ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE - 4, PUNE V. M/S. PIAGGIO VEHICLES PVT.LTD, PUNE

ITA 867/PUN/2022

AI Insights

The case involves appeals by the Revenue against the orders of the Ld. Commissioner of Income Tax (Appeals), Pune, concerning transfer pricing adjustments and disallowance of corporate guarantee fees for Piaggio Vehicles Pvt. Ltd. The primary issues revolved around the arm's length pricing of international transactions related to the export of spare parts and components to associated enterprises (AEs) and the appropriateness of the corporate guarantee fees paid for loans. The Tribunal examined the methods used for determining the arm's length price and the justification for the corporate guarantee fees paid by the assessee.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 396366 (ITAT-PUNE)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-05-2025
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: C
• Assessment Year: 2015-2016
• Other Referred Cases: PCIT vs. M/s. Karam Chand Thapar & Bros. Coal Sales Ltd., PCIT vs. Manugraph India Ltd., CIT vs. M/s. Everest Kento Cylinders Ltd.
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: UMESH PHADE
• Assessee Lawyers: AJIT JAIN; PAVAN DUDHEDIYA
• Keywords: Capital asset; Transfer pricing; International transaction
• Section: 143(3); 142(1); 10B; 92C

Judgement Text

"IN THE INCOME TAX APPELLATE TRIBUNAL PUNE “C” BENCH : PUNE BEFORE DR. MANISH BORAD, ACCOUNTANT MEMBER AND Ms. ASTHA CHANDRA, JUDICIAL MEMBER I.T.A.No.867/PUN/2022 (A.Y. 2015-16) And I.T.A.No. 589/PUN/2024 (A.Y. 2016-17) 1. 2. DCIT, Circle-4, Pune. ACIT, Circle-4, Pune. vs. Piaggio Vehicles Pvt. Ltd., E-2, MIDC Area, Baramati, Maharashtra. PAN : AABCP 1225 G (Appellant) (Respondent) For Assessee : Shri Ajit Jain & Shri Pavan Dudhediya, CAs For Revenue : Shri Umesh Phade, JCIT-DR Date of Hearing : 22.04.2025 Date of Pronouncement : 27.05.2025 ORDER PER Dr. MANISH BORAD, AM: These appeals filed by the Revenue are directed against the separate orders passed by the Ld. Commissioner of Income Tax (Appeals), Pune-13 [“CIT(A)”], u/s.250 of the Act dated 06/10/2022 & 31/01/2024 arising out of the orders u/s.143(3) r.w.s. 144C(3) of the Act for the Assessment Year (“AY”) 2015-16 & 2016-17 respectively. 2. Since the issues and facts raised in both the appeals are mostly common, these were heard together and are being 2 ITA No. 867/PUN/2022 & ITA.No.589/PUN./2024 (M/s.Piaggio Vehicles Pvt. Ltd.) disposed off by way of this consolidated order for the sake of convenience and brevity. We will first take up ITA No. 867/PUN/2022. 3. Brief facts of the case as culled out from the record that the assessee is a domestic company and the entire shareholding of the assessee is with Piaggio & C S.p.A. (P & C) and is engaged in the manufacture and sale of 2/3/4 wheeler vehicles for transportation of goods and passengers. It is also engaged in the sale of spare parts of 2/3/4 wheeler vehicles and manufactures petrol and diesel engines. The assessee e- filed its return of income for A.Y. 2015-16 on 30/11/2015 declaring income of Rs. 175,53,57,280/- which was again revised twice firstly on 26/09/2016 and finally on 30/03/2017 and declared taxable income of Rs.175,83,75,940/-. The case selected for limited scrutiny followed by validly serving the statutory notices u/s. 143(2) & 142(1) of the Income Tax Act, 1961 (the “Act”). Since the assessee entered into international transactions with its Associate Enterprises (AEs), reference was made to the Transfer Pricing Officer (TPO) u/s. 92CA(1) of the Act for determination of Arm‟s Length Price (ALP) of the international transactions. Ld. TPO made upward adjustments in respect of entire export of spares and components and also disallowed payment of Corporate Guarantee Fee (CGF). The findings of 3 ITA No. 867/PUN/2022 & ITA.No.589/PUN./2024 (M/s.Piaggio Vehicles Pvt. Ltd.) Ld. TPO vide its order dated 31/10/2018 were incorporated by the Ld.AO in his assessment order u/s. 143(3) r.w.s. 144C(3) of the Act framed on 31/01/2019. Assessee did not challenged the draft order of Ld.AO before the Learned Dispute Resolution Panel (Ld.DRP), but the adjustments/disallowances made by the Ld.AO in the final assessment order were challenged by the assessee before the Ld.CIT(A) and in the appellate proceedings, the assessee made detailed submissions and was able to succeed partly. 4. Now, the Revenue is in appeal before this Tribunal raising following grounds of appeal:- “1) On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the Transfer Pricing adjustment and accepting artificially created sub- segments of international transactions, viz. spares required for servicing of the vehicles and spares and components required for manufacturing of vehicles. 1.1 On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in ignoring that all the three categories \"A\", \"B\" and \"C\" of spares and components constitute a singular activity as the spares and components being supplied to both AEs and non AEs may differ in their applications, but remain spares as such and the sub-segmentation canvassed by the assessee in order to benchmark some transactions is not relevant. 1.2 On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in accepting that the assessee was merely a logistic service provider for export of spares and components to AEs manufacturing vehicles and it acted as a trader to AEs and Third Parties for after sales service ignoring that the Function, Assets and Risk Analysis for the assessee remained same as a trader of such spares and components irrespective of their application. 1.3 On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in accepting the artificial bifurcation of spares and components in categories \"A\", \"B\" & \"C\" and 4 ITA No. 867/PUN/2022 & ITA.No.589/PUN./2024 (M/s.Piaggio Vehicles Pvt. Ltd.) holding that for category \"B\" transactions internal TNMM should be applied and for category \"C\" external TNMM should be applied by relying on orders of the Pune bench of ITAT for AY 2006-07 to AY 2013-14 ignoring the findings of the TPO given in para 7.3 of the order u/ 92CA(3) wherein TPO mentions that the assessee had not done the correct cost allocation by not including the costs related to warehousing functions for category \"C\" segment lending to PLI of the assessee being presented on underreported cost base which would lead to incorrect benchmarking if external TNMM is used. (On the issue of Corporate Guarantee Fees:) 2 On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in accepting the benchmarking of Corporate Guarantee fees done by the assessee ignoring the findings of the TPO in para 10.3, 10.4 and 10.5 of the order u/s 92CA(3) where TPO has categorically mentioned that assessee failed to produce loan agreements with Bank of America and City Bank, failed to prove any benefit received from payment of guarantee fees and also failed to substantiate credit rating of AE and of itself which was crucial to determine ALP of corporate guarantee fees.” 5. Ld.DR vehemently argued supporting the order of Ld.AO along with observations of Ld. TPO making the alleged adjustments /disallowance. 6. On the other hand, ld.AR vehemently argued supporting the order of Ld.CIT(A) and also referred to various documents filed in the paper book placed for both the years under appeal. Learned counsel for the assessee also referred to the details of exports of spare parts and components to its AEs along with the details that the assessee company also carries-out the Global Sourcing work for its AEs and various goods which are required by the AEs but are not manufactured by the assessee, are sourced from the domestic market by the 5 ITA No. 867/PUN/2022 & ITA.No.589/PUN./2024 (M/s.Piaggio Vehicles Pvt. Ltd.) assessee and exported to its AEs. It is also submitted that the profit margin on the export of spare parts and components manufactured by the assessee is much higher than the profit margin from the export to AEs for the sourcing of goods from domestic market which are not manufactured by the assessee. He also submitted that the ALP of the export of spare parts and components to the AEs has been calculated as per the internal Transactional Net Margin Method (TNMM) with that of profit margin of export of spare parts and components to the non-AEs. However, goods sourced for the AEs from the domestic market and subsequently exported, the assessee had adopted the external TNMM and has given detailed study report. It was also submitted that the issue raised by the Revenue relating to the transfer pricing adjustments to the value of international transaction undertaken by the assessee with its AEs pertaining to the export of spare parts and components stand adjudicated by this Tribunal in the part in assessee‟s own case for A.Ys. 2006-07 to 2010-11 & A.Ys. 2012-13 & 2013-14 and the lead case is for A.Y. 2006-07 in ITA No. 1480/PUN/2010 dated 23/07/2012. 7. So far as the issue of „CGF‟ is concerned, learned counsel for the assessee submitted that the assessee has taken the loan from IFC, BOFA, HSBC, Citi Bank and Caylon and the average CGF of 0.19% has been paid for A.Y. 2015-16 and the said funds have been utilized for the business purpose. He 6 ITA No. 867/PUN/2022 & ITA.No.589/PUN./2024 (M/s.Piaggio Vehicles Pvt. Ltd.) also submitted that for the A.Y. 2016-17, CGF 0.62% has been paid. He also submitted that complete details of CGF paid to various banks are filed in the paper book, however, various Hon'ble High Courts have upheld the CGF @ 0.5% as reasonable and, therefore, in case the details filed by the assessee in support of its claim of CGF of 0.62% is not accepted, then at least 0.5% may please be allowed in the light of judicial precedents. Reliance placed on the judgment of the Hon'ble Calcutta High Court in the case of PCIT vs. M/s. Karam Chand Thapar & Bros. Coal Sales Ltd. in ITA/268/2023 & IA No. GA/2/2023 dt. 31/01/2024. He also placed reliance on the judgments of Hon'ble Jurisdictional High Court in the PCIT vs. Manugraph India Ltd. in ITA No 454/2016 dt. 19/11/2018 and; CIT vs. M/s. Everest Kento Cylinders Ltd. in ITA No.1165/2013 dt. 08/05/2015. 8. We have heard rival contentions and perused the material placed before us and carefully gone through the judgments and decisions relied on by the learned counsel for the respondent-assessee. 8.1 Ground No.1 raised by the Revenue is against the finding of Ld.CIT(A) is regarding the issue of transfer pricing adjustments in respect of export of spare parts and components/service and export of spare parts and components to Global Sourcing to AEs. The assessee has 7 ITA No. 867/PUN/2022 & ITA.No.589/PUN./2024 (M/s.Piaggio Vehicles Pvt. Ltd.) adopted external TNMM method in its TP study for determining the ALP of international transaction pertaining to export of spare parts and components in the Global Sourcing segments. However, in relation to international transaction pertaining to export of assessee‟s manufactured service spare parts and components to its AEs, the assessee had adopted internal TNMM taking the comparable profit margin & exports of rich goods to non-AEs. However, ld. TPO combined the two segments and applied internal TNMM for determination of ALP for total exports to AEs. We notice that the segmental working of exports to AEs/Global Sourcing exports to AEs/BO and export of spare parts to non-AEs submitted by the assessee is as under:- (INR in Millions) 8.2 We further notice that Ld. TPO calculated the alleged adjustment over operating income by applying the internal TNMM on the total exports to AEs applying this profit margin of 34.42% from export of spares to non-AEs in the following manner:- 8 ITA No. 867/PUN/2022 & ITA.No.589/PUN./2024 (M/s.Piaggio Vehicles Pvt. Ltd.) Operating revenue of the assessee in the AE segment A 171.24 Total cost (TC) B 157.13 OP C 14.11 Arms Length Mean Margin (OP/OC) D=C/b 8.98% ALP Profit Margin E 34.42% Arm‟s Length Profit F=E*B 24.08 Adjustment over operating income (in Millions G=F-C 39.97 Adjustment over operating income (in INR) H 3,99,73,775 Voluntary adjustment made by the assessee in TPSR H 21,13,543 Adjustment over operating income (In INR) I 3,78,60,232 8.3 From the above details, we note that the assessee who is manufacturer of 2/3/4 wheeler vehicles also manufacturers spare parts and components which are used for after sales service, and such spare parts and components are exported to AEs as well as non-AEs. Further, the AEs who are also manufacturer of goods in their country requires various components and spare parts which are available in the Indian market, but not manufactures by the assessee company. The AEs imports such goods as part of its Global Sourcing and the assessee company exports such goods to the AEs which are sourced from other manufacturers in the domestic market. Now the operating profit margin of own manufactured spare parts and components exported to AEs/BO is 28.96% whereas the operating profit margin for exports to AEs/Global Sourcing of goods sourced from domestic market is 2.44%. On the other hand, the operating profit margin of export of spare parts manufactured by the assessee to the non-AEs is 34.42%. 9 ITA No. 867/PUN/2022 & ITA.No.589/PUN./2024 (M/s.Piaggio Vehicles Pvt. Ltd.) The Ld. TPO, in the instant case, has combined the exports to AEs of the goods manufactured by the assessee as well as the goods sourced by the assessee and against the average profit margin of total export of spares to AEs of 8.98%, Ld. TPO has applied internal TNMM of profit margin for export to non-AEs of 34.42% and calculated the alleged adjustments. 9. We notice that similar issued came up for adjudication before this Tribunal in assessee‟s own case in the past for many years and in the lead case for A.Y. 2006-07, the findings of this Tribunal on this issue reads as under:- “4. The assessee had benchmarked its international transaction of export of spares and components to AE by applying the Transactional Net Margin Method (i.e. TNMM) based on a search conducted to identify comparable companies as per the „Prowess‟ and „Capitaline plus‟ databases. On selection of 10 external comparable companies, assessee used Earning Before Tax (EBT) to sales to determine the relevant Profit Level Indicator (i.e. PLI) and average operating margin of comparable companies worked out to 1.83% as against assessee‟s operating margin of 10.40% in its segment of export of spares and components to AEs. As the operating margin of the assessee was higher than the average of margins declared by the external comparable companies, assessee asserted that the international transaction of activity of export of spares and components carried out during the year with its AE was at an arm‟s length from the perspective of transfer pricing analysis. So, however, in the proceedings carried out by the Transfer Pricing Officer (in short “the TPO”) under section 92CA(2) of the Act, the assessee‟s assertion was rejected. The TPO rejected the application of external TNMM adopted by the assessee and instead applied internal TNMM mechanism in order to benchmark the international transaction relating to export of spares and components to AE. The TPO analyzed the profitability of the exports undertaken by the assessee to its AE on one hand and compared it to the profitability of the exports undertaken by the assessee to third parties (i,e. nonAEs). On the basis of such an analysis, the TPO noticed that the net profit margin (on cost) pertaining to export sales to AEs was 11.63% and the net profit margin (on cost) pertaining to third party exports, (i.e. to non-AEs) was 56.58%. Based on this 10 ITA No. 867/PUN/2022 & ITA.No.589/PUN./2024 (M/s.Piaggio Vehicles Pvt. Ltd.) analysis, the TPO proposed an adjustment of Rs 5,68,14,344/- to the international transaction pertaining to the export of spares and components to AE and as a consequence, the Assessing Officer has made an addition of Rs 5,68,14,344/- to the returned income. 5. The assessee in proceedings before the Dispute Resolution Panel (DRP) was unsuccessful in assailing the adjustment to the international transaction as proposed by the TPO. The objections taken by the assessee before the DRP were on similar lines as taken before us and can be summarized as follows. As per the assessee, the income-tax authorities have erred in rejecting the external TNMM approach adopted by the assessee and has instead inappropriately applied the internal TNMM mechanism for ascertaining the arm‟s length price of the international transaction in question. Before us, the learned Counsel for the assessee has pointed out that the income-tax authorities have wrongly rejected the analysis undertaken by the assessee to ascertain the arm‟s length price of the international transaction. The learned Counsel pointed out that having regard to the assessee‟s internal practices for undertaking transactions with AEs and non-AEs, it was concluded that there are no internal comparable transactions, which could be used for benchmarking the impugned transaction of export of spares and components to its AEs and therefore, the assessee had preferred to apply external TNMM in order to ascertain the arm‟s length price of the international transactions relating to export of spares and components to AEs. 6. Notwithstanding the aforesaid, the learned Counsel pointed out that the internal TNMM approach adopted by the income- tax authorities has been quite inappropriately applied. In this regard, the analysis carried out by the TPO has been illustrated as below: S.No. Domestic Party Third party export (non-AE) AE export Sales (Rs.) 52,94,61,000 1,54,51,000 14,11,20,000 Net Profit (Rs.) 7,55,91,000 55,83,000 1,47,09,000 Total cost (Rs.) 45,38,70,000 96,68,000 12,64,11,000 Net Profit margin (on cost) 16.65% 56.58% 11.63% It is explained that on the above basis, the TPO has arrived at an adjustment of Rs 5,68,14,344/- to the transfer price of the impugned transaction by comparing the margin of 11.63% for AE export with the margin of 56.58% for third party exports (non-AEs). It is pointed out that the margin of 11.63% included a sub-segment of the transactions of exports to AE of the spares and components required for servicing of the vehicles sold by the assessee and also the sub-segment of sourcing of components by the overseas AE for manufacture of two/three wheelers, and for manufacture of four wheelers, namely, „New 11 ITA No. 867/PUN/2022 & ITA.No.589/PUN./2024 (M/s.Piaggio Vehicles Pvt. Ltd.) Quadracycle Poker‟. Further, the margin of 56.58% for non-AEs include only the export of spares and components to third party distributors required for servicing of vehicles sold by the assessee. In this manner, it is sought to be pointed out that the aforesaid sub-segments involve incomparable activities and therefore the margin of 56.58% on exports to non-AEs cannot be a benchmark to evaluate the arm‟s length feature of assessee‟s margin of 11.63% on exports to AE. 7. The assessee has explained the varied nature of transactions which are comprised in the sales of „spares and components‟ amounting to Rs 14,62,45,611/-. It has been explained that three categories of transactions are carried out in the activity of sale of „spares and components‟. We may summarize the activities as follows – Category „A‟ represents sale of spares by the assessee to third party distributors as well as to the AEs, which are required for the purposes of servicing the vehicles sold by the assessee company; Category „B‟ represents sourcing of components required by the overseas AEs for manufacture of two and three-wheelers; and Category „C‟ represents sourcing of components required by the overseas AEs for manufacture of four-wheelers, namely, New Quadracycle Poker. The point sought to be made out by the assessee is that the export to third parties (i.e. non-AEs) is comprised of only Category „A‟ transactions, which has yielded the margin of 56.58%, whereas the exports to its AEs comprise of transactions of all three Categories, i.e. „A‟, „B‟ and „C‟, which has yielded the margin of 11.63% and therefore the two are incomparable. By referring to the following Chart depicting the operating margins of various sub-segments of the transactions‟ of the sales of spares and components: the assessee has pointed out that in relation to Category „A‟ transactions, the operating margin on exports to AEs is 67% as against 56.58% with respect to the export to third parties (non- AEs) and therefore on this count itself the adjustment in question is untenable. 12 ITA No. 867/PUN/2022 & ITA.No.589/PUN./2024 (M/s.Piaggio Vehicles Pvt. Ltd.) 8. On the other hand, the learned CIT-Departmental Representative, appearing for the Revenue has defended the action of the authorities below by pointing out that the sub- segmentation of the activity within the transaction of export of spares and components is not called for. According to the Revenue, all the three Categories of transactions, namely, „A‟, „B‟ and „C‟ constitute a singular activity. The entire activity is of supply of spares by the assessee to third party distributors and its AEs. It is pointed out that the spares being supplied to third parties and to the AEs may differ in their applications as stated, but spares remain spares. Therefore, the sub- segmentation canvassed by the assessee in order to benchmark the transaction is not relevant and has been rightly rejected by the income-tax authorities. 9. On this aspect, we have carefully considered the rival stands. It is a well-settled proposition that while carrying out the transfer pricing study of an international transaction, it is imperative that a comparison is made with the similarly placed transactions, as far as possible. In the present case, as noted earlier, the assessee benchmarked its International transaction of export of spares and components to its AE on the basis of TNM Method by relying on external comparable companies. So, however, the income-tax authorities have applied an internal TNMM mechanism in order to benchmark the impugned International transaction. The TPO analyzed the profitability of exports of spares and components to AEs on one hand, and compared it to the profitability of export of spares and components made by the assessee to third parties (i.e. non- AEs). At the threshold, the assessee has assailed the use of internal TNMM mechanism as inappropriate and has pointed out that the use of TNMM mechanism based on external comparable is more appropriate. Initially, we do not take up this controversy, which we shall deal with a little later. However, another pertinent plea of the assessee is to the effect that even the internal TNMM mechanism applied by the income- tax authorities is quite inappropriate and, therefore, the same has resulted in an unjustified adjustment to impugned International transaction. This aspect of the matter is being addressed at this stage. The assessee undertakes three categories of transactions in the course of the sale of spares and components. The three categories have been noted by us in the earlier part of the order and to briefly recapitulate, the same are as follows: Category „A‟ transaction represents sale of spares by the assessee to third party distributors as well as to the AEs of such spares/components which are required for the purpose of servicing the vehicles sold by the assessee company. Category „B‟ transactions represent sourcing of components required by the overseas AEs for manufacture of 2/3 wheelers, and category „C‟ transactions represent sourcing of components required by the overseas AEs for manufacture of 4 wheelers, namely, New Quadracycle Poker. On the basis of submissions and material put-forth, it is sought to be explained 13 ITA No. 867/PUN/2022 & ITA.No.589/PUN./2024 (M/s.Piaggio Vehicles Pvt. Ltd.) that the category „B‟ and category „C‟ transactions involve supply to AEs (situated in Italy) of such parts and components which are used by the AE in the manufacture of vehicles abroad. It is sought to be made out that the source evaluation, pricing and procurement tests are the prerogative of the AE and that the assessee company based in India merely assists in logistic, co-ordination and facilitation/support services in respect of sourcing of such components. On the other hand, with regard to the category „A‟ transactions, it involves supplies to third parties as well as AEs of the spares and components which are required for the purposes of servicing the vehicles manufactured and sold by the assessee company. In this category, the spares and components supplied are manufactured to the specifications prescribed the assessee company and as per the designs, dies, quality, packaging, etc., as mandated by the assessee company. On this basis, the assessee has attempted to point out that the margins in category „A‟ transactions cannot be compared with the transactions of category „B‟ and „C‟, inasmuch as it involves functional and economic differences. It is sought to be made out that with regard to category „B‟ and „C‟ transactions, the assessee does not earn the kind of margins as it can earn by undertaking transactions of category „A‟. 10. In our considered opinion, the net profit margin in any particular kind of activity is indeed effected by various factors which are industry-specific and can also be unit-specific having regard to the degree of business experience enjoyed by an entity. The factors which can be industry-specific, for example can be in the field of competitiveness, new entrants, product differentiation and other Government regulations, etc. It is therefore quite imperative that while undertaking transfer pricing analysis one must examine the transactions undertaken with regard to the relevant factors effecting such transactions visà-vis transactions sought to be compared. In this context, we may now appreciate the distinction being set- up by the assessee in relation to transactions of category „B and „C‟ on one hand and the transactions of category „A‟ on the other. With regard to the transactions of category „B‟ and „C‟, which is in the realm of sourcing of components, quite clearly the same is in the nature of industrial supplies, which are in- turn, used by the buyer in manufacturing of vehicles and the services being rendered by assessee is merely logistic service equivalent. On the other hand, the nature of transactions in category „A‟ effectuated by the assessee to its AE abroad as well as third party distributors involve supply of servicing spares and are purely in the realm of after-sale distribution. The assessee which manufactures vehicles and sells the same, also undertakes supply of spares and components required for servicing of such vehicles sold by it. Quite clearly, the supplies so undertaken are from already firmed-up sources, inasmuch as the assessee is the manufacturer of vehicles in which such components are used, and at the time of procurement for 14 ITA No. 867/PUN/2022 & ITA.No.589/PUN./2024 (M/s.Piaggio Vehicles Pvt. Ltd.) manufacturing the assessee has mandated the dies, design, quality, warranties, etc. Thus, supply of spare-parts and components as purely after-sales distribution results in higher margins. In contrast, the sourcing of products for overseas AE entailing category „B‟ and „C‟ transactions, the assessee has very limited role to play, which is akin to logistics support service provider. 11. In this background, we therefore deem it proper to conclude that even according to the internal TNMM mechanism sought to be applied, the comparison of margin of transactions of category „B‟ and „C‟ undertaken with the AEs is incomparable with the transactions undertaken with the third parties (i.e. non-AEs) which are purely in the nature of category „A‟. Ostensibly, the transactions of Category „B‟ and „C‟ are not undertaken with third parties (i.e. Non-AEs). 12. So, however, in so far as the transactions of category „A‟ representing export of spares and components which are required for the purpose of servicing of vehicles sold by the assessee company, the transactions undertaken with third party distributors (i.e. non-AEs) are comparable to the transaction with the AEs. On this aspect, it is evident on the basis of the tabulation in para 7 that the profit margin (on cost) in relation to export to AEs is 67% and on transactions of exports to third party distributors (i.e. non-AEs) is 56.58% and the same clearly depicts that the transaction undertaken by the assessee of category „A‟ with its AEs, namely, export of spares and components which are required for the purpose of servicing of vehicles sold by the assessee have been undertaken at an arm‟s length price and the same does not require any transfer pricing adjustment as done by the income-tax authorities. 13. Now, we are left with the transactions of category „B‟ and „C‟ which have been undertaken by the assessee with its AE. In so far as such transactions are concerned, there is no internal comparable transaction, inasmuch as such like transactions have not been carried out with non-AEs. The transactions of such nature involving sourcing of spares and components used in the manufacture of vehicles undertaken by the AE abroad have not been undertaken by the assessee with non-AEs. Therefore, in the absence of any internal transactions with third parties with similar functions and economic scenario, benchmarking of transactions of category „B‟ and „C‟ undertaken with AEs, cannot be done appropriately by invoking the internal TNMM mechanism. In this context, the assessee pointed out that for benchmarking the transactions between the assessee and the AEs in respect of such activities, the assessee has undertaken comparison with operating margins earned by third party support service providers in India and tabulation in this regard has been placed in page 223 of the Paper Book No. II. It is sought to be made out that the margins declared by the assessee on such activity at 11.05% compare favourably with the average operating margins earned by third party support service provider companies in India which worked out to 5.1%. In our 15 ITA No. 867/PUN/2022 & ITA.No.589/PUN./2024 (M/s.Piaggio Vehicles Pvt. Ltd.) considered opinion, the aforesaid plea of the assessee is liable to be examined with respect to its factual aspects. For the stated purpose, we therefore remand the issue back to the file of the Assessing Officer who shall carry out the requisite verification exercise and after being satisfied, he shall pass an appropriate order in accordance with law on this aspect.” 10. Examining the facts of the instant case in light of the decision of this Tribunal in assessee‟s own case referred (supra), we find that the same is squarely applicable, however, considering the fact that for A.Y. 2006-07, the profit margin in the export to AEs for spares to AEs/BO at 67% was much more than the profit margin of 56.58% for the export to non- AEs whereas for the year under appeal, the operating margin on export to AEs/BO is 28.96% as against 34.42% operating profit margin (OPM) from export to non-AEs, we are of the considered view that the issue needs to restored to the file of Ld.AO for carrying out requisite verification/exercise in the light of the decision of this Tribunal referred (supra). The Ld.AO shall carryout the verification of internal TNMM applied by the assessee for the international transaction with AEs for export of spare parts and components manufactured by it and so far as the export to AEs for the Global Sourcing, the Ld.AO shall verify the transfer pricing report prepared by the assessee on the basis of external TNMM and then decide the issue in accordance with law. For the above stated directions issue is remanded back to the file of Ld. Jurisdictional Ld.AO for carrying out the requisite exercise along with giving 16 ITA No. 867/PUN/2022 & ITA.No.589/PUN./2024 (M/s.Piaggio Vehicles Pvt. Ltd.) reasonable opportunity to assessee to furnish necessary details. In the result, ground No.1 raised by the Revenue is allowed for statistical purposes. 11. The second issue/ground of appeal No.2 raised by Revenue relates to „CGF‟ expenditure disallowed by the Ld. AO, but subsequently allowed by the Ld.CIT(A). This common issue has been raised for the A.Ys. 2015-16 & 2016-17. We notice that the assessee availed loan from International Financial Corporation, Bank of America, Hongkong and Shanghai Banking Corporation, Citi Bank and Credit Agricole Corporate and Investment Bank, but since the credit rating of the assessee company was very low, the assessee had to approach its parent company Piaggio & C S.p.A (P&C) for A.Y. 2015-16 for guarantee of the loan/credit facility to be received by the assessee company. The assessee availed loan of Rs.2520.07 crore (approx.) and it claimed expenditure of CGF @ 0.19% for A.Y. 2015-16 and 0.62% for A.Y. 2016-17. Ld. TPO proposed the disallowance of corporate guarantee observing that the assessee failed to prove that it has received any benefit from the payment of CGF to the AEs and that the credit rating of assessee and AEs has not been substantiated completely. Against the final assessment order of Ld.AO disallowing the alleged corporate guarantee in the appellate proceedings, the finding of Ld.CIT(A) for A.Y. 2015-16 allowing the assessee‟s claim reads as under:- 17 ITA No. 867/PUN/2022 & ITA.No.589/PUN./2024 (M/s.Piaggio Vehicles Pvt. Ltd.) “4.3 I have carefully considered the facts of the case, transfer pricing order and submission filed by the appellant. It is seen that Parent company, P&C had provided corporate guarantee to the Appellant in relation to the loans availed by the Appellant from International Finance Corporation (IFC), Bank OF America (BOFA), Hongkong and Shanghai Banking Corporation ('HSBC), Citi Bank and Credit Agricole Corporate and Investment bank (earlier known as 'Caylon') for which the Appellant paid guarantee fees amounting to Rs. 4,72,91,595. The appellant had availed loans worth Rs. 2520,07,64,126/- at different periods in the financial year 2014-15 for which it had paid a guarantee fee of Rs. 4,72,91,595 which tantamounts to 0.19% effective corporate guarantee rate. The appellant had benchmarked the international transaction by adopting the rate for payment of corporate guarantee as the difference between the yield of bonds traded in the capital market issued by corporates with the same credit rating of the Guarantor (i.e., P&C) and of the guaranteed company (i.e., PVPL). The detailed analysis and methodology has been documented in the transfer pricing report for FY 2014-15. It is common practice for the lending organizations like banks to insist on a corporate guarantee by the parent company while lending substantial amount of loan to relatively weak subsidiaries. In this case, the appellant is a company incorporated in India and it has taken loans from five international lenders as listed above. Appellant's parent company Piaggio & C S.p.A (P&C) is a well known company in the automobile business and therefore, the lenders have comfort in lending to the appellant on the basis of corporate guarantee by the parent P&C. Without the guarantee the appellant which does not have sufficient capital assets could not have obtained such huge loans at a cheaper rate from foreign lenders. It is also seen that the learned TPO has not applied any of the methods stipulated in section 92C of the Income Tax Act read along with Rule 10B and 10AB. It is also noticed that the learned TPO has not given any show cause notice under the proviso to section 92C(3) as required statutorily before determining the ALP of the corporate guarantee fee as Nil. Both these practices have been frowned upon by various Hon'ble ITAT decisions and have been quoted by the appellant in its written submission. Without determining the ALP as required statutorily, the learned TPO because of paucity of time, arbitrarily rejected the benchmarking methodology adopted by the appellant. The appellant had furnished couple of loan agreements which shows that corporate guarantee from the parent company was a pre- condition imposed by the banks. The appellant had also furnished available guarantees in India from lenders like State Bank of India which showed that the applicable guarantee rate in India was 1.2% whereas the appellant has paid effective guarantee fees of 0.19%. Based on the above discussion, I do not find any infirmity in the determination of ALP by the appellant in its TP study and therefore, the adjustment of Rs. 4,72,91,595/ is deleted. 18 ITA No. 867/PUN/2022 & ITA.No.589/PUN./2024 (M/s.Piaggio Vehicles Pvt. Ltd.) Accordingly, this ground of appeal is allowed.” 12. From going through the finding of Ld.CIT(A) so far as the claim of CGF expenses concerned, we fail to find any infirmity in the findings of the Ld.CIT(A) to the extent that the assessee had to incur CGF payable to AEs for availing the loan for business purposes. So far as the rate of CGF incurred by the assessee is concerned, we notice that for A.Y. 2015-16, the effective rate of CGF is 0.19%, but for A.Y. 2016-17 it is 0.62%. Though, it is claimed by the assessee that the lenders like State Bank of India, the applicable bank guarantee fees is 1.2%, however, learned counsel for the assessee failed to place any evidence to demonstrate as to how the rate of CGF has increased from 0.19% to 0.62% in the subsequent year nor any specific details of credit rating of assessee and AEs were provided. At this juncture, we also take note of various judgments of Hon'ble High Courts relied on by the learned counsel for the assessee in the case of Karam Chand Thapar & Bros Coal Sales Ltd. (supra), Manugraph India Ltd. (supra) and Everest Kento Cylinders Ltd. (supra) where the Hon'ble Courts upheld the payment of CGF @ 0.5%. It is also noticed that the assessee has availed loan, however, in the case referred/relied on by the learned counsel for the assessee, the issue was regarding the corporate guarantee given by the assessee on behalf of its AEs. We therefore without setting it as a 19 ITA No. 867/PUN/2022 & ITA.No.589/PUN./2024 (M/s.Piaggio Vehicles Pvt. Ltd.) precedent hold that the assessee has availed loan with the corporate guarantee given by its AEs and since the rate of CGF for A.Y. 2015-16 at 0.19% is less than 0.5% of CGF generally accepted by the Hon'ble Courts, we allow the claim of CGF incurred by the assessee and dismiss the ground No.2 raised by the Revenue for A.Y. 2015-16. However, for A.Y. 2016-17, since the assessee has claimed CGF of 0.62% not properly substantiated and is higher than the accepted CGF of 0.5%, we allow the claim of the assessee only to the extent of 0.5% and the excess amount of CGF @ 0.12% stands disallowed which amounts to Rs. 1,12,88,090/- and partly allow the ground No.2 raised by the Revenue for A.Y. 2016-17. 13. In the result, appeal of the Revenue for A.Y. 2015-16 (ITA No.867/PUN/2022) is partly allowed for statistical purposes and appeal for A.Y. 2016-17 (ITA No. 589/PUN/2024) is partly allowed. Order pronounced on 27.05.2025. Sd/- Sd/- [ASTHA CHANDRA] [MANISH BORAD] JUDICIAL MEMBER ACCOUNTANT MEMBER Pune, Dated 27th May, 2025 vr/- 20 ITA No. 867/PUN/2022 & ITA.No.589/PUN./2024 (M/s.Piaggio Vehicles Pvt. Ltd.) Copy to 1. The appellant 2. The respondent 3. The CIT(A), Pune concerned. 4. D.R. ITAT, “C” Bench, Pune. 5. Guard File. By Order //True Copy // Sr. Private Secretary, ITAT, Pune Benches, Pune. "