TaxTMI 
TaxTMI 
2025 (6) TMI 141
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....ntire 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 Ld. TPO vide its order dated 31/10/2018 were incorporated by the Ld.AO in his assessm....
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....ee 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 det....
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....n 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 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 t....
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....rts 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%. 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....
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..... 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 appli....
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....s 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: Particulars Sales to Non-AEs Export to AE Domestic parties - spares BO (service spares) Exports to third parties - spares BO (service spares) Total sales to Non-AEs Spares- BO (service spares) Global sourcing and NQP(sourcing activities) Total Exports to AE Sales (Rs) 529461000 15451000 544912000 2186000 138934000 141120000 Net Profit (Rs) 75591000 5583000 81174000 877000 13832000 14709000 Total cost (Rs) 453870000 9868000 463738000 1309000 125102000 126411000 Profit margin (on sales) 14.27% 36.13% 14.90% 40.12% 9.96% 10.40% Profit margin (on cost) 16.65% 56.58% 17.50% 67% 11.05% 11.63% ....
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....es 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 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 ....
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....e 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 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 i....
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....erage operating margins earned by third party support service provider companies in India which worked out to 5.1%. In our 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 ....
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....redit 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 know....