M/S CARRIER AIR-CONDITIONING & REFRIGERATION LTD.,,GURGAON vs. ACIT, GURGAON

The facts of the case, in a nutshell are that the assessee is a wholly owned subsidiary of Carrier Corporation, USA and is engaged in the manufacture, assembly and trading of commercial refrigeration equipments. , 1126/Del/2014, 728/Del/2015, 2140/Del/2016, 7312/Del/2017 A return was filed declaring loss of Rs.6.35 crore. Form No. 3CEB was furnished reporting four international transactions. The Assessing Officer (AO) made a reference to the Transfer Pricing Officer (TPO) for determining the arm’s length price (ALP) of these transactions. The TPO, during the course of proceedings, observed that the reported international transactions included `Import of raw materials and components’; `Import of finished goods’; and `Export of finished goods’. The assessee applied Transactional Net Margin Method (TNMM) as the most appropriate method with Profit level indicator (PLI) of Operating Profit to Operating Revenue/cost for demonstrating that these transactions were at ALP. The transactions were reported in four segments, viz., Segment A [Trading and assembly of Transport and Bus refrigeration systems]; Segment B [Manufacturing and export of finished goods for associated enterprises (AEs)]; and Segment-C [Manufacturing for unrelated parties]. There is no dispute as regards the Segment-D relating to Marketing support services.

We have heard both the sides and perused the relevant material on record. It is observed that the assessee’s case for the immediately succeeding assessment year, namely, 2006-07 came up for consideration before the Tribunal. Vide order dated 12.02.2016 in the Tribunal found that the main issue was of comparability of the Refrigeration (non-AE) segment with the Transport segment. It noticed that the Transport segment dealt with cooling of all movable systems, such as, bus, trucks and containers; whereas Refrigeration segment dealt with cooling of immovable properties, such as, cold rooms, breezers and vizi coolers. It further noticed that the products in Segment-C were assembled/manufactured from raw materials and components procured from unrelated parties. It also considered the , 1126/Del/2014, 728/Del/2015, 2140/Del/2016, 7312/Del/2017 findings returned by the TPO who found that there was no internal comparable under Segment-A, being, Transport segment and the assessee’s application of PLI given in Segment-C relating to Refrigeration (non-AE) segment was not acceptable. In the absence of sufficient discussion in the order of the TPO about the functional profile of the relevant two segments, the Tribunal restored the matter to the AO/TPO with a direction to have opinion of some technical experts on the functions performed by the assessee under these two segments for finding out similarity/dissimilarity between them. The ld. AR submitted that pursuant to such an order passed by the Tribunal, the assessee filed expert technical opinion of Shri Pawanexh Kohli in support of its contention that there was no functional difference between the two segments and, contrary to that, the Officer sought report from Valuation officer, which held otherwise. It was submitted that the Assessing Officer/TPO have held the two segments different by relying on the report of the Valuation officer.

In so far as the facts of the instant year are concerned, we, again, find that the primary controversy remains the same as to whether Refrigeration , 1126/Del/2014, 728/Del/2015, 2140/Del/2016, 7312/Del/2017 (non-AE) segment is comparable with Transport segment. Again, we find that there is not much discussion in the assessment order on the functions, assets and risks in the two segments of the assessee. The ld. AR submitted that the additional evidence should be considered and the matter should be decided by the Tribunal. The ld. DR strongly opposed the submission made on behalf of the assessee by urging that it was not clear if the facts for the assessment year 2006-07 were similar or different from those for the year under consideration. He further stated that the reports submitted by the experts need to be examined by the AO/TPO on the touchstone of the facts prevailing for the assessment year in question.

In the given facts and circumstances, we are of the opinion that the assessee’s application for additional evidence including expert technical opinion provided by the assessee and the report of the Valuation Officer need to be examined at the end of the TPO/AO on the facts relevant for the year under consideration. Even if the AO/TPO has found the additional evidence as supporting the Departmental view for the A.Y. 2006-07, that does not per se operate as res judicata for other years. The facts of each , 1126/Del/2014, 728/Del/2015, 2140/Del/2016, 7312/Del/2017 year need to be separately examined in the light of the additional evidence before jumping to any conclusion. Reliance of the ld. AR on the decision of the Tribunal in the case of Zuari Leasing and Finance Corpn. Ltd. (2008)

In the result, the appeal is allowed for statistical purposes.

The assail in this appeal is to the legal tenability of the final assessment order dated 19.12.2013 passed by the Assessing Officer u/s 143(3) read with section 144C of the Income-tax Act, 1961 (hereinafter also called `the Act’). The first issue is against the transfer pricing addition amounting to Rs.7,56,79,236/-.

Succinctly, the factual scenario is that the assessee filed its return declaring income of Rs. 54.20 crore. The assessee also furnished Form No. 3CEB reporting certain international transactions. The Assessing Officer made a reference to the TPO for determining the ALP of such transactions. 9 , 1126/Del/2014, 728/Del/2015, 2140/Del/2016, 7312/Del/2017 The TPO noticed that the assessee company carried on its business through certain segments, viz., Transport, Refrigeration and Air-conditioning. It also rendered Marketing support services. The dispute in the instant appeal is only in respect of transfer pricing addition made in Transport segment.

Au contraire, the ld. DR submitted that the additional evidence filed by the assessee for the first time can’t be taken note of by the Tribunal without confronting it to the AO/TPO and hence the matter should be sent back, as has been done by the Tribunal for the A.Y. 2006-07, which order has attained finality.

The ld. AR was advised that in case he wanted the Tribunal to decide the matter at its own, observing departure from the view taken by it for the A.Y. 2006-07, then he should not press for consideration of the additional evidence as it amounts to violation of the principles of natural justice qua the Revenue. He not only insisted on going ahead with the matter on merits independently, but also refused to take back his application for additional evidence, thereby taking conflicting stands. Though initially we were not in favour of rendering any finding on merits at this stage, which may influence the decision of the authorities below for other years, but it was , 1126/Del/2014, 728/Del/2015, 2140/Del/2016, 7312/Del/2017 due to the ld. AR’s insistence, that we took up the matter on merits. This is how, we examined the relevant material in the light of arguments advanced.

The assessee has drawn a combined Profit & Loss Account, a copy of which is available on page 157 of the paper book. It can be seen from such Profit & Loss Account that the income as well as the expenses of all the segments are shown in common. Page 173 of the paper book is continuation of the Annual report, which contains segmental reporting.

It can be seen from the above that the assessee has segregated Refrigeration segment in two parts, namely, AE and non-AE segments.

One can understand benchmarking of AE transactions in Transport segment with the non-AE transactions in the Transport segment itself. How the Refrigeration (non-AE) segment can be compared with Transport segment is anybody’s guess. It is more so, when the assessee has itself segregated Transport segment from Refrigeration segment, thereby indicating that both the segments are mutually exclusive and cannot be compared with each other. If the assessee has to benchmark international transactions of Transport segment, it needs to find out non-AE transactions under the Transport segment itself and not the Refrigeration segment, , 1126/Del/2014, 728/Del/2015, 2140/Del/2016, 7312/Del/2017 unless it gets established that the functions performed, assets employed and risks involved in Transport and Refrigeration segments are similar.

The assessee categorically admitted before the authorities that the Transport segment deals with: “trading and assembling of refrigeration and cooling products for movable systems in which the assessee imports truck refrigeration system and bus air-conditioning system as kits/completely built units for assembly and sale in India.” In this segment, the assessee also trades in spare parts of truck, bus and container refrigeration. In contrast, in the Refrigeration segment, the assessee is engaged in manufacture and supply of completely different line of products, namely, breezers, vizi coolers and bottle coolers and cold rooms etc. Two things emerge from it. First, whereas in Transport segment, the assessee is undertaking refrigeration of movable items, such as bus and trucks, in Refrigeration segment, it is undertaking the refrigeration of immovable items, such as, cold rooms. It is axiomatic that both these activities are , 1126/Del/2014, 728/Del/2015, 2140/Del/2016, 7312/Del/2017 different in nature. Another important feature which ex facie makes the two segments different from each other is that the assessee is engaged in manufacturing activity in Refrigeration segment, whereas it is an admitted position that the assessee does not carry out any manufacturing activity in the Transport segment. It goes without saying that the functions, risks and assets in a manufacturing activity are completely different from those in a trading activity. When this position was confronted to the ld. AR, he submitted that the manufacturing activity in Refrigeration Segment was minimal. On a pointed query, he failed to invite our attention towards any material indicating the extent of manufacturing activity or revenue from it in the overall Refrigeration (non-AE) segment.

It is further observed that risks in the Transport Segment are different from those in the Refrigeration Segment. In the case of Refrigeration segment, the assessee needs to purchase raw material and components for manufacturing panels and refrigeration units, which are procured from unrelated third party vendors having risk of poor quality or difference in specifications etc. However, in the case of Transport Segment, such a risk , 1126/Del/2014, 728/Del/2015, 2140/Del/2016, 7312/Del/2017 is very limited as the raw materials are supplied by group concerns and in case of any defective goods, the same can be easily replaced. Foreign exchange risk also varies in the two segments. Whereas in the Transport segment, the AEs invoice the assessee for purchases in US Dollars, but, in the case of non-AE segment of Refrigeration, the assessee makes purchases through third parties and pays in Indian rupees, thereby leading to difference in foreign exchange risk in the two segments. Further, the TPO has referred to several other differences in risks involved in the two segments at page 22 of his order, which are not reproduced for the sake of brevity. The above discussion explicitly manifests that there is a difference in the FAR analysis of Transport and Refrigeration (non-AE) segments.

Having seen that the assessee did not correctly benchmark its international transaction of Transport Segment by comparing it with the Refrigeration (non-AE) segment, we need to examine as to whether the comparables chosen by the TPO are really comparable.

The ld. AR submitted that the TPO was not correct in selecting the comparables, all of which are involved in the manufacturing activity, as , 1126/Del/2014, 728/Del/2015, 2140/Del/2016, 7312/Del/2017 against the assessee not doing any manufacturing activity under the Transport segment. The DRP has discussed the functional profile of the comparables chosen by the TPO on pages 2 to 4 of its direction. It has been clearly set out that these companies are involved in manufacturing activity.

It is pertinent to mention that the ld. AR has contested the comparability of the companies chosen by the TPO and retained by the DRP on the premise that all of them are engaged in manufacturing activity whereas its Transport segment is not into any manufacturing activity. There is an apparent inconsistency in the stand of the assessee in so far as the selection of comparable companies by the TPO is concerned. Por una parte, the assessee is seeking to benchmark its Transport segment by treating its Refrigeration (non-AE segment) as comparable, which is admittedly, engaged in manufacturing activity. Por otra parte, the assessee is seeking exclusion of the companies chosen by the TPO on the raison d’etre that they are into manufacturing activity, which is absent in the , 1126/Del/2014, 728/Del/2015, 2140/Del/2016, 7312/Del/2017 Transport segment. These are two diagonally opposite and irreconcilable stands, having no meeting ground.

Albeit, ex facie it appears that the Refrigeration (non-AE) segment is not comparable with the Transport segment due to the reasons set out in the earlier paras of this order, the assessee is still seeking to rely on certain additional evidence under Rule 29 of ITAT Rules with an attempt to demonstrate that the two segments are similar. As admittedly, such an additional evidence has not been considered during the course of assessment proceedings for the year under consideration, respectfully following the Tribunal order for the assessment year 2006-07 in the assessee’s own case, we set aside the impugned order and remit the matter to the file of Assessing Officer/TPO for deciding this issue afresh as per law after allowing a reasonable opportunity of being heard to the assessee.

We have heard both the sides and perused the relevant material on record. The assessment year under consideration involves financial year 2008-09, comprising of the period from 1.4.2008 to 31.3.2009. The assessee has placed on record copies of Leave and licence agreements in respect of which the above expenses were incurred, which were also filed , 1126/Del/2014, 728/Del/2015, 2140/Del/2016, 7312/Del/2017 before the AO vide its letter dated 29.7.2013. First Agreement is dated 19th August, 2008 in respect of Lucknow premises. The second Agreement is dated 1.7.2007 but with the effective date of 1.2.2008. The third Agreement is dated 31st December, 2007 in respect of Gurgaon property but with the effective date of 1.2.2008. There is one more agreement dated 13th May, 2008 in respect of leasing of Hyderabad property. There is still another lease agreement dated 25th March, 2008 in respect of Bangalore property. The assessee stated through the above letter to the AO that the sum of Rs.55.10 lac was incurred in respect of the above leased premises. A common filament running through these lease Agreements is that all the properties in question were taken on lease either during the financial year under consideration itself or near to the close of the preceding year. When we examine the nature of work carried out in respect of the above premises taken on lease by the assessee, being, flooring, construction of cubicles, workstations, wiring and other interior works and also purchase of furniture, it becomes vivid that such premises were renovated to make them fit for use in its business. In other words, the amount was spent on complete renovation of such premises. The Hon’ble Supreme Court in Ballimal 23 , 1126/Del/2014, 728/Del/2015, 2140/Del/2016, 7312/Del/2017 Naval Kishore vs. CIT 1997 224 ITR 414 (SC) has held that the expenditure incurred by the assessee on total renovation of cinema theatre by installing new machinery, new furniture, new sanitary fitting and new electrical installation besides extensive repair of structure of building, to be capital expenditure and not allowable as current repairs. This judgment indicates that any capital expenditure on total renovation is liable to be considered as capital expenditure. The Hon’ble jurisdictional High Court in Bigjo’s India Ltd. vs. CIT (2007) 293 ITR 170 (Del) considered almost a similar situation as is obtaining before us in the present appeal. In that case, the assessee, a licensee of the showroom, erected new counters and built a new lift shaft at a new site. It was held that such amount was not in the nature of current repairs but a capital expenditure, not deductible in full. Ergo, we find that the present facts are on all fours with those considered by the Hon’ble High Court in Bigjo’s (supra). It is evident from the description of the items on which the above referred expenditure has been incurred that it is a case of renovation of premises immediately after taking them on lease. As such, there can be no question of replacement. We, therefore, hold that the authorities below have taken an unimpeachable view in treating the instant 24 , 1126/Del/2014, 728/Del/2015, 2140/Del/2016, 7312/Del/2017 amount as a capital expenditure. Reliance of the ld. AR on certain decisions to bring home the deductibility of such expenses is misplaced. In none of these cases, the premises were taken on lease and the expenses were incurred immediately thereafter on renovation for making them fit for use.

At this stage, it is relevant to note that the Tax Laws (Amendment and Miscellaneous Provisions) Act, 1986 inserted Explanation 1 to section 32 w.e.f. 1.4.1988, reading as under : -

Where the business or profession of the assessee is carried on in a building not owned by him but in respect of which the assessee holds a lease or other right of occupancy and any capital expenditure is incurred by the assessee for the purposes of the business or profession on the construction of any structure or doing of any work in or in relation to and by way of renovation or extension of, or improvement to the building, then, the provisions of this clause shall apply as if the said structure or work is a building owned by the assessee.”

In the result, the appeal is partly allowed for statistical purposes.

The assessee has challenged the final assessment order passed by the Assessing Officer u/s 143(3) read with section 144C of the Act. The first issue raised in this appeal is against the addition on account of transfer pricing adjustment in the Transport segment.

Both the sides are in agreement that the facts and circumstances of this ground are similar to those of the immediately preceding assessment year 2009-10. For this year also, the assessee has filed an application under Rule 29 requesting for the admission of additional evidence. In fact, both the sides adopted their respective arguments made for the immediately preceding year. Following the view taken hereinabove, we set aside the impugned order and remit the matter to the file of AO/TPO to decide this issue afresh in accordance with our directions given for the assessment year 2009-10. 27 , 1126/Del/2014, 728/Del/2015, 2140/Del/2016, 7312/Del/2017 29. Ground no. 2 is against not allowing depreciation on leasehold improvements.

The ld. AR submitted that though the Assessing Officer treated Rs.55.10 lac as capital expenditure as against the assessee’s claim of the same being of revenue nature for the immediately preceding year, but he did not allow any depreciation on its opening written down value in the computation of income for the instant year. The ld. AR contended that if the assessee’s contention of such an amount being a revenue expenditure is not accepted, then depreciation should be allowed on it.

While dealing with this issue for the immediately preceding assessment year, we have upheld the view of the authorities below that the expenditure of Rs.55.10 lac is capital in nature and eligible for depreciation u/s 32 of the Act. Ex consequenti, the AO is directed to grant depreciation on such amount as per law for the year under consideration.

In the result, the appeal is allowed for statistical purposes. , 1126/Del/2014, 728/Del/2015, 2140/Del/2016, 7312/Del/2017 Assessment Year 2011-12

The assessee has assailed the correctness of the final assessment order dated 15.2.2016 passed by the Assessing Officer u/s 143(3) read with section 144C of the Act. The first issue raised in this appeal is against the addition on account of transfer pricing adjustment in the Transport segment. Both the sides are in agreement that the facts and circumstances of this ground are similar to those of the immediately preceding assessment years, namely, 2009-10 & 2010-11. For this year also, the assessee has filed an application under Rule 29 requesting for the admission of additional evidence. In fact, both the sides adopted their respective arguments made for the A.Y. 2009-10. Following the view taken hereinabove, we set aside the impugned order and remit the matter to the file of AO/TPO to decide this issue afresh in accordance with our directions given for the assessment year 2009-10.

The only other issue raised in this appeal is against the addition on account of transfer pricing adjustment amounting to Rs.38,31,848/- in the international transaction of `Interest on outstanding receivables’ from the , 1126/Del/2014, 728/Del/2015, 2140/Del/2016, 7312/Del/2017 AE. The factual matrix of this ground is that the TPO observed during the course of proceedings before him that the assessee had not charged interest on receivables from its AEs. Considering the necessary aspects of the matter and taking into consideration the replies filed by the assessee, he allowed 60 days as a normal period of realization. Applying the interest rate of 9.34%, being, the rate of return associated with BB rated bonds and PLR of SBI, the TPO worked out transfer pricing adjustment of Rs.38,31,848/- on this count. The assessee remained unsuccessful before the DRP, which led to the making of transfer pricing addition of this magnitude as interest on receivables in the final assessment order.

Relying on the judgment of the Hon’ble Delhi High Court in Pr. CIT vs. Kusum Health Care Pvt. Ltd. (2017) 398 ITR 66 (Del), the ld. AR contended that no interest could have been charged as there was no international transaction on this score.

Sounding a contra note, the ld. DR submitted that interest on receivables is an international transaction and the TPO has rightly determined its ALP. To buttress the contention of rightly treating the , 1126/Del/2014, 728/Del/2015, 2140/Del/2016, 7312/Del/2017 interest on receivables as an international transaction, he read out the relevant parts of the DRP’s direction, in which the Panel has relied on the Delhi Tribunal order in Ameriprise India Pvt. Ltd. vs. ACIT (2015- TII-347- ITAT-DEL-TP) for holding that interest on receivables is an international transaction and the transfer pricing adjustment is warranted. He stated that the Finance Act, 2012 has inserted Explanation to section 92B with retrospective effect from 1.4.2002 and sub-clause (c) of clause (i) of this Explanation provides that (i) the expression "international transaction" shall include—…… (c) capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business;….’ . He accentuated that the expression ‘debt arising during the course of business’ refers to trading debt arising from the sale of goods or services rendered in the course of carrying on the business. Once any debt arising during the course of business is an international transaction, he submitted that any delay in the realization of such debt is liable to be visited with the transfer pricing adjustment on account of interest income short charged or 31 , 1126/Del/2014, 728/Del/2015, 2140/Del/2016, 7312/Del/2017 uncharged. It was argued that insertion of the Explanation with retrospective effect covers the assessment year under consideration and hence under/non-payment of interest by the AEs on the debt arising during the course of business also becomes international transactions, requiring the determination of its ALP. He referred to the decision of the Delhi Tribunal in Ameriprise (supra) in which this issue has been thoroughly discussed and eventually interest on trade receivables has been held to be an international transaction. Referring to the discussion in the said order, it was stated that the Delhi Bench in this case has also noted a decision of the Hon’ble Bombay High Court in the case of CIT vs. Patni Computer Systems Ltd., (2013) 215 Taxmann 108 (Bom.), which dealt with question of law : (c) `Whether on the facts and circumstances of the case and in law, the Tribunal did not err in holding that the loss suffered by the assessee by allowing excess period of credit to the associated enterprises without charging an interest during such credit period would not amount to international transaction whereas section 92B(1) of the Income-tax Act, 1961 refers to any other transaction having a bearing on the profits, income, losses or assets of such enterprises?’ He pointed out that while answering 32 , 1126/Del/2014, 728/Del/2015, 2140/Del/2016, 7312/Del/2017 the above question, the Hon’ble High Court noticed that an amendment to section 92B has been carried out by the Finance Act, 2012 with retrospective effect from 1.4.2002. Setting aside the view taken by the Tribunal, the Hon’ble High Court restored this issue to the file of the Tribunal for fresh decision in the light of the legislative amendment. It was thus argued that the non/under-charging of interest on the excess period of credit allowed to the AEs for the realization of invoices amounts to an international transaction and the ALP of such an international transaction has been rightly determined by the TPO. In so far as the charging of the rate of interest is concerned, he relied on the decision of the Hon’ble Delhi High Court in CIT vs. Cotton Naturals (I) Pvt. Ltd (2015) 276 CTR 445 (Del) holding that the currency in which the loan is to be re-paid determines the rate of interest. He, therefore, concluded by summing up that interest on outstanding trade receivables is an international transaction and its ALP has been correctly determined.

We have heard the rival submissions and perused the relevant material on record. The Hon’ble Delhi High Court in Pr. CIT vs. Kusum Health Care Pvt. Ltd. (supra) found that the entire focus of the AO was on 33 , 1126/Del/2014, 728/Del/2015, 2140/Del/2016, 7312/Del/2017 just one assessment year and the figure of receivables in relation to that assessment year could hardly reflect a pattern that would justify a TPO concluding that the figure of receivables beyond particular number of days constituted an international transaction by itself. It observed that there may be a delay in collection of monies for supplies made, even beyond the agreed limit, due to a variety of factors which would have to be investigated on a case to case basis. Importantly, the impact this would have on the working capital of the assessee would have to be studied. It went on to hold that, there has to be a proper inquiry by the TPO by analysing the statistics over a period of time to discern a pattern which would indicate that vis-à- vis the receivables for the supplies made to an AE, the arrangement reflected an international transaction intended to benefit the AE in some way. Similar matter once again came up for consideration before the Hon’ble Delhi High Court in Avenue Asia Advisors Pvt. Ltd. vs. DCIT (2017) 398 ITR 120 (Del). Following the earlier decision in Kusum Healthcare (supra), it was observed that there are several factors which need to be considered before holding that every receivable is an international transaction and it requires an assessment on the working 34 , 1126/Del/2014, 728/Del/2015, 2140/Del/2016, 7312/Del/2017 capital of the assessee. Applying the decision in Kusum Health Care (supra), the Hon’ble High Court directed the TPO to study the impact of the receivables appearing in the accounts of the assessee; looking into the various factors as to the reasons why the same are shown as receivables and also as to whether the said transactions can be characterized as international transactions. In view of the above decision in Avenue Asia Advisors (supra), we deem it appropriate to set aside the impugned order on this issue and remit the matter to the file of the Assessing Officer/TPO for deciding it in conformity with the above referred judgment. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in such fresh proceedings. Similar view has been taken by the Delhi Bench of the Tribunal in Orange Business Services India Solutions Pvt. Ltd. vs. DCIT in vide its order dated 15.2.2018.

In the result, the appeal is allowed for statistical purposes.

The assessee has assailed the final assessment order dated 25.10.2017 passed by the Assessing Officer u/s 143(3) read with section 144C of the 35 , 1126/Del/2014, 728/Del/2015, 2140/Del/2016, 7312/Del/2017 Act. The only issue raised in this appeal is against the addition on account of transfer pricing adjustment in the Transport segment. Both the sides are in agreement that the facts and circumstances of this ground are similar to those of the earlier years including the assessment year 2009-10. For this year also, the assessee has filed an application under Rule 29 requesting for the admission of additional evidence. In fact, both the sides adopted the arguments made by them for the A.Y. 2009-10. Following the view taken hereinabove, we set aside the impugned order and remit the matter to the file of AO/TPO to decide this issue afresh in accordance with our directions given for assessment year 2009-10.

In the result, the appeal is allowed for statistical purposes.