Deputy Commissioner of Income-tax, Circle - 1(1), Pune V. M/s. Carraro India Pvt.Ltd, (AS a Successor of Turbo Gears India Pvt.Ltd), Pune

MA 170/PUN/2022

AI Insights

The case involves the Deputy Commissioner of Income Tax (DCIT), Circle-1(1), Pune as the applicant and M/s. Carraro India Pvt. Ltd., as the respondent. The dispute arose from the application of the Transactional Net Margin Method (TNMM) in determining the Arm's Length Price (ALP) for international transactions during the assessment year 2010-11. The Tribunal had previously directed the application of internal TNMM, which the Revenue contended led to the exclusion of four out of six international transactions from ALP determination. The Tribunal rejected this contention, emphasizing that the aggregation of transactions under TNMM remains consistent regardless of whether internal or external comparables are used.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 137843 (ITAT-PUNE)
• Duration Of Justice: 2 year(s) 1 month(s) 7 day(s)
• Appeal Type: Miscellaneous Application
• Pronouncement Date: 19-02-2023
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 16-02-2023
• Assessment Year: 2010-2011
• Appeal Filed On: 12-01-2021
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction; Set aside

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH, ‘C’ PUNE BEFORE SHRI R.S. SYAL, VICE PRESIDENT AND SHRI PARTHA SARATHI CHAUDHURY, JUDICIAL MEMBER Miscellaneous Application Nos.169 & 170/PUN/2022 (arising out of ITA No.1719 & 1720/PUN/2018) Assessment Year : 2010-11 DCIT, Circle-1(1), Pune Vs. M/s. Carraro India Pvt. Ltd., (As a successor of Turbo Gears India Pvt. Ltd.), B2/2, MIDC, Ranjangaon, Pune 412 220 PAN : AAACC5292M (Applicant) (Respondent) आदेश / ORDER PER R.S.SYAL, VP : These two Miscellaneous Applications have been moved by the Revenue against the order passed by the Tribunal on 28-11-2019 in relation to the assessment year 2010-11. 2. The ld. DR contended that the Tribunal erred in directing to apply the internal Transactional Net Margin Method (TNMM), if found applicable, and accordingly restoring the issue to the file of AO/TPO. He submitted that there were six international Assessee by: Shri M.P. Lohia Revenue by: Shri Suhas Kulkarni Date of hearing 17-02-2023 Date of pronouncement 20-02-2023 M.A.Nos.169 & 170/PUN/2022 M/s. Carraro India Pvt. Ltd., 2 transactions which were aggregated by the assessee and external TNMM was applied. With the direction of the Tribunal to apply internal TNMM, only two international transactions, namely, Import of Raw Materials/components and Export of finished goods stand covered within the aggregate approach and the other four international transactions, namely, Payment of Surety charges; Payment of warranty charges; Reimbursement of expenses paid; and Reimbursement of expenses received have gone out of the ambit of the Arm’s Length Price (ALP) determination. It was, therefore, prayed that the external TNMM should be directed to apply as the internal TNMM has led to extinction of the ALP determination of four out of the six international transactions under consideration. This was opposed by the ld. AR. 3. Having heard both the sides and gone through the relevant material on record, it is seen that the assessee aggregated six international transactions and applied the TNMM by considering external comparables. During the course of proceedings before the TPO, the assessee requested for applying internal TNMM, which was not acceded to. When the matter came up before the Tribunal, the bench set aside the orders of the authorities below and directed M.A.Nos.169 & 170/PUN/2022 M/s. Carraro India Pvt. Ltd., 3 to recompute the Arm’s Length Price (ALP) by, first, applying the internal TNMM. It further held that if the internal TNMM was found to be not applicable for the reasons given in the order, then the TPO may consider any other suitable method to benchmark the international transactions. The contention of the Revenue in the M.As is that the application of the internal TNMM has ousted four international transactions from the purview of the transfer pricing provisions, which were covered when external TNMM was applied. 4. We fail to appreciate the view point canvassed by the Department. There is no difference in calculation of the ALP of six international transactions whether external or internal TNMM is applied. Both involve comparing and computing operating profit from international transactions with the operating profit margin of comparables. When external TNMM is applied, the comparables chosen are external and in case of internal TNMM, the comparable is only internal, that is, the transactions of the assessee with outsiders. In external TNMM, operating profit margin of the comparables is aggregated and averaged to find out the ALP. It is this margin which is considered as a benchmark for determining the ALP of the international transaction. In internal TNMM, the M.A.Nos.169 & 170/PUN/2022 M/s. Carraro India Pvt. Ltd., 4 operating profit margin of the assessee’s own comparable uncontrolled transactions is ascertained which is considered as benchmark for determining the ALP of the international transactions. In fact, relevant criterion for inclusion or exclusion of certain transactions is the approval and the extent of aggregation. If certain transactions are allowed to be aggregated and the TNMM is accepted as the most appropriate method, one cannot say that the internal TNMM does not capture the impact of certain transactions out of such aggregated transactions, which were captured in external TNMM. As both the internal and external TNMM involve determination of the benchmark, being, the arm’s length margin, in the first case, from the assessee’s own transactions with third parties and in the second case, from the comparable transactions of some outsiders with third parties, it is neutral to the composition of the transactions. What is decisive for the composition of international transactions is the decision on aggregation of transactions. Once aggregation of certain transactions is permitted, all of them get captured in the common ALP determination under the TNMM. After that, separate benchmarking of some of such transactions cannot be conceived. It transpires that decision on aggregation is M.A.Nos.169 & 170/PUN/2022 M/s. Carraro India Pvt. Ltd., 5 crucial. Having allowed aggregation of certain transactions, one cannot turn around and say that some transactions out of such aggregate got skipped in the bundled aggregate ALP determination approach. 5. In the extant case, there is no dispute that the aggregation of all the six international transactions was claimed and allowed in the TP determination. There is no rationale in now claiming that application of the internal TNMM over the external TNMM has the effect of ignoring certain international transactions out of the TP purview. The issue in the instant case could have some bearing if aggregation of the six transactions had not been allowed by the TPO and the Tribunal directed to aggregate the transactions and then process such transactions under the internal TNMM instead of external TNMM apply. In fact, the TPO also accepted the aggregation approach and applied the external TNMM. Simply substituting the overall operating profit margin of comparables with the operating profit margin of the assessee’s own comparable uncontrolled transactions, does not in any manner push the other four international transactions namely, Payment of Surety charges; Payment of warranty charges; Reimbursement of expenses paid; and M.A.Nos.169 & 170/PUN/2022 M/s. Carraro India Pvt. Ltd., 6 Reimbursement of expenses received, outside the purview of transfer pricing provisions. We, therefore, do not find any merit in the Miscellaneous Applications filed by the Revenue. 6. In the result, both the Miscellaneous Applications stand dismissed. Order pronounced in the Open Court on 20 th February, 2023. Sd/- Sd/- (PARTHA SARATHI CHAUDHURY) (R.S.SYAL) JUDICIAL MEMBER VICE PRESIDENT पुणे Pune; िदनांक Dated : 20 th February, 2023 सतीश आदेश की ितिलिप अ ेिषत/Copy of the Order is forwarded to: 1. अपीलाथ / The Appellant; 2. थ / The Respondent 3. 4. The Pr. CIT-1, Pune DR, ITAT, ‘C’ Bench, Pune 5. गाड फाईल / Guard file. आदेशानुसार/ BY ORDER, // True Copy // Senior Private Secretary आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune M.A.Nos.169 & 170/PUN/2022 M/s. Carraro India Pvt. Ltd., 7 Date 1. Draft dictated on 17-02-2023 Sr.PS 2. Draft placed before author 20-02-2023 Sr.PS 3. Draft proposed & placed before the second member JM 4. Draft discussed/approved by Second Member. JM 5. Approved Draft comes to the Sr.PS/PS Sr.PS 6. Kept for pronouncement on Sr.PS 7. Date of uploading order Sr.PS 8. File sent to the Bench Clerk Sr.PS 9. Date on which file goes to the Head Clerk 10. Date on which file goes to the A.R. 11. Date of dispatch of Order. *