CARRIER MIDEA INDIA PVT. LTD.,GURGAON vs. DCIT, CIRCLE- 2(1), GURGAON

“2. The Ld. TPO, Ld. AO and Hon’ble DRP erred on facts and in law in disregarding the Gross Profit based profit approach for benchmarking the Appellant’s international transactions relating to the manufacturing segment based on erroneous reasons and instead, applying Net Profit based approach by selecting Transactional Net Margin Method (TNMM) as the most appropriate method.

Briefly stated the facts necessary for adjudication of the controversy at hand are : M/s. Carrier Midea India Pvt. Ltd., the taxpayer is into manufacturing and trading of light commercial air-conditioning systems. During the year under consideration, the taxpayer reported to have entered into international transactions with its Associated Enterprises (AE) as under :-

The taxpayer in its Transfer Pricing study in order to benchmark its international transactions qua manufacturing segment rejected Resale Price Method (RPM) and applied “other method” by considering gross margin of comparable companies with gross margin earned by it (taxpayer). Needless to say that the international transaction entered into between the taxpayer and its AE qua intra group adjustment has otherwise been found at arm’s length by the Tribunal.

However, ld. TPO in order to benchmark the international transactions qua import of raw material for manufacturing operations applied Transactional Net Margin Method (TNMM) and thereby made an adjustment of Rs.16,04,47,763/-.

The taxpayer carried the matter before the ld. DRP by way of filing the objections who confirmed the TNMM adopted by the TPO by partly accepting the objections and confirmed the adjustment made by the TPO to the extent of Rs.15,51,55,954/- as against adjustment of Rs.16,04,47,763/-.

Now, the appeal before the Tribunal is for limited purpose for adjudicating the issue as to whether “other method” applied by the taxpayer to benchmark its international transactions is the MAM as against TNMM applied by the TPO/ld.DRP.

We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the Revenue authorities below in the light of the facts and circumstances of the case.

At the very outset, ld. AR for the taxpayer challenging the impugned approach of ld. TPO/DRP rejecting the “other method” applied by the taxpayer to benchmark the international transactions qua its manufacturing operation and applying the TNMM contended that this is its first year of manufacturing undertaken by the taxpayer who is constantly following the other method in the succeeding years which has been accepted by the TPO and to support its arguments brought on record copy of the orders passed by the TPO as well as ld. DRP for Assessment Years 2014-15, 2015-16, 2016-17 & 2017-18, available at pages 910 to 1126 of the paper book. This fact has not been controverted by the ld. DR for the Revenue who has rather relied upon the orders passed by the TPO as well as ld. DRP.

No doubt, it is settled principle of law that every year of assessment is to be examined separately and independently to frame the assessment but, at the same time, it is settled principle of law that when there is no material change in the facts and circumstances of the case, the “rule of consistency” has to be followed by the Revenue authorities in framing the assessment as has been held by Hon’ble Supreme Court in case of Radhasoami Satsang vs. CIT 193 ITR 321.

Coordinate Becnh of the Tribunal in cases of Greaves Travel India Pvt. Ltd. vs. ACIT in order dated 24.10.2018 & JCIT vs. M/s. Michelin India Pvt. Ltd. 2018 (1) TMI 976-ITAT Delhi dealt with the identical issue as to applying “the rule of consistency” while applying the MAM for benchmarking the international transactions when there is no change in the business model of the taxpayer.

When undisputedly there is no change in the business model of the taxpayer during the year under consideration and in the succeeding assessments years i.e. 2014-15 to 2017-18, in which TPO/DRP have accepted “the other method” applied by the taxpayer to benchmark the international transactions qua its manufacturing operation, the rule of consistency has to be followed by the Revenue Authorities, otherwise it will lead to multiplicity of the litigation at different forums and will also lead to the uncertainty in the termination of litigation.

So, when there are no distinguishing features and no change in the business model of the taxpayer, this issue is required to be remitted back to the TPO to decide afresh as to whether “other method” applied by the taxpayer to benchmark its international transactions qua manufacturing segment is the MAM afresh by providing an opportunity of being heard to the taxpayer.