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Income Tax Appellate Tribunal, MUMBAI BENCH “J” MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI N.K. PRADHAN
ORDER
PER N.K. PRADHAN, AM
This is an appeal filed by the assessee. The relevant assessment year is 2009-10. The appeal is directed against the order passed by the Deputy Commissioner of Income Tax-10(1), Mumbai (in short ‘AO’) u/s 143(3) r.w.s. 144C(13) of the Income Tax Act 1961, (the ‘Act’).
Briefly stated, the relevant facts are that the appellant is a subsidiary of Fiat Group Automobiles SpA, Italy and operates in India under two business divisions namely (i) Tractor and parts, and (ii) Car and parts. It filed its return of income for the assessment year (AY) 2009- New Holland Fiat (India) 10 on 24.09.2009 declaring income of Rs. Nil. The return was taken up for scrutiny and a notice u/s 143(2) was issued on 24.08.2010. The AO made a reference to the Transfer Pricing Officer (TPO) u/s 92CA(1) of the Act in respect of international transaction. The TPO proposed and adjustment of Rs.60,57,94,177/- towards determination of arm’s length price (ALP) of the international transactions relating to tractor division and Rs.4,47,90,090/- towards car division. As per the TPO, the other transactions are to be completed without adjustment. Thus the total adjustment proposed by the TPO is Rs.65,05,84,267/-. The AO made a draft assessment order on 26.03.2013, which was not accepted by the appellant and it filed its objection before the Dispute Resolution Panel (DRP) u/s 144C of the Act. By an order dated 23.12.2013, the DRP rejected the objections raised by the appellant in respect of transfer pricing adjustment made by the TPO and directed the AO to complete the assessment as per the draft assessment order. Accordingly, the AO passed an order by making disallowance/addition of (i) Rs.650,584,267/- towards transfer pricing adjustments, (ii) Rs.6,07,751/- for AIR transaction, (iii) Rs.99,945/- towards club expenditure and (iv) Rs.7,41,374/- in respect of miscellaneous expenditure. The above final order of the AO is carried in appeal before the Tribunal by the assessee. 3. The 1st ground raised by the assessee in this appeal is general in nature. The 2nd ground of appeal relates to adjustment of Rs.60,57,94,177/- towards tractor division. The 3rd ground of appeal New Holland Fiat (India) Rs.4,47,90,090/- towards car division. We discuss below the 2nd and 3rd ground of appeal together as the TPO has computed the adjustment at the entity level considering both AE and Non-AE transactions. The 2nd ground of appeal 2.1 On the facts and circumstances of the case and in law, the TPO erred and the DRP further erred in upholding the action of the TPO of incorrectly rejecting companies comparable to the Appellant, which were selected by the Appellant in the Transfer Pricing documentation, thereby disregarding the provisions of the Rule 10B (2) of the Income Tax Rules, 1962 ('the Rules') and also violating the principles of consistency. 2.2 On the facts and circumstances of the case and in law, the TPO erred and the DRP further erred in confirming the inclusion of a new comparable in spite of having high percentage of controlled transactions. 2.2. On the facts and circumstances of the case and in law, the TPO erred and the DRP further erred in considering Foreign Exchange Gains as non- operating income for the purpose of computing the margin. 2.3 On the facts and in circumstances of the case and in law, the DRP has erred in confirming the action of me AO/TPO by not allowing the variation/reduction of 5 percent from the arithmetic mean while determining the arm’s length price as provided under the proviso to Section 92C(2)of the Act. 2.4 On the facts and in the circumstances of the case and in law, the TPO, the AO and the DRP have violated the Proviso to Rule 10B (4) of the Rules by not allowing use of comparables’ data relating to two years prior to the financial year 2008-09, in addition to financial year 2008-09, for computing the arm's length price.
New Holland Fiat (India) The 3rd ground of appeal 3.1 On the fads and circumstances of the case and in law, the TPO erred in rejecting the AE segment of the Assessee to benchmark the International transaction and applying comparables margins at the entity level while recommending the adjustment and the DRP further erred in confirming the action of the TPO. 3.2 On the facts and in circumstances of the case and in law, the TPO and the AO have erred and the DRP has further erred in confirming attribution of the entire shortfall of Rs.4,47,90,090 in the profit margin of the appellant to the transactions with associated enterprises only, instead of apportioning the same to all transactions of the appellant. 3.3 On the facts and in circumstances of the case and in law, the DRP has erred in confirming the action of the AO/TPO by not allowing the variation/reduction of 5 percent from the arithmetic mean while determining the arm’s length price as provided under the proviso to Section 92C(2)of the Act. 3.4 On the facts and in the circumstances of the case and in law, the TPO, the AO and the DRP have violated the Proviso to Rule 10B (4) of the Rules by not allowing use of comparables data relating to two years prior to the financial year 2008-09, in addition to financial year 2008-09, to computing the arm’s length price.
3.1 The assessee further filed an additional ground of appeal relating to TP adjustment of tractor division which reads as under :
On the facts and in the circumstances of the case and in law, the TPO, the AO and the Hon’ble DRP has further erred in confirming attribution of the entire shortfall of Rs.60,57,94,177/- in the profit margin of the appellant, to the transactions with associated enterprises only, instead of apportioning the same to all transactions of the appellant.
New Holland Fiat (India) As the additional ground filed by the assessee is interlinked the with the 2nd ground of appeal, we admit it for adjudication. The appellant’s tractor and parts division is engaged in manufacturing of tractors, spare parts and allied agricultural/farm equipments and components. The Products (i.e. tractors, spare parts and allied agricultural/farm equipments and components) manufactured by the appellant are exported to the Associated Enterprises (AEs) and also sold in the domestic market. For undertaking, the manufacturing activities, the appellant imports components and spare parts from its AEs, in addition to other supplies from overseas and domestic supplies. During the year, the appellant has earned a Net Cost Plus Margin (‘NCP’) of 10.10% in the tractor division, as compared to three years weighted average NCP of selected five comparables at 10%. As regards the car division, the assessee has earned a NCP of 3.86% in its carved out segment of AE trades, whereas the three years weighted average NCP of selected 8 comparables at 1.23%. As mentioned earlier, the total adjustment proposed by the TPO is Rs.65,05,84,267/- which comprises of Rs.60,57,94,177/- on account of tractor division and Rs.4,47,90,090/- on account of car division. The details as worked out by the TPO are as under :
New Holland Fiat (India) Tractor Division Value of Net Cost Plus NCP of the NCP earned NCP determined by Proposed International Margin (‘NCP’) company as by the TPO for adjustment Transaction of the company determined comparables comparables (Amount in (Amount in INR) by the TPO INR)
473.95 cr. 10.10% 9.16% 11.20% 14.95% 60.57 cr.
Car Division Value of Net Cost Plus NCP of the NCP earned NCP determined by Proposed International Margin (‘NCP’) company as by the TPO for adjustment Transaction of the company determined comparables comparables (Amount in (Amount in INR) by the TPO INR)
29.65 cr. 3.86% (0.97)% 1.18% 1.44% 4.47 cr.
The TPO computed the adjustment at the entity level (i.e. considering both AE & Non-AE transactions) instead of restricting the adjustment to the AE transactions both for the tractor division as well as car division. The DRP vide its direction dated 23.12.2013 has upheld the additions proposed by the TPO. As mentioned earlier, the AO has followed the above direction of the DRP.
Before us, the Ld. counsels for the assessee submit vide written submission dated 17.06.2019 that transfer pricing adjustment can be made only on transactions with AEs and not on the entire turnover. It is explained by them that this legal position is no longer res integra and has been a subject matter in a plethora of judgments. Further, it is submitted by them that the ITAT, Mumbai in appellant’s own case for AY 2008-09 has directed the adjustment to be restricted to the AE transactions. Also New Holland Fiat (India) Supreme Court of India has dismissed the SLP filed by the Income Tax Department in the case of Hindustan Lever Ltd. (2018) 259 Taxman 218 (SC) enunciating the principle that the transfer pricing adjustment ought to be restricted to the value of international transactions, thereby putting rest to this controversy. Thus it is submitted by the Ld. counsels that in view of the above, after restricting the adjustment to AE transaction and considering foreign exchange income as operating income, the ALP would fall within the +/- 5% range. In this regard they filed a copy of the relevant working.
On the other hand, the Ld. DR submits that the TPO has accepted that the assessee has declared segmental results of those divisions in its annual report but the TPO’s main objection in acceptance of segmental result is that the transaction relating to import of components, spare parts, provision of outsourcing services and payment of royalty are aggregated. The Ld. DR thus submits that the individual profit margins cannot be said to have been provided with reference to functional analysis and it is for this reason that the profit level indicator (PLI) computation made with reference to segment result of tractor division is not acceptable as some of those transactions are interlinked with the AE and Non-AE transaction. Further, the Ld. DR submits that the TPO has rightly noted from the annual report of the assessee that gains/losses on settlement of transactions arising on cancellation/renewal of forward exchange contracts are recognized as income or expense. It is explained by him that the assessee could not show before the TPO that the comparables also have similar forex gains/losses factored in New Holland Fiat (India) PLI. Thus the Ld. DR submits that the order passed by the AO by following the direction of the DRP be confirmed.
We have heard the rival submissions and perused the relevant materials on record. The reasons for our decisions are given below.
Similar issue arose before the ITAT ‘K’ Bench, Mumbai in assessee’s own case for AY 2008-09 in ITA No. 7574/Mum/2012. The Tribunal at para 2.2 of the order held as under :
2.2 We have heard the rival submissions and perused the material before us. We find while making the TP adjustments the AO had made an addition of Rs.27.48 crores at the entity level. There is no need to cite any authority to hold that TP adjustments have to be made only in respect of IT.s. entered into by an assessee with its AE and not at an entity level. Therefore, the adjustment made by the TPO/AO at entity level have to be rejected.
Further, in the case of CIT v. Alstom Projects India Ltd. (ITA No. 362 of 2014) the Hon’ble Bombay High Court held as under :
“11. We also note that the Delhi High Court in Commissioner of Income Tax Vs. Keihin Panalfa Ltd. (ITA No. 11 of 2015) decided on 9th September, 2015 has while dealing with transfer pricing adjustment in the absence of segmental accounts held that adjustments have to be restricted only to transactions with Associated Enterprises. It further held that where separate accounts are not available, then proportionate adjustments to be made only in respect of the international transactions with Associated Enterprises.
We are in respectful agreement with the view of the Delhi High Court in Keihin Panalfa Ltd. (Supra). One must not loose sight of the fact that the transfer pricing adjustment is done under Chapter X of the Act. The mandate New Holland Fiat (India) International Transactions with Associated Enterprises. This is particularly so as in respect of transaction with non Associated Enterprises, Chapter X of the Act is not triggered to make adjustment to considerations received or paid unless they are Specified Domestic Transactions. The transaction with non-Associated Enterprises are presumed to be at arms length as there is no relationship which is likely to influence the price. If the contention of the Revenue is accepted, it would lead to artificial increase in the profits of transactions entered into with non Associated Enterprises by applying the margin at entity level which is not the object of Chapter X of the Act. Absence of segmental accounting is not an insurmountable issue, as proportionate basis could be adopted as done by the Delhi High Court in Keihin Panalfa Ltd. (supra).” 6.1 Respectfully following the above decision of the jurisdictional High Court, we set aside the order of the AO. Further, we direct the AO/TPO/DRP to pass an order keeping in mind the ratio laid down in Alstom Projects India Ltd. (supra). We direct the appellant to file the relevant documents/evidence before them.
Now we turn to foreign exchange gain/loss and its treatment. The Special Bench of the Tribunal in ACIT v. Prakash I. Shah (2008) 115 ITD 167 (Mum) (SB) has held that the gain due to fluctuations in the foreign exchange rate emanating from export is its integral part and cannot be differentiated from the export proceeds simply on the ground that the foreign currency rate has increased subsequent to sale but prior to realization. It went on to add that when goods are exported and invoice is raised in currency of the country where such goods are sold and subsequently when the amount is realized in that foreign currency and New Holland Fiat (India) Indian rupees, the entire amount is relatable to the exports. In fact, it is only the translation of invoice value from the foreign currency to the Indian rupees. The Special Bench held that the exchange rate gain or loss cannot have a different character from the transaction to which it pertains. Finally, the Special Bench held that such exchange rate fluctuation gain/loss arising from exports cannot be viewed differently from sale proceeds. In Pr. CIT v. Fiserv India Pvt. Ltd. (ITA 17/2016) the Hon’ble Delhi High Court vide order dated 06.01.2016 held foreign exchange gain/loss as operating income/expenses. Similar is the view in Pr. CIT v. Ameriprise India Pvt. Ltd. (ITA No. 206/2016) decided on 23.03.2016 and Pr. CIT v. B.C. Management Services Pvt. Ltd. (ITA No. 1064/2017) decided on 28.11.2017 by the Hon’ble Delhi High Court. In view of the foregoing decisions, we are of the considered view that the amount of foreign exchange gain/loss arising out of revenue transactions is required to be considered as an item of operating revenue/cost, both for the assessee as well as the comparables. Further, we direct the AO/TPO/DRP to pass an order keeping in mind the ratio laid down above. We direct the appellant to file the relevant documents/evidence before them. Thus the 2nd & 3rd grounds of appeals are allowed for statistical purposes.
New Holland Fiat (India)
The 4th ground of appeal
On the facts and in the circumstances of the ease and in law, the AO has erred and the DRP has further erred, in confirming an addition of Rs.6,07,571/- on account of alleged unexplained AIR transaction. The above ground of appeal relates to the addition of Rs.6,07,571/- made by the AO on account of alleged unexplained AIR transactions. Before the DRP the assessee submitted that the AO should have issued notice u/s 133(6) of the Act to the concerned party and should have cross verified the said fact before making any addition. Relying on the order of the Tribunal in the case of Threadneedle Investment Fund ICVC Asia Fund v. Addl. DIT (IT) 2(2) (ITA No. 8016/Mum/2011), the assessee submitted before the DRP that the Tribunal in the above case had remanded the matter back to the AO for fresh consideration. Having considered the facts of the case, we set aside the order of the AO and restore the matter back to him to decide the matter afresh, after providing the relevant details to the assessee. The AO may issue notice u/s 133(6) to the concerned party for arriving at a proper finding. We also direct the assessee to file the relevant documents/evidence before the AO. Thus the 4th ground of appeal is allowed for statistical purposes.
9. The 5th ground of appeal On the facts and in the circumstances of the case and in law, the learned AO has erred and the DRP further erred in upholding the action of the AO in disallowing club expenditure of Rs.99,945/-.