DCIT Vs Piaggio Vehicles Pvt. Ltd. (ITAT Pune)
The Income Tax Appellate Tribunal (ITAT), Pune Bench, has delivered a significant ruling in the case of the Deputy Commissioner of Income Tax (DCIT) versus Piaggio Vehicles Pvt. Ltd., addressing complex issues of transfer pricing for exported spare parts and the permissibility of corporate guarantee fee (CGF) payments to its parent entity. The Tribunal remanded the transfer pricing matter back to the Assessing Officer (AO) for re-evaluation and partially allowed the CGF expenses, setting a notable benchmark for the acceptable rate.
The case revolved around two primary grounds of appeal by the Revenue department for the assessment years (A.Y.) 2015-16 and 2016-17.
Transfer Pricing on Export of Spares
The first issue concerned the determination of the arm’s length price (ALP) for international transactions involving the export of spare parts and components by Piaggio India to its Associated Enterprises (AEs). Piaggio had segmented these exports into two categories: spare parts manufactured by the company itself and components sourced from the Indian market for its AEs as part of a global sourcing arrangement.
For its manufactured spares exported to AEs, Piaggio used an internal Transactional Net Margin Method (TNMM), comparing the profit margin to that of similar goods sold to non-AEs. For the global sourcing components, it applied an external TNMM, comparing its margins with those of comparable independent companies.
The Transfer Pricing Officer (TPO), however, rejected this segmented approach. The TPO aggregated both export segments—manufactured spares and sourced components—and applied a single internal TNMM. He compared the average profit margin of Piaggio’s total exports to AEs (which was 8.98%) with the significantly higher profit margin from the export of its manufactured spares to non-AEs (34.42%). This comparison led the TPO to propose a transfer pricing adjustment of ₹3.78 crore, alleging that the transactions with AEs were not at arm’s length.
The assessee argued that this aggregation was improper due to functional differences. The export of its own manufactured spares for after-sales service (Category ‘A’) was a high-margin activity. In contrast, the sourcing of components for its AEs’ manufacturing needs (Categories ‘B’ and ‘C’) was a low-margin activity where Piaggio essentially acted as a logistics and facilitation service provider.
Judicial Precedent and Ruling
The ITAT heavily relied on its own decision in Piaggio’s case for a prior assessment year, A.Y. 2006-07. In that precedent, the Tribunal had accepted the assessee’s argument that the different categories of exports were functionally incomparable. It had noted that the supply of after-sales service spares (Category ‘A’) inherently yields higher margins than the low-risk activity of sourcing components for an AE’s manufacturing line (Categories ‘B’ and ‘C’).
In the 2006-07 case, the Tribunal had found that for Category ‘A’ type transactions, Piaggio’s profit margin on sales to AEs (67%) was actually higher than on sales to non-AEs (56.58%), thus requiring no adjustment. For the other categories, since there were no internal comparables, the Tribunal had directed the AO to examine the external TNMM analysis proposed by the assessee.
Applying this precedent to the current case, the ITAT observed a factual difference. For the year under appeal, the operating profit margin on manufactured spares exported to AEs was 28.96%, which was lower than the 34.42% margin from exports to non-AEs.
Given this, the Tribunal concluded that the matter required fresh verification by the AO. It directed the AO to re-examine the issue in light of the 2006-07 ruling. The AO was instructed to verify the internal TNMM for the export of self-manufactured spares and to properly assess the external TNMM for the global sourcing transactions. Consequently, the Revenue’s appeal on this ground was allowed for statistical purposes, sending the issue back for a detailed exercise.
