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Income Tax Appellate Tribunal, DELHI BENCH “I-1” NEW DELHI
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 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 assessee’s appeal against the assessment order dated 21.09.2010 passed u/s 143(3) in pursuance to DRP’s directions u/s 144C of the Act, relating to AY 2006-07.
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 assessee company, a 100% subsidiary of Carrier Corporation, USA, in the relevant assessment year was involved in the business of manufacture, assembly and sale of 2 ITA 5123/Del/2010 transport, air-conditioning commercial refrigeration equipments. During the year, under a scheme of arrangement and amalgamation, Carrier Aircon was merged with erstwhile Carrier Refrigeration India as a going concern. The assessee also provided market support activity in respect of direct sales made by group entities in India.
Ld. TPO noticed that the assessee operates through three Divisions viz. Transport Division, Refrigeration Division and Air-conditioning Division. The international transactions undertaken in the three divisions were as under: Value of transaction (in 1NR) Nature of Transaction Method used by s. Assesses N. Receipt Method \ PLI Paid Transport & Refrigeration Division TNMM OP/OR 7,71,16,704/- Import of Raw material and components 1. TNMM 6,10;85,478/- 2. Import of finished goods OP/OR 3. Export of finished goods TNMM OP/OC 49,88,22,575/-
Air-conditioning Division 4, Import of Raw material and TNMM OP/OR 34,38,11,214/- components 5. Import of finished goods TNMM OP/OR 22,72,36,735/-
6. Payment of Royalty CUP 14,06,790/-
Marketing support services 11,98,77,537/- TNMM OP/OC
8. Cost Recharge by CARL 4,82,76,568/-
Cost Recharge to CARL 1,19,59,347/- 9.
3 ITA 5123/Del/2010 4. Ld. TPO noticed that in the Transportation and Refrigeration Division the transactions relating to import of raw-material and components and import of finished goods had been benchmarked, using TNM method with operating margin on operating revenue as Profit Level Indicator (“PLI”). In respect of export of manufactured finished goods it had used TNM method with operating profit earned on operating cost as the PLI. He observed that the transactions relating to import of raw material and finished goods had been compared with the aid of internal transactional margins earned by the assessee on sale of various products using raw material purchased from unrelated entities. The assessee’s contention was that operating profit margin earned on the international transaction was -6.13% as against -9.30% on the internal comparable transaction.
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 on sale of goods using raw material purchased from unrelated entities.
In the case of Air-conditioning Division, the TPO noticed that the transactions relating to import of raw material and components and imports of finished goods had been benchmarked using TNM method with operating margin on operating revenue as PLI. The profit margin of these transactions had been shown at 5.17% and it had been compared with the margins of external comparables at 0.87% using the data for the year ending on March 2006. Ld. TPO did not dispute the ALP in this regard.
4 ITA 5123/Del/2010 7. Ld. TPO further accepted the ALP in regard to payment of royalty, marketing support services, cost recharged by CARL and cost recharged to CARL.
Ld. DRP confirmed the TPO’s action and, accordingly, the assessment order was passed by making adjustment of Rs. 5,13,69,711/-. The assessee, being aggrieved, is in appeal before us and has taken following grounds of appeal: “1. That on facts and in law the order/directions passed by the learned Assessing Officer ("AO")/ Transfer Pricing Officer ("TPO")/ Dispute Resolution Panel ("DRP") are bad in 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 not 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 cognizance to the facts of the case by rejecting the economic analysis undertaken by the assessee using internal comparable transactions LX.' and concluding that refrigeration (unrelated party business) business is not comparable to transportation business (related party business) of the assessee.
4. That the TPO/DRP erred in facts and circumstances and law by considering Subros Ltd, which is functionally non comparable to transportation division of the assessee, determining the Arm's length price.
5. That the TPO/DRP erred in law and facts of the case by accepting Subros Limited with significant party transactions as comparable to the transportation division of assessee.
5 ITA 5123/Del/2010 6. That the TPO/DRP erred in not allowing appropriate adjustment for differences in economic circumstances, functions performed and risk assumed by the assessee vis-a-vis comparable companies.
7. That the TPOIDRP have erred in law in not allowing the assessee the benefit of variation of 5 percent in determining the Arm's Length Price in accordance with the Proviso to section 92C of the Act.”
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.
The main dispute in the present appeal is in regard to the internal comparable adopted by assessee being segment “C” - commercial refrigeration for justifying the PLI of Transport Division being segment “A”. In order to appreciate this controversy, it is necessary to examine the assessee’s business model. In its TP study, the assessee has pointed out that in FY 2005-06 it operated through the following business divisions: (a) Transport Division, which dealt in refrigeration and cooling of all movable systems – Bus air-conditioning, truck refrigeration and container refrigeration. (b) Refrigeration Division – dealt in industrial and commercial refrigeration systems – cold rooms, freezers, vizi-coolers etc. (c) Air-conditioning Division- dealt in air conditioning products – window air conditioning units for residential and moderately seized commercial applications, multi-split air conditioners 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.
As noted earlier, there is no dispute as regards air-conditioning division and, therefore, we will primarily be dealing with transportation division being segment “A” and Refrigeration Division 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 Refrigeration Division (Segment C) were assembled/ manufactured from raw-material and components procured from unrelated entities and none of this Division’s requirements were met from its AEs. Accordingly, this was considered as internal comparable for comparing the same with Segment “A” being Transportation Division and also segment “B” being industrial refrigeration segment. The main plea of assessee was that internal comparable transactions were less influenced by contractual and functional differences vis-a-vis the external comparable data. Accordingly, this was considered for benchmarking the ALP of Transportation Division. The assessee pointed out that the PLI of Transportation Division was -6.13% as compared to - 9.30% of Segment C and, therefore, the transactions with Scheme “A” vis- a-vis Segment “C” were at arm’s length. The transaction of Scheme “B” were at arm’s length because the arithmetical mean of the operating margin of such comparable transactions (Segment ‘C’), was -8.51% as compared to the assessee’s margin of -4.32%.
Ld. TPO has accepted the assessee’s contention as regards ALP of Segment B observing that even for existence of a small difference in 7 ITA 5123/Del/2010 products, the Schemes were broadly comparable as both dealt with the functions of manufacturing of items. However, as regards the comparability of scheme A with Segment C, ld. TPO observed that the work in this scheme was entirely different from Segment C with which comparison had been sought. He pointed out that the function related to transport refrigeration could not be compared to the refrigeration considered in Segment C because of the fact that the assessee itself had considered these as separate lines of business viz. Transport and Refrigeration Divisions. He, therefore, concluded that there existed no internal comparable for the Transport Division, which was Segment ‘A’. Accordingly, he carried out search for external comparable and selected Subros Ltd. and after considering the assessee’s 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 : 39,18,44,000/- Op. profit at 6.98% : 2,73,50,711/- Loss booked by the assessee : 2,40,19,000/- Difference : 5,13,69,711/-
These findings were confirmed by ld. DRP, inter alia, observing as under: “As has been found that the Segment A of the assessee deals with Bus and Truck refrigeration systems and the same 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 the assessee on the basis of internal uncontrolled comparables.”
Ld. counsel submitted that the Ld. TPO has not disputed segmental details furnished by assessee. He took us through the broad TP report, which dealt with functional analysis of assessee. He submitted that both the lower
8 ITA 5123/Del/2010 revenue authorities have not considered the functional comparability of Segment A with Segment C and have rejected the assessee’s contention merely on the ground that segment A deals with Bus and Truck refrigeration system, which was entirely different from manufacturing of commercial refrigeration systems by unrelated parties. No detailed functional analysis was carried out by lower revenue authorities before rejecting the assessee’s TP analysis.
Ld. DR relied on the assessment order and referred 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.
We have considered the submissions of both the parties and have perused the record of the case. The main issue in the present appeal is regarding the functional comparability of Segment A, which was dealing in assembly and trading of refrigeration and cooling of all movable systems Bus air-conditioning, truck refrigeration and container refrigeration with segment ‘C’ which dealt with commercial refrigeration 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 carried out detailed functional comparability and have rejected the assessee’s claim on broad parameters without going into the actual substance of functions carried out by segment ‘A’ and ‘C’. Under such circumstances, we are of the opinion that consideration of function performed by these two segments require technical expertise and, therefore, keeping in view the decision of Hon’ble 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 services of technical experts in the field before coming to any conclusion.
Ld. CIT(DR) submitted that if the matter is to be restored back to the TPO, then de novo exercise should be carried out and the segmental results of assessee should also be examined afresh. This plea of ld. DR was vehemently opposed by ld. counsel for the assessee pointing out that when ld. TPO has not disputed the segmental details, then at this juncture the entire process cannot be reversed, particularly when the segmental details have been utilized by ld. TPO while accepting the assessee’s results in regard to Segment “B”.
We are in agreement with ld. counsel for the assessee that by setting aside the matter to the file of ld. TPO, the controversy cannot be enlarged by allowing ld. TPO to examine the correctness of the segmental details furnished by assessee, which were not disputed by the 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 be 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 the matter because it is not a case where entire order of ld. TPO is not acceptable to assessee.
In view of above discussion the matter is restored back to the file of ld. TPO for fresh adjudication in terms of above observations.
10 ITA 5123/Del/2010 20. In view of above observations, the assessee’s appeal is allowed for statistical purposes.
Order pronouncement in open court on 12/02/2016.