Karnataka High Court
The Commissioner Of Income Tax vs M/S. Toyota Kirloskar Motors(P) Ltd on 13 July, 2018
Bench: Vineet Kothari, S.Sujatha
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IN THE HIGH COURT OF KARNATAKA, BENGALURU
DATED THIS THE 13TH DAY OF JULY 2018
PRESENT
THE HON'BLE Dr.JUSTICE VINEET KOTHARI
AND
THE HON'BLE Mrs.JUSTICE S.SUJATHA
I.T.A.No.525/2014
BETWEEN:
1. THE COMMISSIONER OF INCOME-TAX
CIT(A), LTU, JSS TOWERS, BSK III STAGE
BANGALORE-560085.
2. THE ASSISTANT COMMISSIONER OF INCOME TAX
LTU, JSS TOWERS, BSK III STAGE
BANGALORE-560 085.
...APPELLANTS
(By Mr. K.V. ARAVIND, ADV.)
AND:
M/S. TOYOTA KIRLOSKAR MOTORS (P) LTD.,
BIDADI INDUSTRIAL AREA
RAMANAGAR DISTRICT
BANGALORE-562109.
...RESPONDENT
(By Mr. S.S. NAGANAND, SR. COUNSEL FOR
Mr. S. SRIRANGA, ADV.,)
THIS I.T.A. IS FILED UNDER SECTION 260-A OF INCOME
TAX ACT 1961, PRAYING TO FORMULATE THE SUBSTANTIAL
QUESTIONS OF LAW STATED ABOVE. ALLOW THE APPEAL AND
SET ASIDE THE ORDERS PASSED BY THE INCOME TAX
APPELLATE TRIBUNAL, BANGALORE IN IT(TP)A
No.1315/Bang/2011 DATED 11-07-2014 ANNEXURE- D AND
Date of Judgment 13-07-2018 I.T.A.No.525/2014
The Commissioner of Income-tax & Anr.
Vs. M/s. Toyota Kirloskar Motors (P) Ltd.,
2/12
CONFIRM THE ORDER OF THE APPELLATE COMMISSIONER
CONFIRMING THE ORDER PASSED BY THE ASSISTANT
COMMISSIONER OF INCOME TAX, LTU, BANGALORE.
THIS I.T.A. COMING ON FOR HEARING, THIS DAY
S. SUJATHA J. DELIVERED THE FOLLOWING:-
JUDGMENT
Mr. K.V. Aravind, Adv. for Appellants-Revenue Mr. S.S. Naganand, Sr. Counsel for Mr. S. Sriranga, Adv. for Respondent- Assessee The appellants-Revenue have filed this appeal u/s. 260A of the Income Tax Act, 1961 (for short 'Act') raising purportedly certain substantial questions of law arising from the order of the Income Tax Appellate Tribunal, 'A' Bench, Bangalore (for short 'Tribunal') dated 11.07.2014 passed in I.T (TP)A No.1315/Bang/2011 for the A.Y.2007-08.
2. The proposed substantial questions of law framed in the memorandum of appeal by the appellants-
Revenue is quoted below for ready reference:
Date of Judgment 13-07-2018 I.T.A.No.525/2014 The Commissioner of Income-tax & Anr. Vs. M/s. Toyota Kirloskar Motors (P) Ltd., 3/12 "1. Whether on the facts and in the circumstances of the case, the Tribunal is right in setting aside the Arm's Length Price determined by the Transfer Pricing Officer by relying on its earlier decision passed in ITA No.828/Bang/2010 dated 22/11/2012 even when the said orders has not reached finality as the Revenue has preferred appeal before this Hon'ble Court in ITA No.172 of 2013?.
2. Whether on the facts and in the circumstances of the case, the Tribunal is right in law holding that TNM Method adopted by TPO for determining the TP issue is not correct even when the TPO has rightly applied the said method by after considering the materials available on record and as per the parameters set out in section 92C of the I.T. Act?.
3. Whether on the facts and in the circumstances of the case, the Tribunal is right in law directing the TPO to compute ALP at the entity/enterprise level by computing the trading and manufacturing segments even when the said way of computation is not applicable to the facts of the case?.
Date of Judgment 13-07-2018 I.T.A.No.525/2014 The Commissioner of Income-tax & Anr. Vs. M/s. Toyota Kirloskar Motors (P) Ltd., 4/12
4. Whether on the facts and in the circumstances of the case, the Tribunal is right in law in allowing the appeal preferred by assessee even when the assessment order and TPO's order are passed in accordance with provisions of the I.T. Act?".
3. This appeal was ADMITTED on 23.11.2015 to consider the aforesaid substantial questions of law framed by the learned counsel for the Appellants-
Revenue.
4. The learned Tribunal, after discussing the rival contentions of both the appellants-Revenue and the Respondent-assessee, has returned the findings as under:
"41. We have given a very careful consideration to the rival submissions. On the issue as to whether the international transactions have to be considered separately or independently without aggregating them as part of the segment to which they relate, we find that the term 'international transaction' has been defined in section 92B of the Act to mean and include transactions between two or more AEs, Date of Judgment 13-07-2018 I.T.A.No.525/2014 The Commissioner of Income-tax & Anr. Vs. M/s. Toyota Kirloskar Motors (P) Ltd., 5/12 either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money or any other transaction having bearing on the profits, income, losses or assets of such enterprise. Section 92 of the Act provides that income from international transactions between AEs shall be computed having regard to ALP. Section 92-C of the Act prescribes the method s of determining ALP, having regard to the most appropriate method which will be decided in accordance with the rules prescribed. Rule 10A(d) of the Income-tax Rules 1962 ['the Rules'] provides that 'transaction' would include a number of closely linked transactions. Rule 10B(1)(d) of the Rules advocate profit split method of determining ALP where international transactions involve transfer of unique intangible or in multiple international transactions which are so inter-related that they cannot be evaluated separately for the purpose of determining ALP of any one transaction. It thus appears that the Act and the Rules contemplate determining ALP by aggregating international transactions which are multiple, interlinked or inter-related to each other and cannot be evaluated separately. To this extent the conclusions of the TPO regarding determination of ALP by taking segmental results without looking into as to whether Date of Judgment 13-07-2018 I.T.A.No.525/2014 The Commissioner of Income-tax & Anr. Vs. M/s. Toyota Kirloskar Motors (P) Ltd., 6/12 the two segments are interlinked or inter-related cannot be sustained. As to what would be the most appropriate method in such cases is again dependent on Rules 10B(2) and (3) of the Rules.
42. The OECD guidelines as well as the Australian Tax Officer (ATO) Taxation Rule 97/20 on International Transfer Pricing para.2.74(1) referred to by the assessee before the Revenue authorities which have been set out in the earlier part of this order seems to support 'combined transaction approach' where the transactions are closely linked or continuous that they cannot be evaluated adequately on an individual basis. In such a situation, rather than assessing the ALP of the transactions individually, the transactions could be evaluated together using the most appropriate method.
43. The above being the legal position, it becomes necessary to examine the international transactions carried out by the assessee with its AE during the previous year which have been categorized into 2 segments by the TPO in his order and find out if they are interlinked or interconnected so that the transactions need to be evaluated together rather than individually. In this regard, we find that the submissions made by the Assessee before TPO as Date of Judgment 13-07-2018 I.T.A.No.525/2014 The Commissioner of Income-tax & Anr. Vs. M/s. Toyota Kirloskar Motors (P) Ltd., 7/12 well as before DRP have not been considered at all. The TPO proceeded on the basis that ALP of each transaction has to be examined independently/individually by placing reliance on the decisions of Tribunal in the case of Star India Ltd. (supra) and UKB(I) (P) Ltd. (supra). We agree with the submissions of the learned counsel for the assessee that these decisions have in fact accepted in principle that aggregation of transactions have to be done where they are interlinked but have on facts found that transactions were not interlinked and therefore held that ALP of transactions have to be determined individually. The following decisions relied upon the learned counsel for the assessee also supports the plea of the learned counsel for the assessee.
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44. The DRP without examining the submissions on behalf of the assessee has simply endorsed the findings of the TPO. With regard to the conclusions of the DRP, upholding the order of the TPO that the trading and manufacturing segment of the assessee are distinct and not inter-related warranting combined transaction approach, the ld. counsel for the assessee drew our attention to the order of the Tribunal in assessee's own case for A.Y. 2003-04 in Date of Judgment 13-07-2018 I.T.A.No.525/2014 The Commissioner of Income-tax & Anr. Vs. M/s. Toyota Kirloskar Motors (P) Ltd., 8/12 ITA No. 828/B/2010, wherein identical issue was considered and decided by this Tribunal as follows:
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45. It is no doubt true that the Tribunal has observed that the ruling given in that year is based on the facts that prevailed in that year. We find that the facts in the present assessment year are also identical and there has been no change whatsoever in the business model of the assessee. In these circumstances, we are of the view that the decision rendered by the Tribunal would be applicable for this assessment year also. Respectfully following the decision of the Tribunal, we hold that the trading and manufacturing segment of the assessee are not distinct and are inter-related warranting combined transaction approach.
46. We have already seen in para 9 of this order that the TPO has arrived at the bifurcation of the manufacturing and trading segmental operating results. In view of our conclusions that the trading and manufacturing segments are interlinked and therefore a combined transaction approach has to be adopted, we combine the results so arrived at by the TPO, which is given in para 9 of this order. If the segmental results are combined, the operating revenue of the assessee would be 3767.91 crores Date of Judgment 13-07-2018 I.T.A.No.525/2014 The Commissioner of Income-tax & Anr. Vs. M/s. Toyota Kirloskar Motors (P) Ltd., 9/12 and the operating profit would be Rs.94.34 crores. Thus, the operating profit margin on sales would be 2.517.
47. Even assuming that the adjustment on account of operational efficiency made by the TPO is to be accepted, then the combined margin after adjustment of the five comparables which is given in para-20 of this order, would be 7.10%. If the arithmetic mean of the five comparables as above is tested as against the operating profit margin on sales of the assessee at 2.517%, then the same would be within the (+)/(-) 5% range of the arithmetic mean and therefore no addition by way of adjustment to the ALP can be made. In this view of the matter, we are of the view that the addition sustained by the DRP deserves to be deleted and is hereby deleted. Gr.No.12 is accordingly allowed. "
5. This Court in ITA No.536/2015 C/w ITA No.537/2015 delivered on 25.06.2018 (Prl. Commissioner of Income Tax & Anr. Vs. M/s. Softbrands India Pvt. Ltd.,) has held that in these type of cases, unless an ex-facie perversity in the findings of the learned Income Tax Appellate Tribunal is Date of Judgment 13-07-2018 I.T.A.No.525/2014 The Commissioner of Income-tax & Anr. Vs. M/s. Toyota Kirloskar Motors (P) Ltd., 10/12 established by the appellant, the appeal at the instance of an assessee or the Revenue under Section 260-A of the Act is not maintainable and the relevant portion of the said judgment is quoted below for ready reference:
" Conclusion:
55. A substantial quantum of international trade and transactions depends upon the fair and quick judicial dispensation in such cases. Had it been a case of substantial question of interpretation of provisions of Double Taxation Avoidance Treaties (DTAA), interpretation of provisions of the Income Tax Act or Overriding Effect of the Treaties over the Domestic Legislations or the questions like Treaty Shopping, Base Erosion and Profit Shifting (BEPS), Transfer of Shares in Tax Havens (like in the case of Vodafone etc.), if based on relevant facts, such substantial questions of law could be raised before the High Court under Section 260-A of the Act, the Courts could have embarked upon such exercise of framing and answering such substantial question of law. On the other hand, the appeals of the present tenor as to whether the comparables have been rightly picked up or not, Filters for arriving at the correct Date of Judgment 13-07-2018 I.T.A.No.525/2014 The Commissioner of Income-tax & Anr.
Vs. M/s. Toyota Kirloskar Motors (P) Ltd., 11/12 list of comparables have been rightly applied or not, do not in our considered opinion, give rise to any substantial question of law.
56. We are therefore of the considered opinion that the present appeals filed by the Revenue do not give rise to any substantial question of law and the suggested substantial questions of law do not meet the requirements of Section 260-A of the Act and thus the appeals filed by the Revenue are found to be devoid of merit and the same are liable to be dismissed.
57. We make it clear that the same yardsticks and parameters will have to be applied, even if such appeals are filed by the Assessees, because, there may be cases where the Tribunal giving its own reasons and findings has found certain comparables to be good comparables to arrive at an 'Arm's Length Price' in the case of the assessees with which the assessees may not be satisfied and have filed such appeals before this Court. Therefore we clarify that mere dissatisfaction with the findings of facts arrived at by the learned Tribunal is not at all a sufficient reason to invoke Section 260-A of the Act before this Court.
Date of Judgment 13-07-2018 I.T.A.No.525/2014 The Commissioner of Income-tax & Anr. Vs. M/s. Toyota Kirloskar Motors (P) Ltd., 12/12
58. The appeals filed by the Revenue are therefore dismissed with no order as to costs."
6. In the circumstances, having heard the learned Counsel appearing for both the sides, We are of the considered opinion that no substantial question of law arises for consideration in the present case.
Hence, the Appeal filed by the Appellants-Revenue is liable to be dismissed and is accordingly dismissed.
No costs.
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JUDGE Sd/-
JUDGE TL