Assistant Commissioner of Income-tax, V. Johnson Control Marine & Refrigeration India, Pune

ITA 578/PUN/2015

• Counselvise Citation: [2017] 126 COUNSELVISE.COM (IT) 7308 (ITAT-PUNE)
• Duration Of Justice: 2 year(s) 5 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-10-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 04-10-2017
• Assessment Year: 2010-2011
• Appeal Filed On: 28-04-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: NIRUPAMA KOTRU
• Keywords: Transfer pricing; International transaction; Rule of consistency; Working capital adjustments; Reasonable cause

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE . , , BEFORE SHRI D.KARUNAKARA RAO, AM AND SHRI VIKAS AWASTHY, JM . / ITA NO.578/PUN/2015 / ASSESSMENT YEAR : 2010-11 ACIT, CIRCLE-14, PUNE . /APPELLANT VS. JOHNSON CONTROL MARINE & REFRIGERATION INDIA, 501A, BUSINESS PLAZA, 5 TH FLOOR, 36/3B, MUNDWA, PUNE 411 001 PAN : AAACU0929R . / RESPONDENT C.O.NO.10/PUN/2017 (ARISING OUT OF ITA NO.578/PUN/2015) / ASSESSMENT YEAR : 2010-11 JOHNSON CONTROL MARINE & REFRIGERATION INDIA, 501A, BUSINESS PLAZA, 5 TH FLOOR, 36/3B, MUNDWA, PUNE 411 001 PAN : AAACU0929R . /APPELLANT VS. ACIT, CIRCLE-14, PUNE . / RESPONDENT / APPELLANTS BY : SHRI M.P. LOHIA / RESPONDENT BY : SMT. NIRUPAMA KOTRU / DATE OF HEARING : 04.10.2017 / DATE OF PRONOUNCEMENT: 11.10.2017 / ORDER PER D. KARUNAKARA RAO, AM : THE MAIN APPEAL IS FILED BY THE REVENUE VIDE ITA NO .578/PUN/2015 FOR THE A.Y. 2010-11 AGAINST THE ORDERS OF DRP/TPO/AO. ASS ESSEE FILED THE CROSS OBJECTION VIDE C.O.NO.10.PUN/2017 FOR THE A.Y. 2010 -11 ESSENTIALLY SUPPORTING THE ORDER OF THE DRP. TO START WITH, WE SHALL TAKE UP THE ISSUES PERTAINING TO THE APPEAL OF THE REVENUE. ITA NO.578/PUN/2015 AND CO NO.10/PUN/2017 JOHNSON CONTROL MARINE & REFRIGERATION INDIA 2 ITA NO.578/PUN/2015 (BY REVENUE) : 2. REVENUE FILED THE APPEAL WITH A DELAY OF 14 DAYS . IN THIS CONTEXT, REVENUE FILED AN AFFIDAVIT TO SUBSTANTIATE THE DELAY. IT I S MENTIONED IN THE AFFIDAVIT THAT THE DELAY IS CAUSED DUE TO BONAFIDE OR GENUINE REASONS. AFTER HEARING THE LD. DR AND AFTER GOING THROUGH THE CONTENTS OF AFFIDAVIT, WE A RE OF THE OPINION THAT 14 DAYS DELAY IN FILING THE APPEAL BY THE REVENUE NEEDS TO BE CONDONED. AS SUCH, LD. AR DID NOT OPPOSE THE CONDONATION REQUEST DUE TO ITS S MALLNESS OF DELAY. ACCORDINGLY, WE CONDONE THE DELAY AND ADMIT THE APPEAL OF THE RE VENUE FOR ADJUDICATION. 3. REVENUE RAISED THE FOLLOWING GROUNDS OF APPEAL : 1. WHETHER ON THE FACTS AND CIRCUMSTANCES AND IN L AW THE DRP WAS CORRECT TO DIRECT THE TPO TO FOLLOW AGGREGATED APPROACH FOR PL I COMPUTATION WHEN THE ASSESSEE PERFORMS TWO DISTINCT AND DIFFERENT TRANSA CTION AND WHEN THESE TWO TRANSACTIONS ARE HAVING DIFFERENT FAR ANALYSIS. 2. WHETHER ON THE FACTS AND CIRCUMSTANCES AND IN LA W THE DRP WAS CORRECT TO CONSIDER CONSISTENT LOSS MAKING COMPANY AS COMPARAB LE COMPANY AND WHETHER THE DRP WAS CORRECT TO INCLUDE THE COMPANY EVEN THOUGH THE ITAT, PUNE BENCH HAS CLEARLY LAID DOWN THE PRINCIPLES OF COMPARABILITY I N CASE OF COMPANY HAVING SEGMENTED FINANCIALS. 4. GROUND NO.1 BY THE REVENUE RELATES TO THE CORREC TNESS OF THE GUIDELINES OF THE DRP IN DIRECTING THE TPO TO FOLLOW AGGREGATED APPROACH FOR THE PLI COMPUTATIONS. THE CASE OF THE REVENUE ON THIS ISSU E INCLUDES THAT THE ASSESSEE PERFORMED TWO DISTINCT AND DIFFERENT ACTIVITIES/TRA NSACTIONS DURING THE YEAR AND THEY REQUIRE INDEPENDENT FAR ANALYSIS FOR THESE TWO ACTI VITIES. SUCH DISTINCT AND DIFFERENT ACTIVITIES/TRANSACTIONS CANNOT BE AGGREGA TED FOR PLO STUDIES OF THE ASSESSEE. 5. ON THE OTHER HAND, THE CASE OF THE ASSESSEE IS T HAT INTERNATIONAL TRANSACTIONS INCLUDES PURCHASE OF GOODS, SALE OF GOODS, PAYMENT OF ROYALTY AND RECEIPT OF COMMISSION. ALL THESE TRANSACTIONS REVOLVE AROUND THE SINGLE FUNCTION OF THE ASSESSEE, THE ACTIVITY OF TURN-KEY SERVICE PROVIDE R. BRINGING OUR ATTENTION TO THE FAR ANALYSIS OF THE ASSESSEE, IT IS SUBMITTED THAT EARNING OF COMMISSION ON THE ITA NO.578/PUN/2015 AND CO NO.10/PUN/2017 JOHNSON CONTROL MARINE & REFRIGERATION INDIA 3 IMPORT OF THE SPARES IS INCIDENTAL TO THE MAIN FUNC TION OF SERVICE PROVIDING TO THE CUSTOMERS IN INDIA AS AND WHEN CERTAIN PURCHASES AR E REQUIRED FOR EXECUTION OF THE SAID SERVICES TO THE CUSTOMERS. ASSESSEE EARNS COM MISSION FROM THE ASSOCIATED ENTERPRISE ON THE SAID IMPORTS. THEREFORE, THIS TR ANSACTION OF EARNING COMMISSION IS INCIDENTAL TO THE FUNCTION OF TURN-KEY SERVICE PROVIDER OF REFRIGERATION AND THEREFORE, THERE ARE NO DISTINCT ACTIVITIES OR TRAN SACTIONS. APPRECIATING THE SAME, THE DRP ISSUED DIRECTIONS TO THE TPO/AO FOR ADOPTIN G THE AGGREGATION APPROACH. DISCUSSION IS GIVEN IN PARA NO.2.2.13 IS RELEVANT. AGGRIEVED WITH THE SAME, THE REVENUE IS IN APPEAL NOW. 6. ON HEARING BOTH THE PARTIES AND PERUSING THE ORD ERS OF REVENUE, WE FIND THE SAID PARA NO.2.2.13 IS RELEVANT FOR EXTRACTION AND THE SAME READS AS UNDER : 2.2.13 THE TPO HAS NOT ACCEPTED THE BUSINESS STRAT EGY OF THE ASSESSEE. WE DO NOT AGREE WITH THE TPO. THE TPOS APPROACH WOULD HAVE B EEN VALID, IF IN THE UNCONTROLLED SITUATIONS, THE COMPANIES FOLLOW A SEG REGATED APPROACH. HOWEVER, THE ASSESSEE SUBMITTED THE ANNUAL REPORT EXTRACTS OF TH E COMPARABLE COMPANIES EVIDENCING THAT THE COMPARABLE COMPANIES ARE ALSO E NGAGED IN TRADING AND COMMISSION ACTIVITY. ACCORDINGLY, WE ARE OF THE VIE W THAT THE TPO WAS IN ERROR IN SEGREGATING THE CLOSELY LINKED BUSINESS ACTIVITIES OF THE ASSESSEE. FURTHER, THE PRINCIPLE OF CONSISTENCY SHOULD BE RESPECTED, UNLES S THERE ARE REASONABLE CAUSE FOR THE SAME. ON SAME FACTS IN EARLIER YEARS, THE AGGRE GATION APPROACH HAS BEEN ACCEPTED. WE DO NOT SEE ANY REASON TO DEVIATE FROM THE APPROACH ADOPTED IN THE PAST. IN VIEW OF THE ABOVE DISCUSSION, WE DIRECT TH AT THE AGGREGATION APPROACH SHOULD BE ACCEPTED FOR THE PURPOSE OF DETERMINATION OF ARMS LENGTH PRICE. THUS, THE OPERATING MARGIN EARNED BY THE ASSESSEE AT AN E NTITY LEVEL SHOULD BE CONSIDERED FOR DETERMINATION OF ARMS LENGTH PRICE OF INTERNATIONAL TRANSACTION. 7. AFTER PERUSING THE ABOVE REFERRED EXTRACTED PORT ION, WE FIND THERE IS NO DISPUTE ON THE FACT THAT COMMISSION INCOME IS EARNE D OUT OF IMPORT OF THE SPARES, WHICH ARE NEEDED IN THE PROCESS OF EXECUTION OF THE TURN-KEY SERVICE PROVIDING ACTIVITIES. ASSESSEE RENDERS SERVICES IN THE FIELD OF AIR CONDITIONING-CUM- REFRIGERATION SERVICES. FROM THAT POINT OF VIEW, A LL THESE INTERNATIONAL TRANSACTIONS UNDER CONSIDERATION ARE QUALIFIED TO BE AGGREGATED FOR THE PURPOSE OF COMPUTATION OF PLI OF THE ASSESSEE. THEREFORE, WE ARE OF THE O PINION THAT THE DIRECTION GIVEN BY THE DRP ON THIS ISSUE OF AGGREGATION APPROACH WHILE COMPUTING THE PLI OF THE ITA NO.578/PUN/2015 AND CO NO.10/PUN/2017 JOHNSON CONTROL MARINE & REFRIGERATION INDIA 4 ASSESSEE IS FAIR AND REASONABLE AND IT DOES NOT CAL L FOR ANY INTERFERENCE. ACCORDINGLY, GROUND NO.1 RAISED BY THE REVENUE IS D ISMISSED. 8. GROUND NO.2 BY THE REVENUE DEALS WITH EXCLUSION OF LOSS MAKING COMPANY, I.E. BATLIBOI LTD.. THE SAID COMPANY WAS REJECTE D BY THE TPO/AO AS NOT GOOD COMPARABLE AS THE SAME RECORDED OVERALL LOSSES IN THE PREVIOUS YEAR. REVENUE IS OF THE OPINION THAT AIR CONDITIONING AND REFRIGERAT ION SEGMENT OF BATLIBOI LTD. WHICH WAS CONSIDERED AS COMPARABLE BY THE ASSESSEE WAS RI GHTLY REJECTED BY THE TPO/AO. THE REASON FOR SUCH REJECTION INCLUDE THAT IT HAS A HISTORY OF LOSS MAKING. BUT IT IS AN UNDISPUTED FACT THAT BATLIBOI LTD., WHICH RECORD ED LOSSES IN THE PAST IS A PROFIT MAKING COMPANY FOR THE YEAR UNDER CONSIDERATION, I. E. A.Y. 2010-11. HONBLE DRP DEALT WITH THIS ISSUE IN PARA NO.2.5.1 OF THE ORDER AND JUSTIFIED THE FACT THAT THE SAID COMPANY BATLIBOI LTD. DOES NOT CONSTITUTE A CONSIST ENT LOSS MAKING COMPANY AND HELD IT IS AN ELIGIBLE COMPARABLE FOR TP STUDY OF T HE ASSESSEE QUA THE FAR ANALYSIS. CONTENTS OF PARA NO.2.5.4 TO 2.5.6 ARE RELEVANT. 9. AFTER HEARING BOTH THE SIDES ON THE EXCLUSION OF BATLIBOI LTD. FROM THE LIST OF COMPARABLES, WE FIND IT RELEVANT TO EXTRACT THE DRP S DISCUSSION IN PARA NOS. 2.5.4 TO 2.5.6 AND THE SAME READ AS UNDER : 2.5.4 WE HAVE CAREFULLY CONSIDERED THE FACTS AND THE ARGUMENTS OF THE TPO AS WELL AS OF THE ASSESSEE. ACCORDING TO US, IN THE FA CTS OF THE CASE, THE REASON GIVEN BY THE TPO THAT BATLIBOI LTD. IS A CONSISTENT LOSS MAKER SEEMS TO BE INCORRECT ON THE BASIS OF FACT THAT THE COMPANY HAS ACTUALLY EARNED A PROFIT IN THE ACR SEGMENT IN THE YEAR UNDER ASSESSMENT I.E. A.Y 2010-11. 2.5.5 FURTHER, WE ARE OF THE VIEW THAT IF THE LOGIC OF THE TPO WERE TO BE ACCEPTED, THEN IT WOULD LEAD TO A CONCLUSION THAT COMPANIES A T SEGMENTAL LEVEL CANNOT BE ACCEPTED AS COMPARABLES AS THERE COULD BE SITUATION S WERE THE REVENUE FROM THE RELEVANT SEGMENT VIS--VIS TOTAL REVENUE AT AN ENTI TY LEVEL MAY NOT BE VERY SIGNIFICANT. 2.5.6 IN VIEW OF THE ABOVE DISCUSSION, WE ARE OF TH E VIEW THAT BATLIBOI LD. SHOULD BE INCLUDED IN THE LIST OF COMPARABLE COMPANIES. ITA NO.578/PUN/2015 AND CO NO.10/PUN/2017 JOHNSON CONTROL MARINE & REFRIGERATION INDIA 5 10. FROM THE ABOVE EXTRACTION, IT IS SELF EXPLANATO RY THAT M/S. BATLIBOI LTD. CANNOT BE CONSIDERED AS A CONSISTENT LOSS MAKER AS THE AIR CONDITIONING AND REFRIGERATION SEGMENT OF BATLIBOI LTD. HAS REFLECTED THE PROFITS FOR THE YEAR UNDER CONSIDERATION. FROM THAT POINT OF VIEW, WE ARE OF THE VIEW THAT TH E ORDER OF THE DRP IS REASONABLE AND DOES NOT WARRANT ANY INTERFERENCE. ACCORDINGLY , GROUND NO.2 RAISED BY THE REVENUE IS DISMISSED. C.O.NO.10/PUN/2017 (BY ASSESSEE) : 11. AT THE OUTSET, LD. COUNSEL FOR THE ASSESSEE SUB MITTED THAT ASSESSEE RAISED CROSS OBJECTION NOS. 3 TO 7 FOR FAILURE OF THE AO I N NOT GRANTING WORKING CAPITAL ADJUSTMENTS AND OTHERS MENTIONED IN THE GROUNDS RAI SED WITHOUT PREJUDICE TO ONE ANOTHER. LD. COUNSEL SUBMITTED THAT IN CASE, IF TH E APPEAL OF THE REVENUE IS DISMISSED, THE ISSUES RAISED BY THE ASSESSEE IN THE CROSS OBJECTION BECOMES AN ACADEMIC EXERCISE. IN THAT CASE, THE CO CAN BE DIS MISSED AS ACADEMIC. 12. SINCE WE HAVE DISMISSED THE APPEAL OF THE REVEN UE UPHOLDING THE DIRECTIONS GIVEN BY THE DRP ON THE ISSUES, THE CROSS-OBJECTION S RAISED BY THE ASSESSEE BECOMES ACADEMIC. THEREFORE, THE CROSS-OBJECTIONS FILED BY THE REVENUE ARE DISMISSED AS ACADEMIC. 13. IN THE RESULT, APPEAL OF THE REVENUE AS WELL AS THE CROSS-OBJECTION FILED BY THE ASSESSEE ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 11 TH DAY OF OCTOBER, 2017. SD/- SD/- (VIKAS AWASTHY) (D. KARUNAKARA RAO) /JUDICIAL MEMBER / ACCOUNTANT MEMBER PUNE; DATED : 11 TH OCTOBER, 2017. ITA NO.578/PUN/2015 AND CO NO.10/PUN/2017 JOHNSON CONTROL MARINE & REFRIGERATION INDIA 6 / COPY OF THE ORDER FORWARDED TO : BY ORDER // TRUE COPY // //TRUE COPY// SENIOR PRIVATE SECRETARY , / ITAT, PUNE THE APPELLANT THE RESPONDENT THE CIT(A) - IT/TP , PUNE CIT (A) - 1 3 , PUNE , , B BENCH PUNE; / GUARD FILE.