty Charges & Fin. Charges) 117487.9992 Net profit/ Loss with adjustment (after adj. for VRS & extra Warranty Charges & Fin. Charges) -5604.739429 NP/ Total Income (Without Adj.) -9.008% NP/ Total Income (with ad j.) -5.009% 13. Since the assessee has reported segmental margin, it has selected 10 comparable companies having mean operating margin of 3.03% for benchmarking the manufacturing segment and 14 companies having mean operating margin of 3.80% for benchmarking the trading 8 segment. The TPO, however, selected the following 8 comparable companies which were taken as comparables in the preceding assessment year: S no. Name of the company Working capital Adjusted operating margin 1. Blue Star Ltd. 4.10% 2. Hotline Teletube and Components Ltd. 5.50% 3. Khaitan Electrical Ltd. 0.90% 4. Kirloskar Copeland NA 5. Salora International Ltd -1.70% 6. Videocon Appliances Ltd. 6.70% 7. Videocon Communications Ltd. 3.50% 8. Videocon International Ltd. 6.80% Average 3.69% 14. Accordingly, the TPO made adjustment of Rs 97,34,49,822/- and computed as under: Total Income - B 111,883.25 Total Expenses (after adj. for VRS and Extra Warranty Charges & Fin. Charges) - C 117,487.99 ALP Profit - D - (=A*B) 4,129.75 Loss incurred by the assessee — E — - (=B-C) -5,604.73 Adjustment to the income of the assessee D+E 9,734.498 Working of the ALP Rs. In Lacs Rs. In Lacs 3 Years Avg. ALP Margin - A 3.69% 9 15. The assessee challenged the assessment before the ld. CIT(A) where it was able to convince the ld. CIT(A) that transfer pricing adjustment shall be made only with reference to the international transactions undertaken by the assessee and not with reference to the overall turnover. The CIT(A) accepted the contention and reduced the addition of Rs. 97,34,49,822/- to Rs. 4,06,71,820/-, against which the Revenue is in appeal. 16. However, the ld. CIT(A) rejected the contention with regard to use of segmental profitability on the basis that the trading turnover constitutes less than 10% of total sales of the assessee. 17. Before us, the ld. counsel for the assessee vehemently stated that the lower authorities have grossly erred in dismissing the segmental profitability statement of the assessee. It is the say of the ld. counsel for the assessee that it is not only logical but a prudent approach to benchmark each segment separately, stating that the consequences of benchmarking together all the segments, any adjustment made therein will affect the other segment. 10 18. The ld. counsel for the assessee further stated that in so far as segmental accounts are concerned, no adverse inference has been drawn and the only reason given by the ld. CIT(A) for rejecting the segmental profitability is that trading turnover constitutes less than 10% of the total sales of the assessee. 19. Alternatively, the ld. counsel for the assessee pleaded for allowing suitable adjustment on account of loss of Revenue due to the reduction price and cash discount in nature of interest cost and other discount offered. 20. Per contra, the ld. DR strongly supported the findings of the Assessing Officer and reiterated that since the trading turnover is less than/around 10% of the total turnover, it would not be prudent to bench mark the international transactions segment-wise. 21. We have given thoughtful consideration to the orders of the authorities below. At the very outset, we would like to refer to the decision of the Hon'ble Delhi High Court in the case of Sony Ericsson Mobile Communications India Pvt Ltd 374 ITR 118 wherein the Hon'ble High Court held that in cases where the assessee is engaged in the 11 manufacturing/sales trading activities it would be inappropriate to apply TNMM on entity wide basis. The relevant findings read as under: “9.1. In case the tested party is engaged in single line of business, there is no bar or prohibition from applying the TNM Method on entity level basis. The focus of this method is on net profit amount in proportion to the appropriate base or the PLI. In fact, when transactions are inter- connected, combined consideration may be the most reliable means of determining the arm ‘s length price. There are often situations where closely linked and connected transactions cannot be evaluated adequately on separate basis. Segmentation may be mandated when controlled bundled transactions cannot be adequately compared on an aggregate basis. Thus, taxpayer can aggregate the controlled transactions if the transactions meet the specified common portfolio or package parameters. For complex entities or where one of the entities is not plain vanilla distributor ‘, it should be applied when necessary and applicable comparables on functional analysis, with or without adjustments are available. Otherwise, the TNM Method should not be adopted or applied on account of being an inappropriate method. 9.2 It would not be appropriate and proper to apply the TNM Method in case the Indian assessed is engaged in manufacturing activities and distribution and marketing of imported and manufactured products, as interconnected transactions. Import of raw material for manufacture would possibly be an independent international transaction viz marketing and distribution activities or functions” 12 22. Keeping in mind the aforesaid decision of the Hon'ble Jurisdictional High Court of Delhi, all that we have to consider is as to whether the segmental results are to be taken into consideration or profit margin at entity level is to be considered. 23. In our considered opinion and in light of the provisions of section 92 to 94 of the Act, international transactions are to be taken into consideration. Therefore, in our considered opinion, segmental results are to be considered and not the profit at entity level. 24. Moreover, considering the factual matrix of the case in hand, nature of transactions are functionally different and even the risks assumed are different. We are, therefore, inclined to accept the stand of the ld. counsel for the assessee to bench mark the manufacturing segment and the trading segment separately. Rejection by ld. CIT(A) is solely on the ground that turnover of the trading segment is around 10% of the total turnover. This appears to be logical if considered as it is. 13 25. However, if the same is considered in light of total sales made by the assessee for the year ended 31.03.2005, the picture is totally different. The assessee has recorded turnover of Rs. 1062 crores and 10% of which would be around 106 crores, claim of the ld. DR that it would be difficult to find comparables does not hold any water as several comparables can be found in Rs. 100 crores club. 26. Considering the facts of the case in totality, in light of the decision of the Hon'ble Delhi High Court in the case of Sony Ericsson Mobile Communications [supra] we direct the Assessing Officer/TPO to bench mark the international transactions separately segment wise with suitable comparables and decide the issue afresh after affording reasonable and adequate opportunity of being heard to the assessee. 27. Alternative plea taken by the assessee becomes otiose and the appeal is allowed for statistical purposes. 14 ITA No. 5472/DEL/2013 [Revenue’s Appeal] 28. The sum and substance of the grievance of the Revenue is that the ld. CIT(A) held that the TP adjustment shall be made only with reference to international transactions undertaken by the assessee and not with reference to the overall turnover. 29. The ld. DR fairly stated that the view taken by the ld. CIT(A) is in line with the TP regulations. 30. We have given thoughtful consideration to the orders of the authorities below. In TP Regulations, price of only international transaction is to be determined for which adjustment of ALP is to be done in respect of international transactions only. Therefore, the TPO/Assessing Officer grossly erred in considering the total turnover and did not restrict the ALP adjustment to the international transactions. Therefore, we do not find any reason to interfere with the findings of the ld. CIT(A). 31. In the result, the appeal of the Revenue is dismissed. 15 32. In the result, the appeal of the assessee in ITA No. 5338/DEL/2013 is allowed for statistical purposes whereas the appeal of the Revenue in ITA No. 5472/DEL/2013 stands dismissed. The order is pronounced in the open court on 11.10.2022. Sd/- Sd/- [C.M. GARG] [N.K. BILLAIYA] JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 11 th October, 2022. VL/ Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi 16 Date of dictation Date on which the typed draft is placed before the dictating Member 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 Date on which the final order is uploaded on the website of ITAT Date on which the file goes to the Bench Clerk Date on which the file goes to the Head Clerk The date on which the file goes to the Assistant Registrar for signature on the order Date of dispatch of the Order