2021 (3) TMI 1151 - AT - Income Tax

TP adjustment - Inappropriately combining of export of service spare and export of parts and components in global sourcing segment - HELD THAT - Tribunal in assessee's own case for assessment year 2008-09 2014 (12) TMI 1 - ITAT PUNE after going through the findings for assessment year 2006-07 observed and held that in relation to the international transactions of export to the associated enterprises relating to the spares and components required in servicing of vehicle manufactured and sold by the assessee, the Tribunal found that even on an application of internal TNM mechanism the international transactions undertaken with associated enterprises was at an arm's length price. Even in the present assessment year i.e. 2013-14, the same position holds good as can be seen from the tabulation enumerated by the TPO at Para 6 of his order. Therefore, following the aforesaid precedent, the adjustment computed by the TPO with regard to the export to associated enterprises of spares and components required for the purpose of servicing of vehicles sold by assessee is untenable, as the transactions undertaken with third-party distributors are comparable to the transaction with the associated enterprises. Other part of the transactions relating to export of spares and components which are required by the associated enterprises for manufacture of two and three wheelers undertaken by them and the components which are required by the overseas associated enterprises for manufacture of four wheelers, namely, New, Quadracycle Poker. For these two categories of transactions, the Tribunal negated the invoking of internal TNM mechanism by the TPO and instead remanded the matter back to the file of the Assessing Officer to examine the plea setup by the assessee. We restore the issue back to the file of the Assessing Officer who shall carry requisite verification/exercise and re-adjudicate the matter while complying with the principles of natural justice. We direct the Assessing Officer to redetermine the ALP of the impugned international transaction of export of spares and components on the basis of the decision of the Tribunal in assessee's own case for assessment year 2006-07 (supra.). Thus, Ground Nos. 2, 3 and 4 raised by the assessee are allowed for statistical purposes. Whether education cess can be allowed as deduction? - HELD THAT - this additional ground in respect of 'Education cess' is also remanded to the file of the Assessing Officer to adjudicate the issue in view of the principles laid down by the Hon'ble Jurisdictional High Court in the case of Pr. Commissioner of Income Tax, Kota Vs. Sesa Goa Limited Vs. JCIT 2020 (3) TMI 347 - BOMBAY HIGH COURT and M/s. Chambal Fertilizers and Chemicals Ltd. 2018 (10) TMI 589 - RAJASTHAN HIGH COURT . Thus, additional ground No. 1 raised in appeal by the assessee is allowed for statistical purposes. Verification in respect of the various DTAA agreements - HELD THAT - Taking totality of facts and circumstances into consideration wherein the DTAA agreements has to be looked into and factual aspects needs to be verified. Therefore, these additional grounds are also remanded to the file of the Assessing Officer who shall adjudicate these issues while complying with the principles of natural justice. Thus, Additional Ground Nos. 8.1 8.2 raised in appeal by the assessee are allowed for statistical purposes.

Summary

Issues Involved:
1. Transfer pricing adjustment of ?1,28,70,000.
2. Combining export of service spares and parts in global sourcing segment.
3. Rejection of external TNMM approach for benchmarking international transactions.
4. Disregarding ITAT decisions for AY 2006-07 to AY 2009-10.
5. Consideration of foreign exchange fluctuations as non-operating items.
6. Levy of penalty under section 271(1)(c).
7. Deduction of education cess.
8. Rate of Dividend Distribution Tax (DDT) under DTAA.

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment:
The appellant challenged the transfer pricing adjustment of ?1,28,70,000 made by the AO by rejecting the appellant's analysis for the international transaction of exporting spare parts and components to its Associated Enterprises (AEs).

2. Combining Export of Service Spares and Parts in Global Sourcing Segment:
The appellant contended that the AO erred by combining transactions of exporting service spares and parts in the global sourcing segment, ignoring the functional and risk differences between these transactions. The Tribunal observed that the appellant's transactions had been previously decided in their favor for earlier assessment years, and the Revenue's appeal on this matter was pending before the High Court. The Tribunal noted that the TPO made adjustments to protect revenue interests at the High Court stage, despite being convinced of the appellant's transaction validity.

3. Rejection of External TNMM Approach:
The appellant argued against the rejection of the external TNMM approach for benchmarking the international transaction of exporting spare parts and components. The Tribunal referred to earlier decisions where the internal TNMM mechanism was deemed inappropriate, and the external TNMM was considered more suitable for benchmarking.

4. Disregarding ITAT Decisions for AY 2006-07 to AY 2009-10:
The Tribunal noted that similar issues had been decided in favor of the appellant in previous assessment years, and the TPO's adjustments were primarily to protect revenue interests pending High Court decisions. The Tribunal reiterated the need to follow precedents set in earlier years, where the appellant's benchmarking approach was accepted.

5. Consideration of Foreign Exchange Fluctuations:
The appellant contended that foreign exchange fluctuations should be considered operating items while computing margins. The Tribunal remanded this issue to the AO for re-adjudication, aligning it with the remand of the main grounds.

6. Levy of Penalty under Section 271(1)(c):
The Tribunal found the issue of penalty under section 271(1)(c) premature and did not require adjudication at this stage.

7. Deduction of Education Cess:
The appellant argued for the deduction of education cess, relying on decisions from the Bombay High Court and Rajasthan High Court, which allowed such deductions. The Tribunal remanded this issue to the AO to adjudicate in line with these precedents.

8. Rate of Dividend Distribution Tax (DDT) under DTAA:
The appellant contended that the DDT rate should be as per the India-Italy DTAA (15%) instead of the rate under section 115-O (16.223%). The Tribunal remanded this issue to the AO for factual verification and adjudication based on the DTAA agreements.

Conclusion:
The Tribunal allowed the appeal for statistical purposes, remanding the main grounds and additional grounds to the AO for re-adjudication, ensuring compliance with principles of natural justice. The Tribunal emphasized adherence to precedents and factual verification for a conclusive determination.