Toyota Boshoku Automotive India Private Limited, Ramanagaram V. The Deputy Commissioner Of Income Tax, Circle-7(1)(1), Bangalore

ITTPA 722/BANG/2022

• Counselvise Citation: [2022] 104 COUNSELVISE.COM (IT) 2694 (ITAT-BANGALORE)
• Duration Of Justice: 1 month(s) 3 day(s)
• Appeal Type: Income Tax (Transfer Pricing) Appeal
• Pronouncement Date: 25-09-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 20-09-2022
• Assessment Year: 2017-2018
• Appeal Filed On: 21-08-2022
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; Opportunity of being heard; International transaction; TDS
• Section: 92D; 234B; 144C; 274; 143(2)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL ‘B’ BENCH : BANGALORE BEFORE SMT. BEENA PILLAI, JUDICIAL MEMBER AND SHRI LAXMI PRASAD SAHU, ACCOUNTANT MEMBER IT(TP)A No. 722/Bang/2022 Assessment Year : 2017-18 M/s. Toyota Boshoku Automotive India Pvt. Ltd., 41, Bhimenahalli, MN Halli Post, Bidadi, Ramanagaram – 562 109. PAN: AAECT1871F Vs. The Deputy Commissioner of Income Tax, Circle 7(1)(1), Bangalore. APPELLANT RESPONDENT Assessee by : Shri Darpan Kirpalani, Advocate Revenue by : Shri Manjunath Karkihalli, CIT DR Date of Hearing : 21-09-2022 Date of Pronouncement : 26-09-2022 ORDER PER BEENA PILLAI, JUDICIAL MEMBER Present appeal is filed by assessee against the final assessment order dated 29/06/2022 passed by the Ld.DCIT, Circle – 7(1)(1), Bangalore for A.Y. 2017-18 on following grounds of appeal: “The grounds mentioned herein below are independent and without prejudice to the other grounds preferred by the Appellant. Page 2 of 11 IT(TP)A No. 722/Bang/2022 On the facts and circumstances of the case and in law: 1. The order passed by the Deputy Commissioner of Income Tax, Circle 7(1)(1), Bangalore ('Learned AO), pursuant to the directions of the Hon'ble Dispute Resolution Panel — 2. Bangalore ('Panel' or 'DRP'), and the order of the Learned Deputy Commissioner of Income-tax, Transfer Pricing- Circle (2)(2)(2), Bengaluru ('Learned TPO') to the extent prejudicial to the Appellant. is bad in law and facts and liable to be quashed. 2. The order of the Learned AO passed under section 143(3) read with section 144C of the Act in relation to AY 2017-18 to the extent prejudicial to the Appellant is arbitrary. contrary to law, facts and circumstances of the case and liable to be quashed. 3. The Learned AO/ TPO erred in making the transfer pricing adjustment to the Appellant's international transaction of payment of royalty amounting to INR 4,51,53,446. 4. The Learned AO/ TPO erred in rejection of the TP documentation maintained by the Appellant and in the application of profit split method ('PSM') as the MAM without appreciating that PSM is not applicable in the Appellant's case. 5. The Learned AO/ TPO erred in rejecting the aggregation of international transactions adopted by the Appellant and in rejection of Transactional Net Margin Method ('TNMM') as the most appropriate method ('MAM'), for benchmarking the international transaction of payment of royalty. 6. The Learned AO/ TPO erred in the considering the segments of the Appellant inappropriately as "Manufacturing" and -Trading" instead of "Manufacturing" and "Contract Application Engineering" as documented by the Appellant in the transfer pricing study maintained in compliance with Section 92D of the Act, without appreciating the fact that the trading activity of the Appellant is not a separate business activity but integral to the manufacturing segment to facilitate the main business activity of manufacturing. 7. The Learned AO / TPO erred in not following a similar approach as in case of preceding assessment years (AY 2011-12. AY 2012-13) where TNMM was accepted as the Page 3 of 11 IT(TP)A No. 722/Bang/2022 MAM for the benchmarking of royalty transaction, given that there is no change in the facts for AY 2017-18 as well. 8. The Hon'ble Panel also erred in upholding the adjustment proposed by the learned TPO without appreciating the fact that for the preceding assessment years (AY 2011-12, AY 2012-13) as well as for the succeeding AY 2018-19. no adjustment has been proposed by the Learned TPO for the benchmarking of royalty transaction and TNMM has been accepted as the MAM. 9. The Learned AO/ TPO has erred in questioning the commercial rationale for payment of running royalty to Toyota Boshoku Corporation. 10. Without prejudice to the other grounds of appeal, the Learned AO erred in the computation of tax liability of the Appellant in the Assessment Order dated June 29, 2022 by incorrectly considering the amount of TDS and TCS in the computation. 11. Without prejudice to the other grounds of appeal, the Learned AO erred in the computation of interest u/s 234B of the Act in the Assessment Order dated June 29, 2022. 12. The Learned AO erred in initiating the penalty proceedings under section 274 read with section 270A of the Act without considering the merits of the case. That the Appellant craves leave to add to and/or to alter, amend, rescind, modify the grounds herein above or produce further documents before or at the time of hearing of this Appeal.” 2. Brief facts of the case are as under: 2.1 Toyota Boshoku Automotive India PO Ltd is engaged in the manufacture of automobile components such as seats, door trims and interiors, for passenger cars. TBI manufactures components such as seats, door trims and interiors, for the automobile industry. TBI is a licensed manufacture conducting the manufacturing activities with the license and technical know-how obtained from TBC. The said licensed products are the sole Page 4 of 11 IT(TP)A No. 722/Bang/2022 property of TBC and license is granted, to TBI to manufacture and sell the licensed products in India, by using manufacturing technical know-how, information and data provided by TBC. 2.2 The Assessee filed its return of income on 29.11.2017 declaring total income of Rs.1,29,08,53,660/- The return filed was taken upon for complete Scrutiny (Computer Aided Scrutiny Selection) and accordingly a notice u/s 143(2) was issued to the assessee on 08/08/2019 and 24/09/2018. As per the audit report in Form 3CEB filed by the assessee, the aggregate value of the international transactions of the assessee with its Associated Enterprises are to the tune of Rs.4,51,53,446/-. As it was necessary to compute the arm's length price in relation to these international transactions, a reference was made to the Ld.TPO u/s 92CA. The Ld.TPO passed TP order u/s 92CA(3) of the Act dated 28.01.2021 proposing adjustment of Rs. 4,51,53,446/-. The Ld.AO passed draft assessment order on 21.07.2021. In response to this, the assessee filed objections before DRP. 2.2.1 The DRP upheld the order passed by the Ld.TPO, against which the assessee filed the appeal before this Tribunal. 2.3 At the outset, the Ld.AR submitted that transfer pricing adjustment raised in Ground nos. 3-5 and 7-9 are in respect of adoption of appropriate MAM for computing the ALP of the international transaction. He submitted that, this is a recurring issue and in the preceding assessment years i.e. A.Ys. 2013-14 and 2015-16 in IT(TP)A Nos. 1646/Bang/2017 & 2586/Bang/2019 by order dated 13/04/2022 this issue has been remanded by this Tribunal in IT(TP)A No. 1646/Bang/2017 by observing as under: Page 5 of 11 IT(TP)A No. 722/Bang/2022 11. Ground No.2 to 10 is in respect of the transfer pricing adjustment made to the royalty as independent international transaction by using PSM as the most appropriate method. He submitted that, identical issue was considered by coordinate bench of the Tribunal in assessee’s sister concern’s case of Toyota Kirloskar Auto Parts Ltd vs. DCIT, reported (2020)185 ITD 806. He submitted that, the facts and circumstances in the sister concern’s case is identical, with that of the assessee, and the Ld.TPO therein, also applied PSM to be the most appropriate method to benchmark the royalty transaction. 11.1. On the contrary, the Ld.CIT.DR placed reliance and orders passed by authorities below. 11.2. We have perused submissions advanced by both sides in light of records placed before us. We note that the functions performed by the assessee before us, and that of Toyota Kirloskar (supra) considered by Coordinate Bench of this Tribunal, being the sister concern, are identical in nature. Both these assessee are engaged in manufacture of automotive components, peculiar to automobile industry. The assessee before us aggregated all the international transaction by using TNNM as the most appropriate method to benchmark the international transactions. The Ld.TPO segregated management fees and royalty payment, which constituted major part of the transaction. The entire dispute before us, is in respect of the method used for benchmarking the royalty transaction by separately benchmarking it under PSM. 11.3. The overall margin computed by the assessee was at 5.26%. From the transfer pricing study, we note that the assessee paid Rs.105,317,196/- as royalty to the AE, for use of technical know-how relating to manufacture and sale of automotive components. The net sales earned by the assessee for the year under consideration is Rs.4,61,06,57,812/-. Thus, the effective rate of royalty paid by the assessee to the AE is at 2.28% over net sales. We note that, the Ld.TPO computed the royalty rate by using profit split method at 3.19%. The Ld.TPO considered the profit split ratio of 2:3 wherein 40% split was considered to be the share of the AE. There is in the overall margin of 5.26% 2.28% over the net sales are paid as royalty to the AE by assessee. 11.4. We note that, Ld.TPO referred to the decision of Hon’ble Delhi bench in case of Global One India (P.)Ltd. vs. ACIT (supra). On perusal of this decision, we learn that, that was a case where, Global One India, out of highly integrated operations and deployment of assets and functions of different entities located in different geographical locations, for execution of one transaction, to be ultimately delivered by way of combined effort. It was under such circumstances that profit split method was necessary to be considered as the most appropriate method. Page 6 of 11 IT(TP)A No. 722/Bang/2022 11.5. In the present facts of the case that technology is obtained from the evil witches used by assessee in its manufacturing activity as there is no involvement of the global entities in order to execute the transaction. We have perused the decision case of assessee’s sister concern referred to herein above, wherein, in identical circumstances, the Tribunal observed and held as under: “15. We have considered the rival submissions. We are of the view that the issue with regard to Most Appropriate Method in the case of assessee had already been settled by the Tribunal. The TPO as well as the DRP have not followed the aforesaid decision of the Tribunal on the ground that economic life of the technology had an impact on the MAM and that technology in question was to be used by start-ups and since the assessee was using the technology for a fairly long period of more than 5 years, it would not be proper to adopt the TNMM as the MAM, as the economic life of the technology would no longer exist. In our view, there is no basis for the TPO as well as the DRP to come to a conclusion that technology in question was to be used by a start-up. There is no basis for the TPO and DRP to come to a conclusion that the Assessee is a start up in manufacture of various parts for automobiles. The technology in question was that of TMC Japan. The technology is being used by the Assessee even today. There is no basis for the TPO/DRP's conclusion that the useful economic life of the technology would be only 5 years. In any event passage of time cannot be the basis to discard TNMM which is already held by the Tribunal and upheld by the Hon'ble High Court as no longer the MAM because the conditions necessary for PSM as MAM are not met in the case of the Assessee. Even going by Rule 10B(1)(d), there should be contribution by each of the parties to a transaction for earning profits from sale of goods or provision of services. Then the contribution of each of the parties is identified and the profit is split between those parties. In the case of the Assessee the technology is given by TMC, Japan for which royalty is paid. The use of the technology in manufacturing and the sale of the product so manufactured contribute to the profit of the Assessee and TMC, Japan has nothing to do with that. There is therefore absence the first condition for application of PSM as MAM. As submitted by the Assessee PSM is used as MAM only in a case involving transfer of unique intangible or in multiple inter-related international transactions which cannot be valued separately for determining the ALP. The OECD guidelines cited on behalf of the assessee clearly supports the aforesaid approach and the OECD guidelines in this regard reads as follows:— "Further reliance is also placed on OECD Guidelines, which clearly lay down the situations in which the PSM is selected as an appropriate method for benchmarking. The relevant extract from the OECD Guidelines (para 2.109) is as below: "A transactional profit split method may also be found to be the most appropriate method in cases where both parties to a transaction make unique and valuable contributions (e.g. Page 7 of 11 IT(TP)A No. 722/Bang/2022 contribute unique intangibles) to the transaction, because in such a case independent parties might wish to share the profits of the transaction in proportion to their respective contributions and a two-sided method might be more appropriate in these circumstances than a one-sided method. In addition, in the presence of unique and valuable contributions, reliable comparables information might be insufficient to apply another method. On the other hand, a transactional profit split method would ordinarily not be used in cases where one party to the transaction performs only simple functions and does not make any significant unique contribution (e.g. contract manufacturing or contract service activities in relevant circumstances), as in such cases a transactional profit split method typically would not be appropriate in view of the functional analysis of that party". 16. The revised guidance (June 2018) on the application of transactional PSM, provided by the OECD state the importance of delineating the transactions in determining whether the PSM is applicable or not. The relevant extract from the OECD Guidelines is provided below: "2.125. The accurate delineation of the actual transaction will be important in determining whether a transactional profit split is potentially applicable. This process should have regard to the commercial and financial relations between the associated enterprises, including an analysis of what each party to the transaction does, and the context in which the controlled transactions take place. That is, the accurate delineation of a transaction requires a two-sided analysis (or a multi-sided analysis of the contributions of more than two associated enterprises, where necessary) irrespective of which transfer pricing method is ultimately found to be the most appropriate. 2.126. The existence of unique and valuable contributions by each party to the controlled transaction is perhaps the clearest indicator that a transactional profit split may be appropriate. The context of the transaction, including the industry in which it occurs and the factors affecting business performance in that sector can be particularly relevant to evaluating the contributions of the parties and whether such contributions ale unique and valuable. Depending on the facts of the case, other indicators that the transactional profit split may be the most appropriate method could include a high level of integration in the business operations to which the transactions relate and /or the shared assumption of economically significant risks (or the separate assumption of closely related economically significant risks) by the parties to the transactions. It is important to note that the indicators are not mutually exclusive and on the contrary may often be found together in a single case. Page 8 of 11 IT(TP)A No. 722/Bang/2022 2.127. At the other end of the, spectrum, where the accurate delineation of the transaction determines that one party to the transaction performs only simple functions, does not assume economically significant risks in relation to the transaction and does not otherwise make any contribution which is unique and valuable ........ " "2.147. Under the transactional profit split method, the relevant profits are to be split between the associated enterprises on an economically valid basis that approximates the divisi6n of profits that would have been anticipated and reflected in an agreement made at arm's length. In general, the determination of the relevant profits to be split and of the profit splitting factors should: Be consistent with the functional analysis of the controlled transaction under review, and in particular reflect the assumption of the economically significant risks by the parties, and Be capable of being measured in a reliable manner." 17. It is clear from the above OECD guidelines that in 'order to determine the profits to be split, the crux is to understand the functional profile of the entities under consideration. Although the comparability analysis is at the "heart of the application of the arm's length principle", likewise, a functional analysis has always been a cornerstone of the comparability analysis. In the present case the Assessee leverages on the use of technology from the AE and does not contribute any unique intangibles to the transaction. It may be true that the Assessee aggregated payment of royalty with the transaction of manufacturing as it was closely linked and adopted TNMM but that does not mean that the transactions are so interrelated that they cannot be evaluated separately for applying PSM. Further, the Assessee does not make any unique contribution to the transaction, hence PSM in this case cannot be applied. 18. Therefore, we are of the view that TNMM is the Most Appropriate Method in the case of assessee. The decision of the Tribunal in the earlier AY 2008-09 has also been upheld by the Hon'ble High Court of Karnataka in CIT v. Toyota Kirloskar Auto Parts (P.) Ltd. [IT Appeal No.104 of 2015, dated 16-7-2018], which was an appeal of the revenue against the order of Tribunal for AY 2008-09. The Tribunal has upheld TNMM as MAM from AY 2007-08 to 2011-12. In those AYs the dispute was whether TNMM or CUP was the MAM. It is for the first time in AY 2013-14 that the revenue has sought to apply PSM as MAM. In the given facts and circumstances, we are of the view that TNM Method is the Most Appropriate Method and the AO is directed to apply the said method in determining the ALP, after affording opportunity of being heard to the assessee. The grounds of appeal of the assessee are treated as allowed. 11.5. We note that, the Ld.TPO in present facts of the assessee before us, used identical comparables in order to ascertain the transaction to be at arms length as it was used in case of the Page 9 of 11 IT(TP)A No. 722/Bang/2022 sister concerns case referred to herein above. There is no dispute that, factual metrics and background our identical and the nature of payment having considered identically by the revenue authorities in both these cases. We are therefore respectfully following the view taken by coordinate bench of this tribunal in case of Toyota Kirloskar (supra), we are of the view that TNM Method is the Most Appropriate Method and the Ld.AO/TPO is directed to apply the said method in determining the ALP, after affording opportunity of being heard to the assessee. Accordingly, Ground No.2-10 raised by assessee for the assessment year 2013-14 stands allowed.” 3. Similar view has also been taken by Coordinate Bench of this Tribunal in A.Y. 2015-16 and A.Y. 2016-17 in IT(TP)A No. 362/Bang/2021 by order dated 18/07/2022. The Ld.DR did not object for the issue to be remitted by placing reliance on orders passed by authorities below. We have perused the submissions advanced by both sides in the light of records placed before us. 4. We note that a consistent approach has been taken by this Tribunal by remanding this issue back to Ld.AO/TPO to verify the factual position and to apply TNMM as the most appropriate method. It is further observed by this Tribunal in the order passed for A.Y. 2013-14 that this issue has been upheld by Hon’ble High Court in case of CIT vs. Toyota Kirloskar Autoparts Pvt. Ltd. in ITA No. 104/2015 dated 16/07/2018 in an appeal filed by revenue against the order passed by this Tribunal for A.Y. 2008-09. 5. Respectfully following the above view, we direct the Ld.AO to use TNMM as the most appropriate method in determining the ALP after affording proper opportunity of being heard to assessee. Assessee is directed to file all relevant details / information in Page 10 of 11 IT(TP)A No. 722/Bang/2022 respect of the same in order to assist the Ld.AO/TPO to compute the margin. Accordingly, these grounds raised by assessee stands allowed. 6. The Ld.AR submitted that ground no. 10 is in respect of incorrect granting of TDS and TCS for which the assessee sought direction for correcting the same. We direct the Ld.AO to verify the TDS and TCS certificates and to consider the claim of assessee in accordance with law. Accordingly this ground raised by assessee stands allowed for statistical purposes. 7. Ground nos. 11 & 12 are consequential in nature and therefore need not be adjudicated. 8. Ground nos. 1, 2 and 6 are general in nature and therefore need not be adjudicated. In the result, the appeal filed by assessee stands allowed. Order pronounced in open court on 26 th September, 2022. Sd/- Sd/- (LAXMI PRASAD SAHU) (BEENA PILLAI) Accountant Member Judicial Member Bangalore, Dated, the 26 th September, 2022. /MS / Page 11 of 11 IT(TP)A No. 722/Bang/2022 Copy to: 1. Appellant 4. CIT(A) 2. Respondent 5. DR, ITAT, Bangalore 3. CIT 6. Guard file By order Assistant Registrar, ITAT, Bangalore