Karnataka HC upholds ITAT ruling Classifying Toyota Tsusho India Pvt ltd as Not a Wholesale Trader [Read Order]

The Karnataka High Court upheld the Income Tax Appellate Tribunal (ITAT) ruling, classifying Toyota Tsusho India Pvt Ltd as not a wholesale trader. It observed that there is no cavil that the Assessee could not be classified as a wholesale trader, if it did not cumulatively comply with both the conditions as set out in the explanation under the notification dated 29.10.2015.

The Revenue has filed the present appeal under Section 260-A of the Income Tax Act, 1961 [the Act], impugning an order dated 04.09.2024 passed by the learned Income Tax Appellate Tribunal [ITAT] in MP.No.63/Bang/2023 in IT(TP)A. No.2806/Bang/2017 in respect of the Assessment Year [AY] 20132014.

The respondent [the Assessee] had filed the aforementioned miscellaneous application seeking rectification/modification of an order dated 02.03.2023 passed by the learned ITAT in IT(TP)A.No.2806/Bang/2017. The said order was passed in an appeal filed by the Assessee against the final assessment order dated 21.07.2022. The principal dispute before the learned ITAT was in respect of transfer pricing adjustments as directed by the transfer pricing officer [TPO], which was further reduced by the Dispute Resolution Panel [DRP].

The Assessee is trading in automobile components, processing of steel products and providing logistic services, primarily catering to the automotive industry. The Assessee had filed his return of income for the assessment year 2013-2014 on 29.11.2013, declaring a loss of `10,86,90,508/-. After the verification, it was found that the Assessee had entered into international transactions with Associated Enterprises [AEs], the value of which was more than `15 Crores. The learned Assessing Officer [AO] made a reference to the TPO for determination of the arms length price [ALP] of the international transactions.

The Assessee furnished its transfer pricing studies in respect to two segments, namely, the trading segment and the manufacturing segment. The assessee's operating profit/ operating revenue margin (which was selected as the PLI) was 0.94%. The weighted average net profit margin of comparables selected by the Assessee was 3.54%. The learned TPO found that the Assessee's PLI was not within the tolerance range of plus/minus 1% and therefore concluded that the international transactions with AE's were not at ALP.

The TPO also rejected the transfer pricing studies and determined the mean PLI of the selected comparables at 4.715%. And, the arms length margin of operating profit/ operating costs at 4.95%. On the aforesaid basis, the TPO computed the transfer pricing adjustment at `25,23,76,521/- in the trading segment.

In so far as manufacturing segment is concerned, the TPO determined the arms length PLI at 3.45% and accordingly made in adjustment of `6,02,89,351/- for the manufacturing segment. The AO passed a draft assessment based on the adjustments made by the TPO.

The Assessee preferred its objections before the DRP. The DRP disposed of the objections raised by the Assessee in terms of the directions issued on 26.09.2017 under Section 144-C(5) of the Act. One of the objections raised by the Assessee related to the adoption of tolerance limit of 1% variation under Section 92-C(2) of the Act instead of 3% in respect to the trading segment. However, the DRP rejected the said objection. The AO passed the final Assessment Order on the basis of the aforesaid directions on 21.07.2022.

The Assessee appealed the said order before the ITAT. The ITAT considered the appellants' objection regarding the tolerance range in trading activity. Whereas the assessee had claimed that he was a trader and therefore tolerance limit of 3% would apply; the TPO and the DRP had fixed the tolerance variation limit at 1% of PLI. There is no dispute that in terms of the notification No.30/2013 issued by the Central Board of Direct Taxes [CBDT] on 15.04.2013, the tolerance range for wholesale traders was fixed at 1% and for other cases at 3%. Thus the question whether tolerance limit was a variation of 1% or 3% was required to be determined on the basis whether the Assessee could be construed as a wholesale trader in respect of its trading activities.

The ITAT noted that the term 'wholesale trader' was defined in terms of the notification No.86/2015 dated 29.10.2015. It stipulated that the expression 'wholesale trading' would mean international transaction or specified domestic transaction for trading in goods, which fulfilled two conditions. The first being that the purchase cost of finished goods is 80% of the total costs pertaining to such trading activities.

And the second condition being that the average monthly closing inventory of goods is 10% or less of the sales pertaining to such trading activities. The Assessee had furnished data to establish that its average monthly closing inventory was more than 10% of the sales pertaining to the trading activities and therefore it did not satisfy the second condition. Thus, it could not be considered as a wholesale trader.

Although the ITAT had noted the above, the Tribunal remanded the matter to the AO/TPO/DRP to determine whether the Assessee was covered under the definition of wholesale trader under the relevant notification.

The assessee filed a miscellaneous application inter alia seeking modification of the order dated 02.03.2023 to the extent of directing that the tolerance limit of 3% be adopted instead of remanding the matter to the learned AO. The said application is premised essentially on two grounds.

First, that the ITAT had in assessee's own case for the year 2014-15, held that the Assessee was not a wholesale trader and therefore the tolerance band of plus/minus 3% was applicable to the trading segment. Second, that the TPO had not categorized the assessee as a wholesale trader and therefore there was no requirement of remanding the matter to the learned AO/TPO.

A division bench of Vibhu Bakhru, Chief Justice and Justice C M Joshi observed that the question whether the assessee is required to be considered as a trader other than a wholesale trader, is essentially dependent on whether the two conditions as set out in the CBDT notification dated 29.10.2015 are satisfied or not. As noted above, the Assessee had furnished data to establish that it did not comply with one of the conditions for being considered as a wholesale trader.

In addition, ITAT had also accepted that the Assessee was not a wholesale trader for the assessment year 2014-2015. There is no cavil that the Assessee could not be classified as a wholesale trader, if it did not cumulatively comply with both the conditions as set out in the explanation under the notification dated 29.10.2015. Thus, the controversy, if any, is fact centric and no substantial question of law arises for consideration by this court. The appeal is accordingly dismissed.

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