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2025 Supreme(Kar) 1251
IN THE HIGH COURT OF KARNATAKA AT BENGALURU
Vibhu Bakhru, C.J., C M Joshi, J
Pr. Commissioner Of Income Tax-2 And Ors. - Appellants
Versus
Toyota Tsusho India Private Limited. – Respondent
Income Tax Appeal No. 149 of 2025
Decided On : 02-09-2025
For the Appellant :Sri. Sanmathi E.I., Advocate
The classification of traders under transfer pricing regulations requires compliance with specific statutory criteria; failing to meet both conditions prevents the assessee from being classified as a wholesale trader.
Headnote:(A) Income Tax Act, 1961 - Section 260-A - Transfer pricing adjustment - The court evaluated the determination of the arms length price (ALP) under transfer pricing regulations, concluding that the assessee, trading in automobile components, does not qualify as a wholesale trader based on inventory criteria - Appeals dismissed on grounds of insufficient grounds for appeal since no substantial question of law arises. (Paras 5, 10, 14)
(B) Classification of traders - The definition of wholesale trader is grounded on specific conditions as stipulated in the CBDT notifications, which were analyzed, emphasizing that the assessee's status must comply with both conditions to qualify as a wholesale trader. (Paras 10, 12)
Facts of the case:
The appeal arises from the assessee's dissatisfaction with transfer pricing adjustments made on international transactions amounting to over Rs. 15 Crores. The assessments made by the TPO were contested with claims of a higher tolerance limit of 3%, which was dismissed by the ITAT. (Paras 3, 9)
Findings of Court:
The court found no justification for classifying the assessee as a wholesale trader; hence, the tolerance limit of 1% applied. The decision to remand the matter was deemed unnecessary based on prior determinations regarding the assessee’s trading status. (Paras 11, 14)
Issues: The principal issue was the appropriate tolerance limit for transfer pricing adjustments and whether the assessee could be classified as a wholesale trader based on the statutory definitions. (Paras 9, 10)
Ratio Decidendi: The court reasoned that the definition of wholesale trader necessitates compliance with both conditions set out in the CBDT notifications, and in this instance, the assessee failed to qualify under those definitions. There was no substantial question of law, thus the appeal was dismissed. (Paras 10, 14)
Result: The appeal is accordingly dismissed.
| Table of Content |
|---|
| 1. assessment of income and transfer pricing (Para 2 , 3 , 4 , 5 , 6 , 7 , 8) |
| 2. determination of wholesale trader status (Para 9 , 10 , 12 , 13) |
| 3. final ruling on trader classification (Para 11 , 14) |
JUDGMENT :
VIBHU BAKHRU, CJ.
1. For the reasons stated in the application - I.A.1/2025, the same is allowed. The delay in filing the appeal is condoned.
2. 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] 2013-2014.
3. 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].
4. 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 Rs.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 Rs.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.
5. 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 learned TPO computed the transfer pricing adjustment at Rs.25,23,76,521/- in the trading segment.
6. In so far as manufacturing segment is concerned, the learned TPO determined the arms length PLI at 3.45% and accordingly made in adjustment of Rs.6,02,89,351/- for the manufacturing segment.
7. The learned AO passed a draft assessment based on the adjustments made by the learned TPO. The Assessee preferred its objections before the DRP.
8. The learned 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 learned DRP rejected the said objection. The learned AO passed the final Assessment Order on the basis of the aforesaid directions on 21.07.2022.
9. The Assessee appealed the said order before the learned ITAT. The learned 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 learned 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 who
