Toyota Kirloskar Motor (P) Ltd Vs ACIT (ITAT Bangalore)
The Appellant submits the in its own case for AY 2003-04, the Honourable Bangalore Tribunal has accepted that TP adjustment has to restricted to AE transactions. Further, in Appellants own case for AY 2013-14 [ITA No.2016/Bang/2018, dated 18.08.2021], the Honourable Bangalore Tribunal has upheld the action of CIT(A) in directing the TPO to restrict TP adjustment to AE transactions.
A similar issue has been decided by us in assessee’s own case for the assessment year 2012-13 and the result mutatis mutandis shall apply to assessment year 2014-15.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
These appeals filed by the assessee are directed against separate Final Assessment order passed by the AO, Bangalore dated 22.11.2016 and 24.12. 2018 for the assessment year 2012-13 and 2014-15 respectively.
2. The assessee has raised following grounds of appeal:-
General grounds: (Assessment Year 2012-13)
1. The Orders passed by learned Assitant Commissioner of Income Tax, LTU Circle— 1, Bangalore (hereinafter referred to as “AO” for brevity), learned Additional Commissioner of Income Tax, Transfer Pricing-2(2), Bangalore (hereinafter referred to as “TPO” for brevity) and Honorable Dispute Resolution Panel-2 (hereinafter referred to as Honorable DRP) (“AO “TPO” and “DRP” collectively referred as “lower authorities” for brevity)-are bad in law and liable to be quashed.
GROUNDS RELATING TO TRANSFER PRICING — LEGAL ISSUES
2. The learned AO has erred in making a reference to TPO for determining arm’s length price without demonstrating as to why it was necessary and expedient to do so and without appreciating that being jurisdictional officer for all matters, he could not have referred the matter to the TPO. The DRP has erred in confirming the action of the Assessing officer.
3. The lower authorities have erred in:
a. Making transfer pricing adjustment of Rs. 773,93,55,214/-;
b. Passing the order without demonstrating that the Appellant had motive of tax evasion;
c. Not appreciating that there is no amendment to the definition of “income” and the charging or computation provision relating to income under the head “Profits & Gains of Business or Profession” do not refer to or include the amounts computed under Chapter X and therefore addition made under Chapter X is bad in law; and
d. Not appreciating that there being no disallowance under section 40A(2) for royalty payment, adjustment under Chapter X ought not to be made.
GROUNDS RELATING TO COMPUTATION OF ALP
4. The lower authorities have erred in :
a. Rejecting M/s Hindustan Motors Ltd as a comparable, on the ground that the comparable company is engaged in only manufacture of Car and it is a persistently loss making company;
b. Inappropriately computing operating margins of the Appellant by considering i)Interest received; ii) Claims received from insurance companies; iii) Liabilities/Provisions written back; iv) Miscellaneous income; and v) Interest paid as non-operating in nature. On parity of reasoning these should be considered as operating in nature even in case of comparables; and
c. Not providing the computation of revised TP adjustment pursuant to DRP Directions and not appropriately computing the operating margin of the Appellant and the comparables companies
5. The lower authorities have erred in :
a. Not making proper adjustment for enterprise level and transactional level differences between the Appellant and the comparable companies;
b. Ignoring the business, commercial and industry realities and economic circumstances applicable to the Appellant vis a vis the comparables;
c. Not providing Customs Duty adjustment, which was required to be made to put all comparables on a level playing fields;
d. Not providing adjustment for abnormal expenditure incurred due to Thai Floods; and Not providing working capital adjustment
e. Not providing working capital adjustment.
6. The lower income tax authorities have erred in:
a. Not considering Cash Profit Level Indicator (`PLI’) in the case of the Appellant and the Comparables for the purpose of TP analysis even though in the facts and circumstance Cash PLI was more appropriate; and
b. Without prejudice in case Cash PLI is not adopted, depreciation adjustment was required to be granted in the facts and circumstances of the case.
7. The lower authorities have erred in applying the modified PLI to all expense transaction including expenses incurred with non-associate enterprises and thereby making an adjustment in respect of transactions with non-associate enterprises also.
GROUNDS RELATING TO ROYALTY ADJUSTMENT
8. The leaned TPO has erred in performing alternate TP analysis of Royalty payments and directing AO to make alternate adjustment if main adjustment is deleted without appreciating that there is no legal sustainable basis for . such alt‘ ernate analysis and role of TPO is restricted to computing ALP.
9. Without prejudice to the above, the lower income tax authorities have erred in:
a. Not, appreciating that the Appellant had adopted the TNMM at the entity level, in which process, the royalty payment were considered as closely linked transaction and hence were subsumed into the expenditure and accordingly already considered;
b. Not substantiating how the royalty payment were singled out of the many transactions to be tested on the basis of the arm’s length principle;
c. Not appreciating that once the net profit margin is tested on the touchstone of arm’s length price, it pre-supposes that the various components of income and expenditure considered in the process of arriving at the net profit are also at arm’s length; and
d. Comparing prices after completing the analysis of comparing margins. which process is unacceptable in law.
10. Assuming without admitting that the royalty is to be separately evaluated on the touchstone of arm’s length principle, the lower authorities have erred in adopting the CUP without justifying how the same` is the most appropriate method in the case of the Appellant.
11. The lower authorities have erred in:
a. Concluding that the Appellant has not received any economic benefit from know-how received from the AE’s;
b. Concluding, without basis, that there was no proof that the third parties are also charging identical royalty for similar technology and in similar circumstances;
c. Concluding that since the margin of the Appellant is lower than the comparable companies, it has not derived any economic benefit from the royalty payment; and
d. Not appreciating that a lower margin does not pre-suppose that no economic benefit has been derived;
12. The lower authorities have erred in not appreciating that:
a. Royalty represents a recurring payment for a one time transfer of technology; and
b. Technology for some models of Etios Tm was received during the year under consideration whereas technology for other existing vehicles had been received in the earlier years.
13. The lower authorities have erred in:
a .Rejecting external CUP transaction on unjustified grounds;
b. Ignoring the fact that the ratio of R&D expenses of TMC was much higher than the effective royalty rate of the Appellant;
c. Ignoring the fact that the Technical Assistance Agreements were approved by Government authorities and therefore royalty payment should be considered as at arm’s length; and
d. Ignoring the fact that, the learned CIT(A), DRP and ITAT in earlier years have accepted both factum as well as quantum of royalty as at arm’s length for the preceding assessment years;
14. Without prejudice to above, the lower authorities have erred in:
a. Adopting inconsistent denominator while calculating arm’s length price;
b. Adopting ratio of royalty and R&D expenditure to net sales in the case of comparables vis-à-vis that of royalty to Local Value Addition (LVA) instead of net sales in the case of the Appellant;
c. Not appreciating that the Appellant was using LVA as base for paying royalty and not net sales;
d. Adopting data of FY 11-12 only for analysis, without appreciating that the business, commercial, economic and technological factors require consideration of multi-year data; and
e. Not granting adjustment for superior quality of technology in case of Appellant vis-à-vis that of the comparables.
15. Assuming without admitting that the adjustment is to be made, the lower authorities have erred in not allowing the benefit of the +/-5% range prescribed in the proviso to section 92C(2).
GROUND RELATING TO CORPORATE TAX
16. The lower authorities have erred in:
a. Disallowing provision towards employee long term service benefit liability on the ground that such provision is contingent and not accrued;
b. Not appreciating that the provision for employee long terms service benefit is in accordance with provisions of Accounting Standard (AS) 15 Employee benefit and based on actuary valuation, and
c. Holding that employee long term service benefit liability has not crystallized nor has accrued.
17. The lower authorities have erred in:
a. Disallowing a sum of Rs. 60,26,382/-, as excess depreciation claimed on the basis of year end provision which were reversed in subsequent years;
b. Disregarding accounting methodology adopted by the Appellant and not appreciating that amount capitalized was based on fair estimates made for work c. already completed but. for which final bills were pending; and appreciating that the assets were acquired and put to use during the year under consideration.
d. Not appreciating the fact that reversal amount is reduced from opening WDV on gross basis thereby even reversing the depreciation.
18. The lower authorities have erred in:
a. Disallowing a sum of Rs. 57,53,23,147/- towards royalty pertaining to AY 11-12 claimed in accordance with the provisions of section 40(a)(i) on the ground that royalty is already disallowed in AY 201112 u/s 92CA as TP adjustment and also u/s 37;
b. Not appreciating that Rs.57,53,23,147 has been disallowed in AY 2011-12 u/s 40(a)(i) apart from TP adjustment of Rs. 107,98,91,825/-; and
c. Not appreciating that his action of not allowing deduction for Rs. 57,53,23147/- has led to double disallowance.
19. The lower authorities have erred in:
a. Disallowing a sum of Rs. 1,34,40,305/- towards price reduction of purchases which was offered to tax by the Appellant in subsequent year, when the income had actually accrued to it;
b. Disregarding the correct and regular accounting practices adopted by the Appellant and not appreciating that no liability accrued in favour of the Appellant during the year under consideration; and
c. Not appreciating that such a disallowance is revenue neutral and therefore addition is not called for:
GENERAL GROUNDS.
20. The lower authorities have erred in levying a sum of Rs 86,94,71,473/- as interest under section 234B. On the facts and in the circumstances of the case, nterest under section 234B is not applicable. Even otherwise, the interest u/s 234B is excessive.
3. Facts of the case are that the assessee company filed its original return of income for the Assessment Year 2012-13 on 28.11.2012 declaring loss of Rs.266,58,45,617/-. The case was selected for scrutiny and statutory notices were issued to the assessee. During the course of proceedings, it was observed that there was International transaction exceeding Rs. 15 crores, the case was referred to Transfer Pricing Officer (TPO) to determine the Arm’s length price. After receipt of reference with the prior approval of CIT(LTU), the ld. TPO started his proceedings and the assessee was asked to submit the documents mentioned in terms of sec.92D of the Act. The tax payer filed its TP documentation vide its letter dated 11.04.2014. A detailed notice dated 25/08/2014 was issued to the assessee proposing to make adjustments to the ALP in the manufacturing segments and specific queries with respect to manufacturing, marketing and trading intangibles also calling for details on payment of technical assistance fees, royalty and other intra group services. The tax payer filed its reply dated 28/09/2015 and other notices were also issued to the assessee.
3.1 The profile of the assessee company is as under:-
As per the TP study report of the taxpayer, the Taxpayer, Toyota Kirloskar Motor Private Limited (TKML), is a subsidiary of Toyota Motor corporation, Japan (TM C), manufactures and sells multi-utility vehicles. Presently it: manufactures MUV’s under the model name Innova “‘ and Fortuner. The passenger car under the model name Corolla TKML has obtained license to manufacture Innova TM, Corolla TM and Fortuner from the TMC, which owns these brands. Fortuner was launched during the year with the technology provided by the TMC. TKML also imports Camry TM and sports utility vehicle (SUV) Land Cruiser Prac.io, Prius and LC 200 Tm as Completely Built Units (CI3U) and sells the same in the Indian market. The CBUs are stored at a warehouse in Mumbai.
TKML commenced its manufacturing operations in November 1999. The manufacturing plant consists of Press shop, Weld Shop, Paint Shop and Assembly shop. TKML manufactures using world renowned Toyota Production System UPS), TKML imports various critical parts, components and FRW materials required for the manufacture of automobiles from the Group affiliates.”
3.2 The assessee had calculated PLI as under:-
