Case Law Details
Court: Mumbai Bench of the Income-tax Appellate Tribunal
Citation: ACIT Vs. Fiat India Pvt. Ltd. [2010-TII-30-ITAT–MUM-TP]
Brief- In a recent ruling in the case of ACIT Vs. Fiat India Pvt. Ltd. [2010-TII-30-ITAT–MUM-TP], the Mumbai Bench of the Income-tax Appellate Tribunal (“the Tribunal”), while deciding the case in favor of the assessee, accepted various adjustments made while determining arm’s length price (“ALP”), as they had been sufficiently explained and evidenced by the assessee. The Tribunal also ruled that for an asset intensive industry, the appropriate Profit Level Indicator (“PLI”) shall be Profit Before Interest and Tax (“PBIT”) and not Profit before Depreciation Interest and Tax (“PBDIT”).
Facts- The assessee is engaged in the business of manufacturing and selling of passenger cars and trading of spare parts. The assessee adopted Transaction Net Margin Method (“TNMM”) for determining the ALP of its international transactions with its associated enterprises (“AEs”), and while working out its operating margin under TNMM, the assessee made several adjustments on account of depreciation and other fixed overheads primarily owing to capacity under utilization due to low sales/ production volume. During the course of transfer pricing (“TP”) assessment proceedings, the Transfer Pricing Officer (“TPO”) disallowed most of the adjustments.
The Assessing Officer (“AO”) passed an order, incorporating the TP order, against which the assessee filed an appeal before the Commissioner of Income-Tax, Appeals (“CIT(A)”). The CIT(A) ruled in favor of the assessee, aggrieved by which the Revenue appealed before the Tribunal.
Assessee’s contentions:
• As per Rule 10B(1)(e)(iii) of the Indian Income-tax Rules, 1962, profit margin must be adjusted to take into account material differences which exist between the assessee and the comparable uncontrolled transactions.
In the case of the assessee, there existed material differences between the assessee and the comparables, as outlined below, for which the assessee had made appropriate adjustments to enable like-to-like comparison:
-Higher incidence of excise duty (due to slow moving stock) and octroi levy (due to difference in plant location)
-Scrapping of inventory (due to rain / water logging as the manufacturing plant was situated in a low lying area) and high inventory obsolescence (due to low sales volume)
-Low volume from an otherwise profitable spare parts business (due to low sales volume of cars)
-Provision for contingencies charged to P&L (disputed tax liability and other claims)
Higher employee salary costs on account of minimum number of trained and specialised labour required to keep manufacturing plant operative, despite low production volume.
• The assessee is operating in an asset intensive industry (where assets are key value drivers) and therefore PBIT, and not PBDIT, is the appropriate PLI (See Note-1 below) .
• The above contentions were accepted in the case of the assessee for the two immediately preceding, and two immediately succeeding, years.
Revenue Contentions
• Under TNMM, PBDIT was used as a PLI rather than PBIT, as has been used by the assessee. Therefore, the assessee’s contention on capacity utilization, to the extent of depreciation, was addressed by using PBDIT as the PLI instead of PBIT.
• The other fixed overheads, on account of which the assessee had claimed the adjustment, were not extraordinary or specific only to the assessee, but generally existed in case of most companies owing to existence of similar circumstances.
Tribunal Ruling
The Tribunal upheld the order of the CIT(A) and ruled in favour of the assessee, stating the following:
• The assessee had sufficiently explained and demonstrated (with relevant facts / figures and supporting evidence) that there were material differences in the facts of the assessee and those of the comparable cases.
• In accordance with the OECD Guidelines and the decision of the Bangalore Bench of the Tribunal in the case of Philips Software Centre Pvt. Ltd. Vs. ACIT [2008—TII-09—ITAT—Bang—TP], in an asset intensive industry, where assets are key value drivers, excluding depreciation would not lead to a meaningful outcome. Accordingly, the appropriate PLI for the assessee was PBIT and not PBDIT.
• The TPO had himself allowed similar adjustments for the two immediately preceding, and two immediately succeeding years, wherein the facts were similar.
Conclusion
By upholding the necessity to carry out appropriate adjustments for determining the ALP based on the differences in the facts of the case of the taxpayer vis-à-vis the comparable, the Tribunal has only reiterated what has been upheld by its earlier rulings (See note 2 below for list of rulings) . However, it may be worthwhile to highlight that in this ruling, the Tribunal has allowed adjustments made to the assessee’s financial data, rather than the profit margin of the comparable as is required by Rule 10B(1)(e)(iii) of the Indian Income Tax Rules, 1962. Nevertheless, the eminence of this ruling lies in the reliance placed by the Tribunal on the business / commercial reasoning and supporting data provided by the taxpayer to substantiate its claims for the adjustments, which once again necessitates a robust functional, industry and economic analysis to be undertaken by an assessee as part of its transfer pricing analysis.
On a separate note, it may be worthwhile to consider that, an alternative to the approach of selecting / upholding the selection of the assessee as the tested party could have been considered after analysing the extent of functions performed / value-added by the assessee vis-à-vis AEs as well as the extent of development and use of intangibles involved in the transaction. However, since this was not a point of contention, it was neither argued by the assessee / Revenue nor ruled upon by the CIT(A) / the Tribunal.
Note
1. As per decision of the Bangalore Bench of ITAT in the case of Philips Software Centre Pvt. Ltd. v. ACIT [2008—T11-09—ITAT—Bang—TP].
2. ACIT v. Vedaris Technologies Pvt. Ltd. [2010—T11-10—ITAT—Del—TP] , Mentor Graphics (Noida) Pvt. Ltd. v. DCIT [2007] 18 SOT 76 (Delhi), Star India Private Ltd. v. ACIT [ITA No. 3585/M/2006], Skoda Auto India Private Ltd. v. ACIT [ITA No. 202/PN/07]
