ASSISTANT COMMISSIONER OF INCOME TAX, PUNE vs. PIAGGIO VEHICLES PRIVATE LIMITED, BARAMATI

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 details that the assessee company also carries-out the Global Sourcing work for its AEs and various goods which are required by the AEs but are not manufactured by the assessee, are sourced from the domestic market by the & ITA.No.589/PUN./2024 (M/s.Piaggio Vehicles Pvt. Ltd.) assessee and exported to its AEs. It is also submitted that the profit margin on the export of spare parts and components manufactured by the assessee is much higher than the profit margin from the export to AEs for the sourcing of goods from domestic market which are not manufactured by the assessee. He also submitted that the ALP of the export of spare parts and components to the AEs has been calculated as per the internal Transactional Net Margin Method (TNMM) with that of profit margin of export of spare parts and components to the non-AEs. However, goods sourced for the AEs from the domestic market and subsequently exported, the assessee had adopted the external TNMM and has given detailed study report. It was also submitted that the issue raised by the Revenue relating to the transfer pricing adjustments to the value of international transaction undertaken by the assessee with its AEs pertaining to the export of spare parts and components stand adjudicated by this Tribunal in the part in assessee‟s own case for A.Ys. 2006-07 to 2010-11 & A.Ys. 2012-13 & 2013-14 and the lead case is for A.Y. 2006-07 in dated 23/07/2012.

7. So far as the issue of „CGF‟ is concerned, learned counsel for the assessee submitted that the assessee has taken the loan from IFC, BOFA, HSBC, Citi Bank and Caylon and the average CGF of 0.19% has been paid for A.Y. 2015-16 and the said funds have been utilized for the business purpose. He & ITA.No.589/PUN./2024 (M/s.Piaggio Vehicles Pvt. Ltd.) also submitted that for the A.Y. 2016-17, CGF 0.62% has been paid. He also submitted that complete details of CGF paid to various banks are filed in the paper book, however, various Hon'ble High Courts have upheld the CGF @ 0.5% as reasonable and, therefore, in case the details filed by the assessee in support of its claim of CGF of 0.62% is not accepted, then at least 0.5% may please be allowed in the light of judicial precedents. Reliance placed on the judgment of the Hon'ble Calcutta High Court in the case of PCIT vs. M/s. Karam Chand Thapar & Bros. Coal Sales Ltd. in ITA/268/2023 & IA No. GA/2/2023 dt. 31/01/2024. He also placed reliance on the judgments of Hon'ble Jurisdictional High Court in the PCIT vs. Manugraph India Ltd. in dt. 19/11/2018 and; CIT vs. M/s. Everest Kento Cylinders Ltd. in ITA No.1165/2013 dt. 08/05/2015.

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 & ITA.No.589/PUN./2024 (M/s.Piaggio Vehicles Pvt. Ltd.) 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 the segmental working of exports to AEs/Global Sourcing exports to AEs/BO and export of spare parts to non-AEs submitted by the assessee is as under:-

(INR in Millions)

We further notice that Ld. TPO calculated the alleged 8.2 adjustment over operating income by applying the internal TNMM on the total exports to AEs applying this profit margin of 34.42% from export of spares to non-AEs in the following manner:-

& ITA.No.589/PUN./2024 (M/s.Piaggio Vehicles Pvt. Ltd.) Operating revenue of the A 171.24 assessee in the AE segment Total cost (TC) B 157.13 OP C 14.11 Arms Length Mean Margin D=C/b 8.98% (OP/OC) ALP Profit Margin E 34.42% Arm‟s Length Profit F=E*B 24.08 Adjustment over operating G=F-C 39.97 income (in Millions Adjustment over operating H 3,99,73,775 income (in INR) Voluntary adjustment made by H 21,13,543 the assessee in TPSR Adjustment over operating I 3,78,60,232 income (In INR)

8.3 From the above details, we note that the assessee who is manufacturer of 2/3/4 wheeler vehicles also manufacturers spare parts and components which are used for after sales service, and such spare parts and components are exported to AEs as well as non-AEs. Further, the AEs who are also manufacturer of goods in their country requires various components and spare parts 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%.

& ITA.No.589/PUN./2024 (M/s.Piaggio Vehicles Pvt. Ltd.) 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 reads as under:-

“4. The assessee had benchmarked its international transaction of export of spares and components to AE by applying the Transactional Net Margin Method (i.e. TNMM) based on a search conducted to identify comparable companies as per the „Prowess‟ and „Capitaline plus‟ databases. On selection of 10 external comparable companies, assessee used Earning Before Tax (EBT) to sales to determine the relevant Profit Level Indicator (i.e. PLI) and average operating margin of comparable companies worked out to 1.83% as against assessee‟s operating margin of 10.40% in its segment of export of spares and components to AEs. As the operating margin of the assessee was higher than the average of margins declared by the external comparable companies, assessee asserted that the international transaction of activity of export of spares and components carried out during the year with its AE was at an arm‟s length from the perspective of transfer pricing analysis. So, however, in the proceedings carried out by the Transfer Pricing Officer (in short “the TPO”) under section 92CA(2) of the Act, the assessee‟s assertion was rejected. The TPO rejected the application of external TNMM adopted by the assessee and instead applied internal TNMM mechanism in order to benchmark the international transaction relating to export of spares and components to AE. The TPO analyzed the profitability of the exports undertaken by the assessee to its AE on one hand and compared it to the profitability of the exports undertaken by the assessee to third parties (i,e. nonAEs). On the basis of such an analysis, the TPO noticed that the net profit margin (on cost) pertaining to export sales to AEs was 11.63% and the net profit margin (on cost) pertaining to third party exports, (i.e. to non-AEs) was 56.58%. Based on this & ITA.No.589/PUN./2024 (M/s.Piaggio Vehicles Pvt. Ltd.) analysis, the TPO proposed an adjustment of Rs 5,68,14,344/- to the international transaction pertaining to the export of spares and components to AE and as a consequence, the Assessing Officer has made an addition of Rs 5,68,14,344/- to the returned income.

the assessee has pointed out that in relation to Category „A‟ transactions, the operating margin on exports to AEs is 67% as against 56.58% with respect to the export to third parties (non- AEs) and therefore on this count itself the adjustment in question is untenable.

& ITA.No.589/PUN./2024 (M/s.Piaggio Vehicles Pvt. Ltd.) 8. On the other hand, the learned CIT-Departmental Representative, appearing for the Revenue has defended the action of the authorities below by pointing out that the sub- segmentation of the activity within the transaction of export of spares and components is not called for. According to the Revenue, all the three Categories of transactions, namely, „A‟, „B‟ and „C‟ constitute a singular activity. The entire activity is of supply of spares by the assessee to third party distributors and its AEs. It is pointed out that the spares being supplied to third parties and to the AEs may differ in their applications as stated, but spares remain spares. Therefore, the sub- segmentation canvassed by the assessee in order to benchmark the transaction is not relevant and has been rightly rejected by the income-tax authorities.

10. In our considered opinion, the net profit margin 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 example 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 visà-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 in 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 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 & ITA.No.589/PUN./2024 (M/s.Piaggio Vehicles Pvt. Ltd.) 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. The second issue/ground of appeal No.2 raised by Revenue relates to „CGF‟ expenditure disallowed by the Ld. AO, but subsequently allowed by the Ld.CIT(A). This common issue has been raised for the A.Ys. 2015-16 & 2016-17. We notice that the assessee availed loan from International Financial Corporation, Bank of America, Hongkong and Shanghai Banking Corporation, Citi Bank and Credit Agricole Corporate and Investment Bank, but since the credit rating of the assessee company was very low, the assessee had to approach its parent company Piaggio & C S.p.A (P&C) for A.Y. 2015-16 for guarantee of the loan/credit facility to be received by the assessee company. The assessee availed loan of Rs.2520.07 crore (approx.) and it claimed expenditure of CGF @ 0.19% for A.Y. 2015-16 and 0.62% for A.Y. 2016-17. Ld. TPO proposed the disallowance of corporate guarantee observing that the assessee failed to prove that it has received any benefit from the payment of CGF to the AEs and that the credit rating of assessee and AEs has not been substantiated completely. Against the final assessment order of Ld.AO disallowing the alleged corporate guarantee in the appellate proceedings, the finding of Ld.CIT(A) for A.Y. 2015-16 allowing the assessee‟s claim reads as under:-

& ITA.No.589/PUN./2024 (M/s.Piaggio Vehicles Pvt. Ltd.) “4.3 I have carefully considered the facts of the case, transfer pricing order and submission filed by the appellant. It is seen that Parent company, P&C had provided corporate guarantee to the Appellant in relation to the loans availed by the Appellant from International Finance Corporation (IFC), Bank OF America (BOFA), Hongkong and Shanghai Banking Corporation ('HSBC), Citi Bank and Credit 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 known company in the automobile business and therefore, the lenders have comfort in lending to the appellant on the basis of corporate guarantee by the parent P&C. Without the guarantee the appellant which does not have sufficient capital assets could not have obtained such huge loans at a cheaper rate from foreign lenders. It is also seen that the learned TPO has not applied any of the methods stipulated in section 92C of the Income Tax Act read along with Rule 10B and 10AB. It is also noticed that the learned TPO has not given any show cause notice under the proviso to section 92C(3) as required statutorily before determining the ALP of the corporate guarantee fee as Nil. Both these practices have been frowned upon by various Hon'ble ITAT decisions and have been quoted by the appellant in its written submission. Without determining the ALP as required statutorily, the learned TPO because of paucity of time, arbitrarily rejected the benchmarking methodology adopted by the appellant. The appellant had furnished couple of loan agreements which shows that corporate guarantee from the parent company was a pre- condition imposed by the banks. The appellant had also furnished available guarantees in India from lenders like State Bank of India which showed that the applicable guarantee rate in India was 1.2% whereas the appellant has paid effective guarantee fees of 0.19%. Based on the above discussion, I do not find any infirmity in the determination of ALP by the appellant in its TP study and therefore, the adjustment of Rs. 4,72,91,595/ is deleted.

12. From going through the finding of Ld.CIT(A) so far as the claim of CGF expenses concerned, we fail to find any infirmity in the findings of the Ld.CIT(A) to the extent that the assessee had to incur CGF payable to AEs for availing the loan for business purposes. So far as the rate of CGF incurred by the assessee is concerned, we notice that for A.Y. 2015-16, the effective rate of CGF is 0.19%, but for A.Y. 2016-17 it is 0.62%. Though, it is claimed by the assessee that the lenders like State Bank of India, the applicable bank guarantee fees is 1.2%, however, learned counsel for the assessee failed to place any evidence to demonstrate as to how the rate of CGF has increased from 0.19% to 0.62% in the subsequent year nor any specific details of credit rating of assessee and AEs were provided. At this juncture, we also take note of various judgments of Hon'ble High Courts relied on by the learned counsel for the assessee in the case of Karam Chand Thapar & Bros Coal Sales Ltd. (supra), Manugraph India Ltd. (supra) and Everest Kento Cylinders Ltd. (supra) where the Hon'ble Courts upheld the payment of CGF @ 0.5%. It is also noticed that the assessee has availed loan, however, in the case referred/relied on by the learned counsel for the assessee, the issue was regarding the corporate guarantee given by the assessee on behalf of its AEs. We therefore without setting it as a & ITA.No.589/PUN./2024 (M/s.Piaggio Vehicles Pvt. Ltd.) precedent hold that the assessee has availed loan with the corporate guarantee given by its AEs and since the rate of CGF for A.Y. 2015-16 at 0.19% is less than 0.5% of CGF generally accepted by the Hon'ble Courts, we allow the claim of CGF incurred by the assessee and dismiss the ground No.2 raised by the Revenue for A.Y. 2015-16. However, for A.Y. 2016-17, since the assessee has claimed CGF of 0.62% not properly substantiated and is higher than the accepted CGF of 0.5%, we allow the claim of the assessee only to the extent of 0.5% and the excess amount of CGF @ 0.12% stands disallowed which amounts to Rs. 1,12,88,090/- and partly allow the ground No.2 raised by the Revenue for A.Y. 2016-17.

Order pronounced on 27.05.2025.