Partial Relief for Piaggio: ITAT Directs Fresh TP Verification Due to Incorrect Uniform Margin Application on Exports [Read Order]

The Pune Bench of Income Tax Appellate Tribunal ( ITAT ) granted partial relief to Piaggio Vehicles Pvt. Ltd. by directing fresh transfer pricing verification, citing incorrect application of a uniform profit margin on different categories of exports.

The Revenue-appellant challenged the order passed by CIT(A) for the AY 2015-16 dated 06-10-2022. In this case, Piaggio Vehicles Pvt. Ltd., respondent-assessee, was a domestic company fully owned by Piaggio & C S.p.A. and engaged in manufacturing and selling 2/3/4 wheeler vehicles, spare parts, and petrol/diesel engines.

It filed its return of income for AY 2015-16 on 30.11.2015, declaring income of ₹175.53 crore, which was later revised twice, with the final declared income at ₹175.83 crore.

The case was selected for limited scrutiny, and statutory notices under Sections 143(2) and 142(1) were issued. As the assessee had international transactions with its AEs, the matter was referred to the Transfer Pricing Officer (TPO) under Section 92CA(1). The TPO made upward adjustments on export of spares and components and disallowed the corporate guarantee fee. These adjustments were incorporated in the final assessment order passed on 31.01.2019 under Section 143(3) r.w.s. 144C(3).

Understand the complete process and tax nuances of GST refunds, Click here

The assessee did not approach the Dispute Resolution Panel (DRP) but challenged the final order before the Commissioner of Income Tax (Appeals) [CIT(A)], where it made detailed submissions and received partial relief.

The Revenue appealed before the tribunal.

The two member bench comprising Astha Chandra (Judicial Member) and Manish Borad (Accountant Member) heard both parties, reviewed the records, and considered the case laws cited by the respondent’s counsel.The Department raised an issue regarding transfer pricing adjustments on exports of spare parts and components, including those under the Global Sourcing segment.

The assessee had used the external Transactional Net Margin Method (TNMM) method for Global Sourcing exports and the internal TNMM method for exports of its own manufactured parts to associated enterprises (AEs), using margins from similar sales to unrelated parties.

Complete Guide to Reassessment: Comprehensive Topic-wise Analysis, Circulars, Case Laws & Practical Insights, Click here

However, the TPO combined both types of exports of manufactured goods and sourced goods and applied the internal TNMM with a 34.42% profit margin from non-AE exports. This resulted in an average margin of 8.98% being compared to 34.42%, leading to an upward adjustment of ₹3.78 crore.

The appellate tribunal noted that the profit margin on exports of own manufactured goods to AEs was 28.96%, while for sourced goods under Global Sourcing it was only 2.44%. Despite this difference, the TPO applied the higher margin uniformly, causing the adjustment.

The tribunal recalled a similar issue from an earlier year where the assessee benchmarked exports using external comparables and claimed arm’s length pricing. The TPO had rejected this and applied internal comparables, leading to a ₹5.68 crore adjustment. The assessee had argued that internal comparables were unsuitable because transactions with AEs and non-AEs differed in nature.

The ITAT agreed that the assessee’s exports involved three categories: spares for servicing vehicles, and components for manufacturing two/three-wheelers and four-wheelers. It found that only spares for servicing vehicles were common between AE and non-AE exports.

The tribunal observed that profit margins varied by category. For spares (Category A), margins on exports to AEs (67%) and non-AEs (56.58%) were close, indicating arm’s length pricing. For the other categories (B and C), no similar third-party transactions existed, making internal comparison unsuitable.

On comparing the facts, the bench found the earlier decision applicable. It sent the matter back to the Assessing Officer (AO) to verify facts, including reviewing the transfer pricing methods and the external TNMM report for Global Sourcing. The AO was directed to decide the case after proper verification, allowing the assessee to provide necessary details.

The appeal was partly allowed.

Support our journalism by subscribing to Taxscanpremium. Follow us on Telegram for quick updates