Deputy Commissioner of Income-tax, V. Piaggio Vehicles Pvt. Ltd., Pune

ITA 573/PUN/2015

• Counselvise Citation: [2017] 126 COUNSELVISE.COM (IT) 7181 (ITAT-PUNE)
• Duration Of Justice: 2 year(s) 6 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-11-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 08-11-2017
• Assessment Year: 2010-2011
• Appeal Filed On: 28-04-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction; Question of law
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A , PUNE , , BEFORE MS. SUSHMA CHOWLA, JM AND SHRI ANIL CHATURVEDI , AM . / ITA NO. 573 /P U N/20 15 / ASSESSMENT YEAR : 20 1 0 - 11 THE DY. COMMISSIONER OF INCOME TAX, CIRCLE - 4, PUNE . / APPELLANT VS. PIAGGIO VEHICLES PVT. LTD., 102, PHOENIX, BUND GARDEN ROAD, PUNE 411001 . / RESPONDENT PAN: AABCP1225G / APPELLANT BY : SHRI RAJEEV KUMAR, CIT / RESPONDENT BY : SHRI RAJENDRA AGIWAL / DATE OF HEARING : 0 8 . 1 1 . 201 7 / DATE OF PRONOUNCEMENT: 24 . 1 1 . 201 7 / ORDER PER SUSHMA CHOWLA, JM: THE APPEAL FILED BY THE REVENUE IS AGAINST THE ORDER OF D C IT , CIRCLE - 4, PUNE, DATED 2 7 .02.2015 RELATING TO ASSESSMENT YEAR 20 1 0 - 11 PASSED UNDER SECTION 143(3) R.W.S. 144C(13) OF THE INCOME - TAX ACT , 1 961 (IN SHORT THE ACT) . 2 ITA NO. 573 /P U N/201 5 PIAGGIO VEHICLES PVT. LTD. 2 . THE REVENUE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: - 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN L AW, THE HON'BLE DISPUTE RESOLUTION PANEL ERRED IN DELETING THE TRANSFER PRICING ADJUSTMENT ACCEPTING ARTIF ICIALLY CREATED SUB - SEGMENTS OF INTERNATIONAL TRANSACTIONS ON THE BASIS OF APPLICATION OF SPARES AND COMPONENTS REQUIRED FOR SERVICING OF THE VEHICLES AND REQUIRED FOR MANUFACTURING OF VEHICLES IGNORING THAT THE FUNCTION, ASSETS AND RISK ANALYSIS FOR THE A SSESSEE, THE TESTED PARTY WERE SAME BEING A TRADER OF SUCH SPARES AND COMPONENTS. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE HON'BLE DISPUTE RESOLUTION PANEL ERRED IN ACCEPTING THE ARTIFICIAL BIFURCATION OF SPARES AND COMPONENTS IN CATEGORIES A, B & C ' ON THE BASIS OF THEIR APPLICATION, COMPARING CATEGORY A' EFFECTIVELY UNDER CUP METHOD AND FOR CATEGORY B' & C' RESTORING THE ISSUE TO THE AO / T PO DIRECTING TO USE EXTERNAL TNMM WHEN IN CASE OF INTERNAL COMPARABILITY ADOPTED BY THE ASSESSING OFFICER, THE FUNCTIONAL DIFFERENCES GET MINIMIZED AS COMPARED TO EXTERNAL TNMM. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE HON'BLE DISPUTE RESOLUTION PANEL ERRED IN NOT ACCEPTING THAT ALL THE THREE CATEGORIES A ', B' & 'C ' CONSTITUTE A SINGULAR ACTIVITY AS THE SPARES AND COMPONENTS BEING SUPPLIED TO BOTH AES AND NON AES MAY DIFFER IN THEIR APPLICATIONS, BUT THOSE REMAIN SPARES AND AS SUCH THE SUB - SEGMENTATION CANVASSED BY THE ASSESSEE IN ORDER TO BENCHMARK SOME TRANSACTIONS IS NOT RELEVANT. 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE HON'BLE DISPUTE RESOLUTION PANEL ERRED IN ACCEPTING THAT THE ASSESSEE WAS MERELY A LOGISTIC SERVICE PROVIDER FOR EXPORT OF SPARES AND COMPONENTS TO AES MANU FACTURING VEHICLES WHILE IT ACTED AS A TRADER TO AES AND THIRD PARTIES FOR AFTER SALES SERVICE WHEN THE FAR ANALYSIS FOR BOTH THESE ACTIVITIES WAS SAME. 3. THE ISSUE RAISED IN THE APPEAL FILED BY THE REVENUE IS AGAINST DELETION OF TRANSFER PRICING ADJUSTM ENT BY THE DISPUTE RESOLUTION PANEL (DRP). THE REVENUE IS AGGRIEVED BY THE ORDER OF DRP IN ACCEPTING ALLEGED ARTIFICIAL BIFURCATION OF SPARES AND COMPONENTS IN CATEGORY A, B & C' ON THE BASIS OF THEIR APPLICATION. THE TRANSFER PRICING OFFICER ( TPO ) ON THE OTHER HAND, WAS OF THE VIEW THAT ALL THE THREE CATEGORIES I.E. A, B & C' CONSTITUTE A SINGULAR ACTIVITY AS THE SPARES AND COMPONENTS WERE BEING SUPPLIED TO BOTH THE ASSOCIATED ENTERPRISES AND NON - ASSOCIATED ENTERPRISES THOUGH, MAY DIFFER IN THE IR APPLICATIONS, BUT THOSE REMAIN SPARES AND AS SUCH THE SUB - SEGMENTATION CANVASSED BY THE ASSESSEE IN ORDER TO BENCHMARK THE S O ME TRANSACTIONS WAS NOT RELEVANT. 3 ITA NO. 573 /P U N/201 5 PIAGGIO VEHICLES PVT. LTD. 4. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE AT THE OUTSET POINTED OUT THAT THE I SSUE RAISED IN THE PRESENT APPEAL FILED BY THE REVENUE IS SQUARELY COVERED BY SEPARATE ORDERS OF TRIBUNAL IN ASSESSEES OWN CASE RELATING TO ASSESSMENT YEARS 2006 - 07 TO 2009 - 10. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE FURTHER POINTED OUT TH AT THE HONBLE BOMBAY HIGH COURT HAS ADMITTED THE SUBSTANTIAL QUESTION OF LAW ON THE FIRST ISSUE IN ASSESSMENT YEAR 2006 - 07 IN INCOME TAX APPEAL (L) NO.2063/2012, VIDE ORDER DATED 13.03.2013 . 5. THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE FAIR LY ADMITTED THAT SIMILAR ISSUE HAS BEEN DECIDED BY THE TRIBUNAL IN ASSESSEES OWN CASE. 6. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. BRIEFLY, IN THE FACTS OF THE CASE, THE ASSESSEE FOR THE YEAR UNDER CONSIDERATION HAD FURNISHED THE RETU RN OF INCOME DECLARING TO TAL INCOME AT RS.4,80,35,81,043 / - . THE CASE OF ASSESSEE WAS SELECTED FOR SCRUTINY. THE ASSESSEE WAS ENGAGED IN MANUFACTURING AND SALE OF THREE WHEELED MOTOR VEHICLES FOR TRANSPORTATION OF GOODS AND PASSENGERS. IT WAS ALSO ENGAGE D IN SALE OF SPARE PARTS IN BOTH THE DOMESTIC AS WELL AS FOREIGN COUNTRIES. PIAGGIO WHICH IS BASED IN ITALY WAS ENGAGED IN MANUFACTURING MAINLY TWO AND THREE WHEELER VEHICLES. THE ASSESSEE CARRIED ON THE BUSINESS OF MANUFACTURING OF THREE WHEELER AND AUT OMOBILE PARTS FROM ITS UNIT AT BARAMATI. THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION HAD ALSO STARTED MANUFACTURING ENGINES. THE ASSESSING OFFICER MADE REFERENCE UNDER SECTION 92CA(1) OF THE ACT FOR COMPUTATION OF ARM'S LENGTH PRICE IN RELATION TO I NTERNATIONAL TRANSACTIONS DETAILED IN THE AUDIT REPORT. THE ASSESSEE HAD BIFURCATED ITS BUSINESS INTO THREE SEGMENTS I.E. SEGMENTS A, B & C' AND HAD APPLIED TNMM METHOD TO BENCHMARK THE SAME AND COMPARED ITS RESULTS WITH INDEPENDENT COMPARABLES. THE TPO HOWEVER, 4 ITA NO. 573 /P U N/201 5 PIAGGIO VEHICLES PVT. LTD. REJECTING THE PLEA OF ASSESSEE AND IN VIEW OF THE HONBLE HIGH COURT ADMITTING AN APPEAL AGAINST THE ORDER OF TRIBUNAL IN ASSESSMENT YEAR 2006 - 07 PROPOSED TRANSFER PRICING ADJUSTMENT AT RS.2.82 CRORES ; SAME WAS PROPOSED BY THE ASSESSING OFFIC ER WHILE ISSUING THE DRAFT ASSESSMENT ORDER UNDER SECTION 143(3) R.W.S. 144C OF THE ACT. THE ASSESSEE FILED OBJECTIONS BEFORE THE DRP IN THIS REGARD AND STRESSED THAT THE ISSUE IS SQUARELY COVERED BY THE ORDER OF THE TRIBUNAL , WHICH DELETED THE ADJUSTMENT PROPOSED BY THE ASSESSING OFFICER / TPO. 7. THE REVENUE IS IN APPEAL AGAINST THE ORDER OF DRP. 8. WE FIND THAT THE ISSUE ARISING IN THE PRESENT APPEAL HAS BEEN DECIDED BY THE TRIBUNAL IN ASSESSMENT YEAR 2006 - 07, WHEREIN THE PLEA OF ASSESSEE WAS THAT THR EE CATEGORIES OF TRANSACTIONS WERE CARRIED OUT IN THE ACTIVITY OF SALE OF SPARES AND COMPONENTS, WHEREIN CATEGORY A REPRESENTED SALE OF SPARES BY THE ASSESSEE TO THIRD PARTY DISTRIBUTORS AS WELL AS TO ASSOCIATED ENTERPRISES, WHICH WAS REQUIRED FOR THE PU RPOSE OF SERVICING THE VEHICLES SOLD BY THE ASSESSEE COMPANY; CATEGORY B REPRESENTED SOURCING OF COMPONENTS REQUIRED BY OVERSEAS ASSOCIATED ENTERPRISES FOR THE MANUFACTURE OF TWO AND THREE WHEELERS; AND CATEGORY C' REPRESENTED SOURCING OF COMPONENTS REQ UIRED BY OVERSEAS ASSOCIATED ENTERPRISES FOR MANUFACTURE OF FOUR WHEELERS. AS PER THE ASSESSEE, EXPORT TO THIRD PARTY I.E. NON - ASSOCIATED ENTERPRISES WAS COMPRISED OF ONLY IN CATEGORY A TRANSACTIONS; WHEREAS EXPORT TO ITS ASSOCIATED ENTERPRISES COMPRISE D OF TRANSACTIONS OF ALL THREE CATEGORIES I.E. A, B & C' AND HENCE, THE SAME WERE U N - COMPARABLE. THE TRIBUNAL IN ITA NO. 1480/PN/2010, RELATING TO ASSESSMENT YEAR 2006 - 07, VIDE ORDER DATED 23.07.2012 ACCEPTING THE PLEA OF ASSESSEE HELD THAT THERE WAS DISTINCTION BETWEEN THE TRANSACTIONS OF CATEGORY B AND C' ON THE ONE HAND AND TRANSACTIONS OF 5 ITA NO. 573 /P U N/201 5 PIAGGIO VEHICLES PVT. LTD. CATEGORY A ON THE OTHER HAND. THE RELEVANT FINDINGS OF THE TRIBUNAL VIDE PARAS 10 AND 11 ARE AS UNDER: - 10. IN OUR CONSIDERED OPINION, THE NET PROFIT MARG IN 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 E XAMPLE 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 VIS - - 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 I N 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 IN VOLVE 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 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 LIM ITED 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 C ATEGORY 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). 9. THE TRIBUNAL THUS, HELD THAT INTERNAL TNMM METHOD IS NOT TO BE APPLIED WHILE COMPARING THE MARGINS OF TRANSACTIONS OF CATEGORIES B AND C' UNDERTAKEN WITH THE ASSOCIATED ENTERPRISES BEING UN - COMPARABLE WITH TRANSACTIONS UNDERTAKEN WITH THIRD PARTIES I.E. NON - ASSOCIATED ENTERPRISES WHICH WERE PURELY IN THE CATEGORY OF A. IT WAS FURTHER HELD BY THE TRIBUNAL THAT AS FAR AS THE TRANSACTIONS OF CATEGORY A ARE CONCERNED, THE TRANSACTIONS WERE UNDERTAKEN WITH THIRD PARTY D ISTRIBUTORS I.E. NON - 6 ITA NO. 573 /P U N/201 5 PIAGGIO VEHICLES PVT. LTD. ASSOCIATED ENTERPRISES WERE COMPARABLE TO THE TRANSACTIONS WITH ASSOCIATED ENTERPRISES, SINCE THE MARGINS WERE WITHIN RANGE, NO TRANSFER PRICING ADJUSTMENT WAS MADE. THE RELEVANT FINDINGS OF THE TRIBUNAL ARE VIDE PARA 12. IN RESPECT OF TRANSACTIONS OF CATEGORIES B AND C', THE TRIBUNAL HELD THAT FOR BENCHMARKING THE SAME, THERE WAS NO INTERNAL COMPARABLE TRANSACTIONS. THE TRIBUNAL ACCEPTED THE STAND OF ASSESSEE THAT THE COMPARISON HAD TO BE MADE WITH OPERATING MARGINS EARNED BY THI RD PARTY SUPPORT SERVICES PROVIDED IN INDIA. HOWEVER, THE ISSUE WAS REMITTED BACK TO THE FILE OF ASSESSING OFFICER TO CARRY OUT THE REQUISITE VERIFICATION EXERCISE AND AFTER BEING SATISFIED, TO PASS AN APPROPRIATE ORDER IN ACCORDANCE WITH THE LAW ON THIS ASPECT. THE FINDINGS OF THE TRIBUNAL ARE AT PARA 13. IN OTHER WORDS, THE TRIBUNAL FOR CATEGORY A APPLIED INTERNAL TNMM METHOD AND IN RESPECT OF TRANSACTIONS IN CATEGORY B AND C' APPLIED TNMM METHOD WITH INDEPENDENT THIRD PARTIES. IN VIEW OF THE ISS UE BEING SETTLED BY THE TRIBUNAL IN ASSESSEES OWN CASE, WE DIRECT THE ASSESSING OFFICER TO APPLY THE SAID RATIO LAID DOWN BY THE TRIBUNAL IN ASSESSMENT YEARS 2006 - 07 TO 2009 - 10 AND VERIFY THE MARGINS OF EXTERNAL COMPARABLES. THE ISSUE IS REMITTED BACK TO THE FILE OF ASSESSING OFFICER FOR THIS LIMITED PURPOSE AND AFTER BEING SATISFIED, TO PASS AN ORDER IN ACCORDANCE WITH LAW ON THIS ACCOUNT. ACCORDINGLY, THE GROUNDS OF APPEAL RAISED BY THE REVENUE ARE DISMISSED. 10. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT THERE WAS AN ERROR IN GROUND OF APPEAL NO.2, WHEREIN THE REVENUE HAS ALLEGED THAT THE DRP DIRECTED TO APPLY CUP METHOD FOR CATEGORY A, WHEREAS THE DIRECTIONS OF THE TRIBUNAL IN EARLIER YEARS AS APPLIED BY THE DRP WAS IN TERNAL TNMM METHOD. ACCORDINGLY, WE HOLD SO. THE DRP HAS FOLLOWED EARLIER ORDERS OF THE TRIBUNAL, 7 ITA NO. 573 /P U N/201 5 PIAGGIO VEHICLES PVT. LTD. WHEREIN INTERNAL TNMM METHOD WAS APPLIED AND HENCE, THE GROUND OF APPEAL STANDS DECIDED ACCORDINGLY. 1 1 . IN THE RESULT, APPEAL OF REVENUE IS DISMISSED. ORDER PRONOUNCED ON THIS 24 TH DAY OF NOVEMBER , 201 7 . SD/ - SD/ - ( ANIL CHATURVEDI ) (SUSHMA CHOWLA) / ACCOUNTANT MEMBER / JUDICIAL MEMBER / PUNE ; DATED : 24 TH NOVEMBER , 201 7 . GCVSR / COPY OF THE O RDER IS FORWARDED TO : 1. THE APPELLANT ; 2. THE RESPONDENT; 3. THE DRP, PUNE ; 4. THE DIT (TP/IT), PUNE ; 5. THE DR A , ITAT, P UNE; 6. GUARD FILE . / BY ORDER , //TRUE COPY// / SR. PRIVATE SECRETARY , / ITAT, PUNE