The ITAT held that the margin earned from sale of spare parts for after sale service cannot be compared with margin earned from sale of components sourced from India and sold to AEs.
The taxpayer had exported parts and components to AE as well as non-AE. The TPO adopted internal TNMM as against external TNMM adopted by the taxpayer and made TP additions. The taxpayer explained that export sale to AE consists of sale of spares for after sales services and sale of components sourced from India which were required by the AE for manufacture of vehicles. The taxpayer explained that non-AE exports only consisted of sale of spares for after sales services. Therefore, application of internal TNMM without evaluating the activities performed in the both the segments is incorrect.
The ITAT agreed with the contention of the taxpayer. The held ITAT that margin earned from sale of spares for after sales to unrelated parties cannot be compared with margin earned from sale of components sourced from India and sold to AEs since both the functions are different. The after sales distribution to non-AE can be compared with after sales distribution to the AE under internal TNMM. However, sourcing sales made to AE will have to be compared with external comparables under external TNMM. Followed in Piaggio Vehicles Pvt Ltd v ACIT TS-288-ITAT-2014(PUN)-TP and Piaggio Vehicles [2014] 51 taxmann.com 200 (Pune – Trib.).