M/S. John Deere Equipment Pvt. Ltd.,, ... vs Assessee

John Deere India Pvt. Ltd., Dy. CIT, Circle-11(1), (John Deere Equipment Pvt. Ltd.), Pune (Formerly known as L&T John Deere Pvt. Ltd.), merged with John Deere India Vs. Pvt. Ltd. w.e.f. 1st April, 2010, Off. Pune Nagar Road, Sanaswadi, Tal.-Shirur, Pune-412208 (Appellant) (Respondent) PAN No. AAACL7331A

ITA No. 1686/PN/2011 Assessment Year: 2007-08

John Deere Equipment Pvt. Ltd., ITO, Ward-11(2), (Now amalgamated with John Pune Deere (India) Pvt. Ltd.) Vs. Cyber City, Magarpatta City, Hadapsar, Pune-411013 (Appellant) (Respondent) PAN No. AAACL7331A

Revenue By: Smt. M.S. Verma Assessee By: Shri Nikhil Pathak

ORDER

PER R.S. PADVEKAR, JM:-

These two appeals are filed by the assessee challenging the

impugned orders of the Assessing Officer passed u/s. 143(3) r.w.s. 144C

and 115WE(3) of the Income-tax Act and these appeals pertain to the

A. Yrs. 2006-07 and 2007-08.

2. We first take the appeal for the A.Y. 2006-07 being ITA No.

1476/PN/2011 for disposal. The assessee has filed the concise grounds

in place of descriptive grounds. The concise grounds read as under: 2 ITA Nos. 1476/PN/2010 & 1686/PN/2011, John Deere India Pvt. Ltd., Pune

1. The learned A.O. / DRP erred in disallowing the payments made to John Deere India Pvt. Ltd. of Rs.1,62,80,699/-.

2. The learned A.O. / DRP erred in disallowing the expenditure incurred on software maintenance and other system of Rs.75,72,755/- as a capital expenditure without appreciating that the same was revenue expenditure in nature.

3. The learned A.O. / DRP erred in holding the sale tax / purchase tax subsidy of Rs.6,91,61,972/- received by the assessee from SICOM as a revenue receipt on the ground that the subsidy given was for increasing the profitability of the assessee.

4. The learned A.O. / DRP erred in recomputing the transfer price of the international transactions relating to exports of tractors despite the fact that none of the conditions as prescribed in Section 92C(3) of the Income Tax Act, 1961 ('the Act'), had been violated by the appellant. Thus, the A.O. / DRP erred in making an addition of Rs.33,59,50,091/- u/s 92C on the basis of the order of the TPO u/s 92CA(3) dated 21.10.2009 in the case of the appellant company.

3. The ground Nos. 1 is in respect of payments made to John Deere

India Pvt. Ltd. (in short "JDIPL"). The facts which revealed from the

record are as under. The assessee company is engaged in the business

of manufacturing and selling agricultural farm equipments like tractors,

aggregates, part and components. The assessee was a joint venture

company between Larsen & Turbo Limited (L&T), India and Deere & Co.

Both joint venture partners had an equal stake in assessee company.

Subsequently, there was changed in the L&T's stake in the assessee

company and it became a wholly owned subsidiary of John Deere India

Pvt. Ltd. which is a wholly owned subsidiary of Deere & Co. USA. So far

as issue before us is concerned, in this year the assessee has claimed

the expenditure of Rs.1,62,80,699/- which was in respect of professional

fees to JDIPL. It is claimed by the assessee that the said expenses

represents the reimbursement of the salary payable for the John Deere

Expatriates in India. Moreover, those payments were made towards the 3 ITA Nos. 1476/PN/2010 & 1686/PN/2011, John Deere India Pvt. Ltd., Pune

services of CEO, Quality Manager and Manufacturing Engineer. The

assessee also stated that an identical addition was made in the

preceding years i.e. A. Yrs. 2002-03 to 2005-06 and Ld. CIT(A) has given

the relief to the assessee and the Revenue had carried the issue before

the ITAT, Pune. It was pleaded before the Assessing Officer that no

addition can be made. The Assessing Officer made the addition by giving

the reason that as the Department has not accepted decision of Ld.

CIT(A) and took issue before the ITAT, Pune.

4. We have heard the parties and perused the record. The Ld.

Counsel submits that the issue stands covered in favour of the assessee

by the decision of the Hon'ble ITAT, Pune in the assessee's own case in

preceding year i.e. A.Y. 2001-02. The assessee also filed the copy of the

Tribunal's order in ITA No. 1658/PN/2004 dated 30-11-2009. We find

that the identical issue has come for the consideration in the assessee's

own case in the A.Y. 2001-02 and the issue was decided in favour of the

assessee confirming the order of Ld. CIT(A) allowing the relief to the

assessee in that assessment year. The operative part of the decision is

as under:

"6. On hearing me submissions of both the sides we have found that the nature of expenditure pertained to the year under consideration of "technical consultancy fees" was made in accordance of an agreement dated 31-03-2000 which was signed by one MD of John Deere India Pvt. Ltd. On the other hand; from the side of the assessee it was signed by one Deputy CHO. The said agreement had provided as per the terms for reimbursement of monthly salary. Our attention has also been drawn on the bills which were raised by John Deere wherein as well there was a reference of reimbursement of expenses. It has also been produced on record that the company had entered into an agreement dated 10-02-1998 with its joint venture company i.e. John Deere India Pvt. Ltd. and that agreement was for rendering know how and other activities related to manufacturing of tractors. There was a clause as per the said agreement that in consideration of technical 4 ITA Nos. 1476/PN/2010 & 1686/PN/2011, John Deere India Pvt. Ltd., Pune

consultancy services rendered or to be rendered by the consultant a lumpsum payment of Rs.4 lakhs to be made by the assessee company for the period from the date of incorporation up to 31-03- 1998. Therefore it was argued that after the said period i.e. 31-03- 1998 the payment was nothing but reimbursement of salary to expatriate. Considering all these evidences such as the terms of the agreement, bills raised etc. it clearly indicates that the expenditure was towards reimbursement of salary hence the view taken by Ld CIT(A) that it was revenue in nature deserves to be affirmed. We uphold the said view and dismiss this part of ground of the Revenue."

4.1 We, therefore, following the decision of the Tribunal in the

asseessee's own case in the A.Y. 2001-02, we reverse the order of the Ld.

CIT(A) on this issue in this year and allow the Ground No. 1.

5. The next Ground No. 2 is in respect of the disallowance of

expenditure of Rs.75,72,755/-. In this year the assessee has claimed

the expenditure towards SAP maintenance charges and other system

expenses totaling Rs.75,72,755/-. The identical addition was made by

the Assessing Officer in the preceding years i.e. A. Yrs. 2002-03 to 2004-

05 by holding that the said expenditure is in the nature of capital

expenditure and could not be allowed as a revenue expenditure. In the

preceding years the identical addition was deleted by Ld. CIT(A) and

order of Ld. CIT(A) has been confirmed by the Tribunal. The assessee

has filed the copy of the Tribunal's order in the assessee's own case in

ITA No. 1508/PN/2005 (A.Y. 2002-03) which is a common order also in

respect of A. Yrs. 2003-04 and 2004-05. This issue is discussed in Para

Nos. 11 to 14 of the order which is as under:

11. During the year, the assessee had made payment to John Deere Equipment Pvt. Ltd. on account of SAP maintenance and License fee as well as the Consultancy charges. The A.O disallowed expenditure on the ground that similar expenditure was 5 ITA Nos. 1476/PN/2010 & 1686/PN/2011, John Deere India Pvt. Ltd., Pune

disallowed in A.Y. 2001-02. The Ld. CIT(A) has allowed the claim of the assessee by following his order for A.Y. 2001-02.

12. At the outset of hearing, the ld. A.R. pointed out that the issue raised in the ground is fully covered by the decision of Pune Bench of the Tribunal in the case of assessee itself for A.Y. 2001-02 (Supra). He submitted that the Tribunal has held that the consultancy fee is allowable as a revenue expenditure. Regarding SAP maintenance and License fees, the Tribunal has set aside the matter to decide it afresh in view of the decision of the Special Bench of the Tribunal in the case of Amway India Enterprises, 111 ITD 112 (SB). The Ld. A.R. submitted further that the A.O. in the order passed u/s. 143(3) r.w.s. 254 of the Act after verifying the claims of the assessee has held the said expenditure as revenue in nature.

13. The Ld. D.R. has not disputed the above fact. He, however, placed reliance on the assessment order.

14. Having gone through the orders of the authorities below, we find that the A.O made addition of Rs.79,62,000/- on account of payment made to John Deere (India) Pvt. Ltd. The said expenditure consisted of consultancy charges at Rs.40,80,000/-, system maintenance & development at Rs.36,00,000/- and SAP Licence fees at Rs. 2,82,000/-. The Ld. CIT(A) has allowed the claim of the assessee by following his order for the A.Y. 2001-02. The A.O in compliance of the direction of the Tribunal for A.Y. 2001-02, in his order passed u/s. 143(3) r.w.s. 254 of the Act after verifying the claim has also held that the said expenditure is revenue in nature.

The Tribunal had set aside the matter to the file of the A.O. to decide the matter afresh in view of the decision of the Special Bench of the Tribunal in the case of Amway India Enterprises (Supra). We thus do not find infirmity in the first appellate order in this regard. The same is upheld. Ground No. 1 is accordingly rejected.

5.1 We, therefore, following the order in the asseessee's own case in

A.Y. 2002-03 allow the Ground No. 2 and delete the addition. It is

pertinent to note here that in the A.Y. 2002-03 the Tribunal has

considered the order passed by the Assessing Officer in the A.Y. 2001-02 6 ITA Nos. 1476/PN/2010 & 1686/PN/2011, John Deere India Pvt. Ltd., Pune

u/s. 143(3) r.w.s. 254 of the Act. As the facts are identical in this year,

there is no reason to take different view. Accordingly, Ground No. 2 is

allowed.

6. The next issue which arises from Ground No. 3, the subsidy

received from the SICOM by the assessee. In this year it is claimed by

the assessee as a capital receipt. The facts which revealed from the

record are as under. The assessee company was established in 1998

and has set up it's unit at Sanaswadi near Pune. It is claimed by the

assessee that in response to "1993 Package Scheme of Incentives"

introduced by the Govt. of Maharashtra giving incentive to the units for

setting up units in backward areas, the assessee set up it's unit in the

Sanaswadi, Pune which is notified as a backward area. It is stated that

as the assessee has set up unit in notified backward area i.e. Sanaswadi,

the assessee was eligible for either payment from sales tax and purchase

tax or deferment of sales tax and purchase tax collected by it for a period

of 15 years. Initially, the assessee opted for Deferral Scheme as per

which, the assessee was authorized for collection of sales tax but

payment was to be made after 15 years to the Govt. but subsequently

from the month of September, 2001, the assessee decided to opt for the

Exemption Scheme and shifted from Deferral Scheme. As a part of the

said scheme the assessee is exempted from payment of the sales tax as

well as purchase tax on it's purchase. As per the "Package Scheme

1993", there was a ceiling on the benefit of the exemption to the extent of

its capital investment. The assessee got benefit of Rs.6,91,61,972/- and

the assessee company treated the said as a subsidy and also declared as

a revenue receipt in original return.

7. However, the assessee filed revised return and claimed the said

amount as capital receipt, relying on the decision of the ITAT, Special

Bench, Mumbai in the case of CIT Vs. Reliance Industries Ltd. 88 ITD 7 ITA Nos. 1476/PN/2010 & 1686/PN/2011, John Deere India Pvt. Ltd., Pune

273 (SB), Mumbai and CIT Vs. Ponni Sugar and Chemicals Ltd. 219 CTR

105 (SC). The claim of the assessee was rejected by the Assessing

Officer. The Assessing Officer relied on the decision of the Hon'ble

Supreme Court in the case of Sahaney Steels and Press Work Ltd. 228

ITR 253 and held that the sales tax subsidy to the extent of

Rs.6,91,61,972/- is a revenue receipt and the same was taxable in the

hands of the assessee. The assessee has field the objections before the

Dispute Resolution Panel (DRP) but without successes. The main crux

of the reasons given by the DRP is that in the preceding year, the

assessee has treated the said subsidy as a revenue receipt and for the

first time in this year the assessee has claimed it a capital receipt. Now,

the assessee is in appeal before us.

8. We have heard the rival submissions of the parties and perused

the record. The main plank of the argument of the Ld. AR is that the

assessee become eligible for the sales tax subsidy as it complied with the

terms and conditions of "1993 Package Scheme of Incentives" introduce

by the Govt. of Maharashtra for encouraging the industrialization of the

backward area and dispersal of industries from the developed area. He

referred to the "1993 Package Scheme of Incentives" and submits that

the Package Scheme of Incentive introduced by the Govt. of Maharashtra

has been examined by the Hon'ble ITAT, Special Bench, Mumbai in the

case of Reliance Industries Ltd. (supra). He submits that the matter was

carried before the Hon'ble High Court of Bombay in the case of CIT Vs.

Reliance Industries Ltd. 339 ITR 632 and the decision of the Hon'ble

ITAT, Special Bench, Mumbai has affirmed by holding that the sales tax

subsidy received by the assessee in the said case partakes character of

the capital receipt. He submits that in the case of Reliance Industries

Ltd. (supra), the Package Scheme of Incentives 1979 introduced by the

Govt. of Maharashtra was before the Hon'ble Special Bench, ITAT, 8 ITA Nos. 1476/PN/2010 & 1686/PN/2011, John Deere India Pvt. Ltd., Pune

Mumbai. He submits that so far as "1993 Package Scheme of Incentive"

is concerned, the basic object and purpose for giving the benefit to

industries are the same as per Package Scheme of 1979 and those are

for developing the industries in the backward area to remove imbalance

and to maintain the regional economic growth. He submits that "1993

Package Scheme of Incentive" is only the extension of original scheme

with minor modification but otherwise the object and purpose for giving

the incentives are the same. He also placed his reliance on the following

precedents:

a. Ponni Sugar & Chemicals Ltd. 306 ITR 392 (SC).

b. Reliance Industries Ltd. 88 ITD 273 (SB) (Mum).

c. Ford India Pvt. Ltd. ITA No. 2089/Mds./2011.

d. Birla VXL Ltd. 90 DTR 376 (Guj) (HC).

e. Munjal Auto Industries Ltd. 90 DTR 369 (Guj) (HC).

9. He submits that it is true that the assessee had in the preceding

year declared the said subsidy as a revenue receipt but before the ITAT,

Pune the assessee took the additional ground and hence, the matter was

set aside to the Assessing Officer. He argues that it is a purely legal

issue and it can be decided in this year also. He submits that even

though in the preceding year the matter has been set aside, doctrine of

estoppel is not applicable to the legal issue and moreover, the issue is

seized with the authorities below for deciding the same afresh as per

directions of the Tribunal in the preceding year. We have also heard the

Ld. DR, who supported the order of the DRP and Assessing Officer. He

reiterated the reasons given by the Assessing Officer as his argument to

support impugned order and pleaded for confirming the addition.

10. In the case of Reliance Industries Ltd. (supra) the said assessee

was exempted from payment of the sales tax as per 1979 Package

Scheme of the Govt. of Maharashtra, for setting up a new industrial unit 9 ITA Nos. 1476/PN/2010 & 1686/PN/2011, John Deere India Pvt. Ltd., Pune

in the notified backward area of Patalganga in Raigarh district. It was

claimed by the assessee that the amount of sales tax

exemption/subsidiary should be treated as a capital receipt in the hands

of the assessee. The assessee was covered for getting the said incentive

under the Package Scheme of Incentive 1979 declared by the Govt.

which was notified in the GR dated 05-01-1980. It was a contention of

the said assessee that the earlier incentive schemes were fine-tuned to

make 1979 Package Scheme so as to make them more effective,

employment oriented and to encourage economic growth of backward

areas. It appears that there was a conflicting decision on this issue

decision in the case of M/s. Bajaj Auto Ltd. (ITA No. 49/Bom/91 and

1101/Bom/91) dated 31.12.2002 and matter was referred to the Special

Bench. The operative part of the discussion and finding of the Hon'ble

ITAT, Special Bench in Reliance Industries Ltd. (supra) is as under:

"35. Coming to the facts of the case, they have all been adverted to in the Tribunal's orders, both for the asst. yrs. 1984-85 and 1985-

86. When the assessee applied for the subsidy on 16th Dec., 1980, it did not have any industrial unit in the State of Maharashtra, but was running a synthetic textile mill at Naroda, Ahmedabad. It has been observed by the Tribunal that the assessee had taken possession of the land in June, 1980 in Patalganga Industrial area and spent Rs.1.40 crores for that purpose. It had also obtained registration from the Ministry of Industry, Government of India, for the manufacture of polyester filament yarn with licenced annual capacity of 10,000 tons. The assessee informed the implementing agency (SICOM) that the estimated cost of the project was Rs.66.21 crores and it was proposed to be met by various means of finance. On 27th Jan., 1981, SICOM issued a letter of intent in which the assessee was directed to ensure that the unit commenced commercial production on or before 26th Jan., 1984. When the first phase of the unit had commenced production on 24th March, 1983, SICOM issued eligibility certificate on 6th June, 1983 under the 1979 Scheme which was valid for a period of 5 years from 8th June, 1983 to 7th June, 1988. Since the unit had undergone huge 10 ITA Nos. 1476/PN/2010 & 1686/PN/2011, John Deere India Pvt. Ltd., Pune

expansion, another eligibility certificate was issued on 22nd Oct., 1983, which was valid upto 30th Sept., 1993, by way of deferral and from 1st Oct., 1993 to 30th June, 1997, by way of exemption. It has been found by the Tribunal that the incentive was thus given in several instalments depending on the setting up and expansion of the industrial unit. It was also one of the conditions of the eligibility certificate originally issued that in the matter of employment of personnel for the unit, candidates from Scheduled Castes and Scheduled Tribes and local people should be given preference. All these facts have not been disputed before us. The Departmental authorities have relied on the assessment and appellate order for the earlier years they have not brought any new fact or material on record. Even before us, with respect to counsel who appeared for both the sides, no new arguments were advanced other than the arguments which had been advanced by the assessee and the Department before the Tribunal in the appeal for asst. yr. 1985-86. The preliminary argument of the Department before us that the assessee did not collect any sales-tax and therefore there is no question of any exemption or incentive being given is an argument which has been advanced before the Tribunal both in the asst. yrs.

1984-85 and 1985-86. In fact, in para 74 of its order for the asst. yr. 1985-86, the Tribunal has referred to this aspect of the matter and after noting that the argument has already been found against the Department in the order for the asst. yr. 1984-85, further observed that no fresh material was brought to their notice either in the course of the arguments or in the orders of the Departmental authorities. The position before us, with respect, is the same. Even with regard to the other question as to whether the Tribunal erroneously interpreted the judgment of the Supreme Court in Sahney Steel (supra), the arguments of the Department were the same in the sense that even in the appeal before the Tribunal for the asst. yr. 1985-86, as we find from the order of the Tribunal, the arguments were focused upon the pivotal point that the ratio laid down by the Supreme Court in Sahney Steel (supra) was that if the subsidy is received after and conditional upon the commencement of production, irrespective of the object for which the subsidy is given, it constitutes a revenue receipt in the assessee's hands.

This argument has been rejected by the Tribunal in its order for the asst. yr. 1985-86 for reasons which we have already discussed in some detail and the same arguments have been pressed into service 11 ITA Nos. 1476/PN/2010 & 1686/PN/2011, John Deere India Pvt. Ltd., Pune

before us also. Additionally, the order of the Tribunal in Bajaj Auto Ltd. (supra) was also heavily relied upon. We have already expressed our inability to share the view expressed in Bajaj Auto Ltd. that the Tribunal in the case of RIL for the asst. yr. 1985-86 erroneously interpreted or appreciated the ratio laid down in Sahney Steel (supra). We have also given reasons for our view. Therefore, no separate discussion of the arguments on this point before us is considered necessary.

36. However, some recent decisions which were cited before us on behalf of the Department require to be considered. The first is the judgment of the Madras High Court in Tamil Nadu Sugar Corporation Ltd. vs. CIT (2001) 165 CTR (Mad) 276 : (2003) 130 Taxman 348 (Mad). In this case, the assessee, a sugar factory owner, received purchase tax subsidy equivalent to the quantum of purchase tax, from the State Government for a period of 5 years from the date of commencement of production. It returned the subsidy as business income for the asst. yrs. 1986-87 and 1987-88 but later filed revision applications before the CIT under s. 264 of the IT Act contending that the subsidy should be treated as capital receipt. The applications were rejected by the CIT, against which the assessee moved the Madras High Court by way of writ petitions. The Madras High Court held that a fair reading of the Government order showed that the subsidy was given by way of assistance to the sugar factories on the commencement of production and not for the setting up of the factories and it was given only to tide over the difficulties that might be experienced by the management in the actual running of the sugar factories. It was further held that though the amount of subsidy is equivalent to the quantum of purchase tax, the object behind the grant of the subsidy is not to set up a new sugar factory, but to run the factory efficiently. In other words, the subsidy is given so that the management may not be in trouble in running the factories in the initial year. In this background of facts, the Madras High Court applied the decision of the Supreme Court in Sahney Steel. In doing so, the High Court noted that in Sahney Steel's case, the payments were made directly or indirectly not for the setting up of the industries, but were made only after the production was commenced. It was therefore held, applying the ruling of the Supreme Court, that the subsidy received by the assessee, which was not for the setting up of the sugar factory, is a 12 ITA Nos. 1476/PN/2010 & 1686/PN/2011, John Deere India Pvt. Ltd., Pune

revenue receipt. In the other judgment, which is of the Madhya Pradesh High Court in CIT vs. S. Kumar's Tyre Manufacturing Co. (2003) 183 CTR (MP) 590, the subsidy was expressly given to meet expenditure on power. The Madhya Pradesh High Court held, following the judgment of the Supreme Court in Sahney Steel (supra) and in CIT vs. Rajaram Maize Products (supra) that since the subsidy is given for the purpose of meeting a part of the expenditure on power, it was revenue receipt in the assessee's hands. In both the cases, the object of the subsidy was not to encourage the setting up of factories or for industrialization of any particular area of the State. The object was to assist or lend a helping hand to the concerned assessees after they commenced production so that they tide over the initial difficulties in running the factories. The subsidy in both the cases was an operational subsidy. The facts in these two cases being different from the facts of the present case, they are not applicable.

37. In the paper book filed by the Department containing the above judgments, we noticed a judgment of the Madras High Court in CIT vs. Ponni Sugars & Chemicals Ltd. (2003) 179 CTR (Mad) 477 :

(2003) 260 ITR 605 (Mad). In this case, the assessee received two types of subsidies. One was under a Scheme of the Government framed with the object of augmenting indigenous sugar production and to provide incentives to new sugar factories and expansion products. The Scheme enabled the entrepreneur to initially fund the capital cost by obtaining loans from public financial institutions and discharging them with the help of the incentives after the commencement of production. The incentives were provided exclusively for the purpose of repayment of loans for meeting the capital costs. These incentives were held by the High Court to be capital in nature. The other type of incentives was the subsidy which was linked to the purchase tax and was in no way linked to the expenditure incurred in setting up the sugar industry. The object of the subsidy was to give a concession to the assessee for meeting the cost of running the business after production. There was also no condition to the effect that the subsidy shall be used for a particular purpose only. In these circumstances, the High Court held that this subsidy was a trading receipt in the hands of the assessee. This case emphasises that the object with which the subsidy is given is 13 ITA Nos. 1476/PN/2010 & 1686/PN/2011, John Deere India Pvt. Ltd., Pune

the prime or foremost consideration while determining the nature of the receipt. The High Court held as under:

"The nature of the receipt of the incentive, therefore, has to be examined in the light of that object. Law has to keep up with the newer devices and methods adopted in the world of business as also in the several schemes that policy makers draw up from time to time to ensure the desired development in the different sectors of industry. If the Government found it convenient to adopt a policy of enabling the entrepreneurs to initially fund the capital cost of the project by obtaining loans from the public financial institutions by inducing the entrepreneur and the lender institution to rely upon the incentives provided under the Scheme for discharging such loans, it cannot be said that the incentive given being post production, though meant exclusively for meeting the capital cost, the amount of the incentive would be a trading receipt in the hands of the recipient. The fact that the time of payment is subsequent to the commencement of production would not in the larger perspective make a difference. As observed by the Supreme Court in the case of K.C.P. Ltd. vs. CIT (2000) 162 CTR (SC) 320 : (2000) 245 ITR 421 (SC), it is not the name given by the assessee or even the Revenue or anyone else that matters, but it is the true character of the receipt that determines its taxability and being regarded as falling with the capital field or out of it.

If the true character of the incentive here is to enable the assessee to meet the capital cost, then that true character must be given full recognition and the fact that the receipt was subsequent to the commencement of production (can) not be allowed to stand in the way of its proper treatment as a receipt in the capital field meant to meet a capital cost. The line separating "capital" from "revenue" is a line which is not fixed and unalterable, but one which shifts from time to time depending upon the peculiar facts of a given case. It is the sum total of all the relevant facts of a given case, which will determine the ultimate decision as to whether a particular item of receipt or expenditure is to be regarded as being in the capital or in the revenue field.....................

The purpose and object of the Scheme, therefore, is of vital significance and decided cases which turn upon the special facts cannot pre-determine the outcome of another case merely on the 14 ITA Nos. 1476/PN/2010 & 1686/PN/2011, John Deere India Pvt. Ltd., Pune

ground that post production receipts are normally regarded as trading receipts."

The Madras High Court also referred to the judgment of the Supreme Court in Sahney Steel (supra) and held that the Supreme Court "clearly recognised the possibility of the payments being made not directly but indirectly for the setting up of the industries" and that since in the case before the Supreme Court the payments "had been made post-production and were in no way linked to the steps that had been taken by the assessee therein in setting up the industry, it was observed that the incentives had been given only after production had commenced". These observations of the Madras High Court (at p. 612 of the report) recognise the possibility, depending upon the nature and object of the Scheme, of even post-production payments being linked, albeit indirectly, to the steps taken by the assessee to set up the industry. The High Court also observed earlier at p. 611 of the report, which we have extracted above, that what is of vital significance is the purpose and object of the Scheme and that the decided cases which turn upon the special facts cannot predetermine the outcome of another case merely on the ground that post-production receipts are normally regarded as trading receipts. In other words, the High Court has held that merely because the monies are received after production commences, it cannot be said, irrespective of the purpose and object of the Scheme, that the receipt is of revenue nature. This observation of the Madras High Court and the manner in which the judgment of the Supreme Court in Sahney Steel (supra) has been explained at p. 612 of the report also show that the Tribunal in the case of RIL for the asst. yr. 1985-86 correctly interpreted the judgment of the Supreme Court in Sahney Steel (supra). The observations of the Madras High Court lend support to the view that the purpose and object of the Scheme under which the subsidy is given is of more fundamental importance than the fact that the subsidy was received after the commencement of production or conditional upon it. Therefore, in our view and with respect, the Tribunal in the case of RIL had correctly interpreted and understood the ratio of the judgment of the Supreme Court in Sahney Steel (supra).

38. In this view of the matter, we answer the question referred to us in the affirmative. Since there are other grounds in the appeal of the 15 ITA Nos. 1476/PN/2010 & 1686/PN/2011, John Deere India Pvt. Ltd., Pune

assessee and since there is also an appeal by the Department, they will go back to the Division Bench for being disposed of in accordance with law."

11. It is pertinent to note here that the Hon'ble Special Bench, ITAT

has considered the decision of the Hon'ble Supreme Court relied on by

the Assessing Officer in the case of Sahaney Steels and Press Work Ltd.

(supra). It is also pertinent to note here that the said issue was further

carried by way of appeal by the revenue before the jurisdictional High

Court and the Hon'ble High Court has affirmed the order of the ITAT,

Special Bench, Mumbai in case of Reliance Industries Ltd. (supra) by

holding that the subsidy is clearly on the capital account. We have also

considered the "1979 Package Scheme of Incentives" and as well as

Package Scheme of 1993 introduced by the Govt. of Maharashtra. As

rightly argued by the Ld. AR the object and purpose for which the

incentive by way of sales tax subsidy is given are the identical in both

the Incentive Schemes. It is true that in the preceding years the

Tribunal has set aside the issue to the file of the Assessing Officer for the

fresh adjudication but in our opinion as the issue has been settled by

the jurisdictional High Court on the identical subsidy, we do not

consider it necessary to again set aside the issue to the file of the

Assessing Officer and to create the complexity of the litigation. We,

therefore, following the decision of the Reliance Industries Ltd. (supra)

hold that the sales tax subsidy availed in "Package Scheme of Incentives

1993" is a capital receipt and cannot be taxed as a revenue receipt in the

hands of the assessee. Accordingly, Ground No. 3 is allowed.

12. Ground No. 4 is in respect of the adjustment made by the TPO and

confirmed by the DRP u/s. 92CA(3) of the Act to the extent of

Rs.33,59,50,091/-. The order of the TPO which is as under: 16 ITA Nos. 1476/PN/2010 & 1686/PN/2011, John Deere India Pvt. Ltd., Pune

S. No. Description of transaction Amount (in Rs.) Method applied

1 Import of components 20,21,13,641 TNMM

2 Export of tractors 431,87,60,634 -do-

3 Export of spares 3,19,86,815 -do-

4 Export of Aggregates 25,09,79,676 -do-

5 Payment of royalty 22,63,82,683 -do-/CUP

6 Catalogue updation services 38,95,688 -do-

7 Reimbursement Expenses 2,00,73,737 Actuals at cost

Total 505,41,92,874

13. The assessee company is engaged in the business of manufacture

of tractors, aggregates and spare parts which are sold in the domestic

market as well as the foreign market. For this year, the total sales of the

assessee company are around Rs.808 Crs. and the profit before tax was

Rs.64.67 Crs. In this year, the assessee entered into various

International Transactions with its Associated Enterprises (AEs) and the

details of the same are given on page 2, para 4 of the order of the

Transfer Pricing Officer (in short TPO).

13.1 It was submitted by the assessee to the TPO that the various

transactions entered into by it with its AEs were at Arm's Length Price

(ALP) and hence, no addition is warranted. The copy of the Form No.

3CEB filed by the assessee is on pages 149-169 of the Paper Book 1.

The copy of the Transfer Pricing study report is also enclosed on pages

173-279 of Paper Book 1. It was submitted by the assessee that all its

International Transactions were at ALP and no adjustments were

required to be made. The TPO accepted the contentions of the assessee

in respect of the various International Transactions save for the export of

tractors by the assessee company to its AEs of Rs.431.87 Crs. The TPO

held that the transactions of export of tractors by the assessee company 17 ITA Nos. 1476/PN/2010 & 1686/PN/2011, John Deere India Pvt. Ltd., Pune

to its AEs were not at ALP and therefore, the addition was required to be

made.

13.2 According to the TPO, the assessee company had adopted

transactional net margin method (TNMM) for determining the

international transaction of exports of tractors. The assessee company

had selected 8 companies as comparable and contended that the net

operating margin earned by it in export segment was much higher than

the average operating margin of 8 comparable companies. Accordingly,

the assessee claimed that it's transactions of export of tractors to its AEs

were at ALP. The assessee also filed the chart of the operating margins

of the comparable entities and since the operating margin of the assessee

company was much higher, it was claimed that the transactions are at

Arm's Length Price (ALP).

13.3 The TPO has held that the TNMM is not the most appropriate

method for determining the ALP and in his opinion that the Cost Plus

Method (CPM) is the most appropriate method for determining the ALP.

The TPO has observed that the assessee has also sold tractors in the

domestic market and hence, he has compared the gross margin earned

by the assessee on sale of tractors in the domestic segment vis-à-vis the

gross margin earned by the assessee on sale of tractors to the AEs. The

TPO has discussed the issue regarding the applicability of the method in

paras 4 to 5.3 of his order. He has held that the comparability of the

domestic segment and the export segment of sale of tractors would give a

better picture.

13.4 The TPO in para 4.2.1, page 36 and para 6.1, page 65 of his order

has justified the adoption of CPM as the most appropriate method on the

ground that the assessee has sort of joint facility arrangement and long

term buy and supply arrangement with the AE in respect of export of 18 ITA Nos. 1476/PN/2010 & 1686/PN/2011, John Deere India Pvt. Ltd., Pune

tractors. He has observed that CPM is the most appropriate method for

manufacture, assembly or other production of goods that are sold to

related parties. The TPO has referred to the TP study report wherein it

has been stated that the assessee company is the largest Indian exporter

of tractors to USA and exports contributed 57% of the total turnover of

the assessee company. According to the TPO, the functions performed

and the assets utilized for manufacturing tractors in the domestic and

export segments are the same. The TPO has mentioned that the various

differences in the export and domestic segment are not material and they

do not affect the gross profit of the two segments. The TPO has noted

that the AEs of the assessee are enjoying locational savings since the

cost of manufacture of tractors is lower than the cost of manufacture of

tractors in the AE's countries. Thus, according to him, the domestic

segment is a much better comparable vis-à-vis the external comparables

in the form of 8 companies adopted by the assessee. The TPO has finally

adopted CPM as the most appropriate method for determining the ALP

by discarding TNMM method adopted by the assessee for determining

ALP of export of tractors to AEs as appropriate method.

13.5 The TPO has also rejected some of the comparables selected by the

assessee company. The TPO has rejected the various companies selected

by the assessee for the reasons given on pages 5-6 of the TPO's order.

The TPO has rejected 2 companies, namely, Escorts Ltd. and HMT Ltd.

on the ground that these companies have incurred excessive losses

[Refer para 3-3.2 on pages 31-33 of the TP order]. The TPO has further

held that the total turnover of the assessee company is Rs.808 Crs. and

hence, the companies with turnover ranging between Rs.500 Crs. to

Rs.1,000 Crs. only should be considered as comparable with the

assessee. In short, the TPO applied turnover filter. Accordingly, he has

held that after applying the above filters, the only two companies left 19 ITA Nos. 1476/PN/2010 & 1686/PN/2011, John Deere India Pvt. Ltd., Pune

would be Punjab Tractors Ltd. (OPM - 11.5%) and International Tractors

Ltd. (OPM - 15.41%).

13.6 Finally, after rejection of some of the comparables and holding that

CPM is the most appropriate method, the TPO worked out the G.P. over

cost in the export segment at 18.52% and in the domestic segment at

27.65% (Page No. 21 of TPO order). He computed the difference between

the two at 9.13% and accordingly, he has made an adjustment of

Rs.33.59 Crs. which is being challenged by the assessee company in this

appeal.

14. The assessee company strongly objected to the addition made by

the TPO. Ld. A.R. submitted that the assessee company had adopted

transactional net margin method (TNMM) for determining the ALP in

respect of export of tractors to its AEs. It is submitted that the net

operating margin earned by it in respect of the export of tractors was

much higher than the average operating margin earned by the

comparable entities and accordingly, there was no reason to make any

addition.

14.1 Ld. AR further submitted that that the TPO has grossly erred in

rejecting the TNMM method. It is argued that the assessee company has

exported tractors to AEs for last several years and from A.Y. 2004-05

onwards, the assessee has adopted TNMM method as the most

appropriate method for determining the ALP in respect of the transaction

of export of tractors to the AEs. For all those years starting from 2004-

05 onwards and also for A.Y. 2008-09, the Dept. has accepted TNMM

method as the most appropriate method for determining the ALP in

respect of the sale of tractors to the AEs. He submitted that the copies of

the orders passed for A.Y. 2004-05 to 2005-06 are placed at pages

282-285 of the Paper Book-2 whereas the copy of TP order for A.Y. 20 ITA Nos. 1476/PN/2010 & 1686/PN/2011, John Deere India Pvt. Ltd., Pune

2008-09 is placed at pages 353-354 of the Paper Book-2. The Ld. AR

submitted that for last several years, the Dept. has accepted TNMM as

the most appropriate method for determining ALP in respect of the

transactions of export of tractors. In such a scenario and as the facts for

this year are similar to the facts involved for the earlier years and the

subsequent year i.e. A.Y. 2008-09 that on the principle of consistency,

the TPO should not have rejected TNMM as the most appropriate

method. Ld. AR placed his reliance on the following decisions and

according to him the courts have held that when the facts involved are

similar for various years and the Dept. has accepted a particular stand

in some of the years, there is no reason to take a different stand in the

subsequent years -

a. Alfa Laval (I) Ltd. [149 ITD 285 (Pune)]

b. Radhasoami Satsang v. CIT [193 ITR 321 (SC)]

c. H. A. Shah & Co. v. CIT [30 ITR 618 (Bom)]

d. Brintons Carpets Asia (P) Ltd. [139 TTJ 177 (Pune)]

e. Drilbits International Pvt. Ltd. [62 DTR 171 (Pune)]

f. Agility Logistics (P) Ltd. [145 ITD 566 (Mum)]

g. Skol Breweries Ltd. [153 TTJ 257 (Mum)]

14.2 The Ld. AR for the assessee further submitted that the TPO has

merely rejected the TNMM on the ground that the comparability of the

domestic segment and the export segment would give a better picture. In

this context, Ld. AR submitted that the TNMM was accepted as the most

appropriate method for determining the ALP for all the earlier years and

also accepted for the subsequent year i.e. A.Y. 2008-09 and hence, the

TPO has conveniently ignored this aspect. It is argued that the TPO has

not stated as to how the facts of the current year are different than those

in the earlier years. Ld. AR submitted that since the TPO has not been

able to demonstrate as to how the factors which were relevant for the 21 ITA Nos. 1476/PN/2010 & 1686/PN/2011, John Deere India Pvt. Ltd., Pune

earlier years have changed in this year, the TPO has not been able to

discharge the burden placed on him by Sec. 92C(3) and hence, the

adoption the CPM method is without any basis and not justified at all. In

this context, Ld. AR relied upon the following decisions to support his

argument that if the TPO wants to determine the price under a different

method, he has to demonstrate that the price determined by him reliable

and reasonable by adopting the different method -

a. Aztec Software Technology Services Ltd. v. ACIT [107 ITD

141 (Bang) (SB)]

b. MSS India Pvt. Ltd. [123 TTJ 657 (Pune)]

Ld. AR vehemently submitted that as the facts for this year are similar to

the facts involved in the earlier years, the TPO is not justified in rejecting

TNMM as the most appropriate method. Ld. AR further stressed that for

A.Y. 2008-09, the TPO had again accepted its transactions on account of

export of tractors to its AEs were at ALP and had not disturbed the

TNMM adopted by the assessee for determining the ALP. Accordingly, he

contended that since even in the later year, the TPO has accepted TNMM

as the most appropriate method, the same should have been accepted

for this year also for determining the ALP.

14.3 As regards the issue of comparables, Ld. AR submitted that the

assessee company had selected the following 8 companies as comparable

entities -

Sr. No. Name of the Company Operating Profit Turnover Margin 1 Escorts Ltd. 1320.32 -12.02% 2 Tractors & Farm Tractor Ltd. 1391.20 11.90% 3 Mahindra & Mahindra Ltd. 3441.82 8.65% 4 VST Tillers Tractors Ltd. 131.14 9.40% 5 Punjab Tractors Ltd. 958.55 11.50% 22 ITA Nos. 1476/PN/2010 & 1686/PN/2011, John Deere India Pvt. Ltd., Pune

6 International Tractors Ltd. 953.25 15.41% 7 Kerala Agro Machinery Corp. Ltd. 80.15 -0.54% 8 HMT Ltd. 281.24 -4.84% Mean 4.93%

14.4 Ld. A.R. submitted that the reasons given by the TPO for rejecting

the comparable companies are not correct. Firstly, it is stated that the

TPO is not justified in holding that the companies with excessive losses

should be excluded. In this respect, it is submitted that in A.Y. 2005-06,

Escorts Ltd. and HMT Ltd. were considered as comparable entities. In

fact, the Operating profit margin of Escorts Ltd. for A.Y. 2005-06 was

(10.62%) and the said company was accepted as comparable by the

same TPO in A.Y. 2005-06. Ld. AR stated that there was no reason for

the TPO to reject Escorts Ltd. and HMT Ltd. as comparable entities on

the ground that they had incurred substantial losses. Ld. AR submitted

that those two companies had incurred losses in their normal day to day

functioning and the losses were not on account of any exceptional

factors and hence, there was no reason to reject those two companies as

comparables.

14.5 Secondly, Ld. AR submitted that the TPO has stated that the

turnover of the assessee is Rs.808 Crs. and hence, he has held that

companies with turnover within the range of Rs.500 Crs. to Rs.1,000

Crs. should only be considered as comparable. The assessee contended

that out of the 8 companies selected in this year, barring for Kerala Agro

Machinery Corp. Ltd., all the other 7 companies were selected by it as

comparable entities in A.Y. 2005-06 and the same were accepted by the

TPO. It is was pointed out that in A.Y. 2005-06, the turnover of the

assessee company was Rs.633 Crs. whereas the turnover of the

comparable entities was ranging from Rs.285.7 Crs. to Rs.2543.03 Crs.

Ld. AR submitted that company wise turnover for A.Y. 2005-06 is given 23 ITA Nos. 1476/PN/2010 & 1686/PN/2011, John Deere India Pvt. Ltd., Pune

on page 27 of DRP Application filed in Form No. 35A for this year. It was

clarified that the TPO has accepted almost similar turnover range in A.Y.

2005-06, there is no reason as to why he should object to the set of

comparables adopted by the assessee in the current year. The assessee

stated that there is no reason to disturb the set of comparables on the

reason of turnover filter, particularly because of the fact that similar

turnover filter was adopted in A.Y. 2005-06 and was accepted by the

same TPO while determining the ALP.

14.6 The assessee further submitted that the TPO had adopted a very

narrow turnover filter of companies having turnover of Rs.500 Crs. to

Rs.1000 Crs. It is stated that the turnover of the assessee was Rs.808

Crs. and hence, the companies selected by it were comparable. It was

explained that there is not vast difference in turnover of the comparables

and accordingly, the rejection of the companies on turnover filter was not

justified. Ld. AR also contended that tractor segment is a very niche

segment and it is not a case of software business wherein the number of

companies involved are huge and the turnover plays an important role in

determining the comparability of the companies. Ld. AR placed his

reliance on the decision of ITAT, Bangalore in the case of Genisys

Integrating Systems (India ) Pvt. Ltd. [152 TTJ 215]. In that case, the

turnover of the assessee was Rs.8.15 Crs. and ITAT held that companies

whose turnover ranges between 1-200 Crs. should be selected. Ld. AR

submitted that the turnover the various companies selected by it was in

comparable range and there is no reason to reject any company on the

basis of turnover filter.

14.7 It is further argued that the TPO had also raised objections in

respect of a few comparables vide his letter dated 13.04.2012. In the said

letter, the TPO has objected to the inclusion of Kerala Agro Machinery

Corporation Ltd. on the ground that the said company was 24 ITA Nos. 1476/PN/2010 & 1686/PN/2011, John Deere India Pvt. Ltd., Pune

manufacturing power tillers and power reapers and not engaged in the

business of manufacturing tractors. Accordingly, he stated that the said

company cannot be considered as comparable. Further, the TPO has

further stated that Kerala Agro Machinery Corporation is a PSU and

hence, cannot be considered as a comparable. Similarly, the TPO has

stated that HMT Ltd. is also engaged in various activities and hence,

comparison of HMT entity as a whole is not correct. The TPO has further

mentioned that VST Tillers is also engaged in different business and

therefore, should be rejected as a comparable. Finally, in respect of

Escorts Ltd., the TPO has stated Escorts is also engaged in selling farm

equipments along with tractors and therefore, cannot be considered as a

comparable entity.

14.8 Ld. AR argued that the various contentions raised by the TPO are

not correct. Firstly, it is submitted that Escorts, VST Tillers and HMT

were considered as comparables in the earlier years and hence, there

was no reason of rejecting those companies in this year considering the

fact that the facts of this year are similar to the earlier years. Secondly,

in respect of Escorts, it is stated that the main business is of selling

tractors and therefore, the assessee has considered it as a comparable

entity and this point was clarified to the TPO. The assessee would

clarified that in respect of HMT, more than 90% of the total turnover was

on account of sale of tractors and hence, even in the absence of the

segmental results, HMT should be considered as a comparable entity.

Without prejudice, the assessee contended that assuming without

admitting that the contention of the TPO is correct with regard to the 4

companies, still the balance 4 companies are comparable to the assessee

company and in the absence of any objection raised by the TPO, the

same should be considered as comparables. Ld. AR stated that the net

operating margins of the balance 4 companies is within plus or minus 25 ITA Nos. 1476/PN/2010 & 1686/PN/2011, John Deere India Pvt. Ltd., Pune

5% of the net operating margin of the export segment and hence, the

transactions are at ALP and the relevant working is as under -

Sr. No Name of the company Net operating margin

1 Tractors & Farm Tractor Ltd. 11.90%

2 Mahindra & Mahindra Ltd. 8.65%

3 Punjab Tractors Ltd. 11.50%

4 International Tractors Ltd. 15.41%

Average net operating margin 11.87%

Net operating margin of export segment 11.17%

14.9 Ld. AR alternatively submitted that the TPO had compared the

margins of the domestic and export segment. It is argued that the TPO

should have compared the net operating margins of the two segments

and not the gross margins. He submitted that as per rule 10B, TNMM

can be applied either by adopting external comparables or internal

comparables. It is contended that if at all, the domestic segment is to be

compared with the export segment, then it should be at net profit level

and not gross margin level. It is submitted that after all, every company

is concerned about its net profit and Income tax is also levied on the net

profit and not on gross profit. There are certain expenses which are

incurred by the companies which have a major impact on its business.

But some of such expenses are not considered while determining the

gross margin. Ld. AR accordingly submitted that the comparability of the

gross margin gives a distorted picture since certain important costs and

elements are ignored.

14.10. Ld. AR argued that in case of gross margins, only the direct

and indirect costs of manufacturing are considered. But, certain vital

costs like marketing, sales and promotion, interest, bad debts, etc. are

totally ignored. Those costs have vital impact on the business. By 26 ITA Nos. 1476/PN/2010 & 1686/PN/2011, John Deere India Pvt. Ltd., Pune

incurring higher sales and advertisement costs, the companies try to

boost their sales. Thus, sales and marketing costs are an important cog

in any business. Similarly, if the bad debts are pretty high, it would

result in lower profitability irrespective of increase in sales. Hence, it is

contended that comparison of net margin is always proper and feasible

vis-à-vis the gross margins. The assessee contended that if the net

margins of the two segments are compared, the transactions relating to

sale of tractors to the AEs is at ALP. Ld. AR pointed out that the net

margin in export segment is 11.17% while the net margin in domestic

segment is 8.33% as per chart given on page 327 of Paper Book-2. It is

submitted that since the net margin of the export segment is much more

than the domestic segment, the transactions relating to export of

tractors are at ALP.

14.11 As regards adoption of CPM, Ld. AR submitted that both the

export and domestic segments had controlled transactions, such as

import of components, payment of royalty and reimbursement of

expenses, and therefore, comparison of export and domestic profitability

would be comparison of one controlled transaction with another

controlled transaction, which is not envisaged in CPM. It is contended

that internal CPM also is required to be rejected. It is thus submitted

that for the purposes of application of any method, whether it be CPM or

TNMM, the transaction being considered as benchmark should be both

uncontrolled and comparable.

14.12 Ld. AR also contended that the TPO was not justified in

adopting the CPM on the ground that the assessee had a joint

manufacturing facility and the AEs had agreed for long term buy and

supply arrangement. It is submitted that a joint facility arrangement is

where a company purchases semi-finished goods from the principal,

carries out operations and sells the finished goods back to the principal, 27 ITA Nos. 1476/PN/2010 & 1686/PN/2011, John Deere India Pvt. Ltd., Pune

involving in some cases the transfer or licensing of intangible property

from the principal to the manufacturer. It is submitted before us that a

Joint facility arrangements/long term buy and supply arrangements are

the ones where the associated enterprise is a contract manufacturer

carrying low risks and carrying out low - level functions.

14.13 It is stated that there was no joint facility arrangement

between the AEs and the assessee company. Further, Ld. AR submitted

that there was no such agreement for purchase and sale of tractors on a

long term basis with the AE. He further stated that the assessee

company is also selling the tractors in the domestic market and the sales

to the AEs are purely governed by the demand and supply mechanism.

Ld. AR pointed out that there was no contract of whatsoever nature

wherein the AEs have agreed to purchase a fixed quantity of tractors

produced by the assessee company and on the contrary, the assessee's

domestic sales were increasing year to year and there was considerable

increase in the assessee's share in the domestic market. Accordingly, the

assessee submitted that the TPO has erred in holding that the assessee

had a joint manufacturing facility with its AEs and there was a long term

buy and supply arrangement with the AEs. The assessee has submitted

the details of its sales in domestic market and the same are as under:

Fig. in units

Particulars F.Y. ending F.Y. ending F.Y. ending F.Y. ending

31.3.2009 31.3.2008 31.3.2007 31.3.2006

Sale of tractors in 17,920 13,395 11,624 9,132

domestic market.

Sale of tractors in 12,877 15,227 8,060 10,625

export market 28 ITA Nos. 1476/PN/2010 & 1686/PN/2011, John Deere India Pvt. Ltd., Pune

14.14 Ld. AR tried to explain that considering the above chart, it is

apparent that the sales in the domestic market are increasing year after

year. And in fact, in F.Y. 2006-07, the number of tractors sold in the

domestic market were much more than the tractors sold in the export

market. Similar was the position in F.Y. 2008-09. Accordingly, it is

submitted that the assessee is not a contract manufacturer nor is there

any arrangement between the assessee and its AEs. The assessee also

submitted that the TPO had brought up the issue of locational savings

on the ground that the manufacture of tractors in India is less costlier

than to manufacture the tractors in AE countries. The assessee

contended that said contention of the TPO is without any merits and he

has not brought on record any facts to substantiate the inference. Thus,

Ld. AR stated that the basic premise of the TPO for adopting CPM that

the assessee was having a joint facility arrangement with its AE is

incorrect and therefore, the adoption of CPM has to be rejected.

14.15 Ld. AR further submitted that considering the various

differences in the two segments, the CPM adopted by the TPO is not

correct. In this context, Ld. AR placed reliance on the decision of ITAT,

Pune in the case of Drilbits International Pvt. Ltd. In that case, the TPO

had rejected TNMM method and had computed the ALP by adopting the

CPM. The assessee explained that there are various differences in the

two segments in the form of marketing functions, credit risk, types of

customers, etc. etc. and hence, the CPM could not be applied. ITAT in

para 50 of the order has held that considering the differences in the

functions performed and the assets utilized, suitable adjustments are

not possible to be made and hence, the CPM was not the most

appropriate method for determining the ALP. Accordingly, considering

the principle laid down by Hon'ble ITAT, the assessee submits that CPM

is not the most appropriate method for determining the ALP.

29 ITA Nos. 1476/PN/2010 & 1686/PN/2011, John Deere India Pvt. Ltd., Pune 14.16 Ld. AR also relied upon ITAT, Pune decision in the case of

Alfa Laval India Ltd. (149 ITD 285) wherein similar issue was involved. In

that case, the assessee had adopted TNMM as appropriate method for

determining the ALP. However, the TPO rejected TNMM and adopted

CPM. In that case also gross margin of the domestic and export segment

were compared. ITAT Pune held that CPM was not the most appropriate

method for determining the ALP in view of the fact that there were

various differences between the export and domestic segment.

14.17 Without prejudice, Ld. AR submitted that if at all, CPM is to

be adopted, suitable adjustments on account of the above differences

may also be made.

15. The Ld. CIT (DR) supported the orders of the lower authorities. It is

argued by her that there is no res judicata in income tax proceedings

and therefore, simply because the TNMM was accepted as the most

appropriate method in the earlier years that did not mean that the same

should be followed in the current year. It is submitted that each year is

an independent year and since in this year, the TPO has given elaborate

reasons for rejection of TNMM, there is no reason to accept TNMM on the

ground that it is accepted in the earlier years. The Ld. CIT (DR)

submitted that the TPO has pointed out that CPM was the most

appropriate method on the facts of the case and therefore, the same

should be adopted for determining the ALP.

15.1 Ld. CIT (DR) also argued that the comparables selected by the

assessee were not proper and hence, the TPO was justified in rejecting

the same. She placed reliance on the order of the TPO wherein he has

given various reasons for rejecting the comparable companies. It is

argued by her that the turnover filter applied by the TPO is reasonable

and hence, only the companies having turnover in the range of Rs.500 30 ITA Nos. 1476/PN/2010 & 1686/PN/2011, John Deere India Pvt. Ltd., Pune

crs to Rs.1000 crs should be selected. She also argued that the TPO has

highlighted that some of the companies were not functionally

comparable with the assessee company and hence, the same are to be

omitted as comparable entities.

15.2 As regards the adoption of CPM, the Ld. CIT (DR) argued that on

the facts of the case, CPM is the most appropriate method and the same

is also clarified by the TPO. It is submitted by Ld. CIT (DR) that

comparability of the gross margins of the two segments would provide

better picture and hence, CPM is rightly adopted by the TPO as the most

appropriate method.

15.3 Ld. CIT (DR) further argued that no adjustment on account of the

various differences between the export and domestic segments should be

allowed. It was submitted that those differences do not affect the gross

margins and therefore, the TPO was justified in disallowing the

adjustments on account of differences pointed out by the assessee. The

Ld. CIT (DR) also argued that CPM is the direct method and hence,

preference to the same should be given as against TNMM which is an

indirect method for determining the ALP. Accordingly, it is submitted by

Ld. CIT (DR) that TNMM is rightly rejected by the TPO and the addition

made is justified on the facts of the case.

16. We have heard the rival submissions of the parties and perused

the record. We have also considered all the decisions and precedents

relied on by both the parties. On this ground there are two sub issues -

first is rejection of the TNMM method adopted by the assessee and

substituting the said method with CUP by the TPO/DRP and second

issue is in respect of the ALP adjustment made by the Assessing Officer.

In this case, the ALP adjustment is made only to the export of tractors

and in respect of other reported transactions the Assessing Officer has 31 ITA Nos. 1476/PN/2010 & 1686/PN/2011, John Deere India Pvt. Ltd., Pune

accepted the method adopted by the assessee as well as determination of

the ALP as per the T.P. study filed by the assessee. The contention of the

assessee is that it had exported tractors to AEs for last several years and

the assessee has adopted TNMM method as the most appropriated

method for determining the ALP in respect of the transaction of export of

tractors to the AEs from A.Y. 2004-05. The said contention of the

assessee has not been disputed before us by the Revenue. Admittedly,

for all those assessment years starting from 2004-05 onwards and also

for the A.Y. 2008-09 the Assessing Officer has accepted the TNMM

method as a most appropriate method for determining the ALP in respect

of the sale of tractors by the assessee to the AEs. The assessee has filed

the copies of the assessment order for the A.Ys. 2004-05 and 2005-06

which are placed in the Compilation (Page Nos. 282 - 285 of the P/B-2).

The assessee has also filed the TPO's order for the A.Y. 2008-09 which is

placed at Page Nos. 353 - 354 of the P/B-2. Though the TPO/DRP has

gone on discussing the provisions of law but have conveniently ignored

to put of record how the facts of the current year are different from the

fact in A.Ys. 2004-05 and 2005-06 as in those years the TNMM was

adopted by the assesse for determining the ALP which has been accepted

as a most appropriate method by the TPO without any objection or

reservation. The assessee has also filed the copy of the TPO order for the

A.Y. 2008-09 which is also placed at Page Nos. 353 - 354 of the P/B-2.

17. There is no dispute on the proposition that the doctrine of the res

judicata is not applicable to tax proceedings but at the same time if there

is no change of the facts in respect of the a particular issue and the

Revenue has a particular approach or method to determine the taxability

then there must be consistency and this view is expressed by the Hon'ble

Supreme Court in the case of Radhasoami Satsang Vs. CIT 193 ITR 321

(SC). It is also certainly strange that in the A.Y. 2008-09 the TPO has 32 ITA Nos. 1476/PN/2010 & 1686/PN/2011, John Deere India Pvt. Ltd., Pune

again accepted the TNMM method as an appropriate method which was

adopted by the assessee and has not disturbed the result. We may refer

here to the few decisions of the other Co-ordinate Benches in which it is

held that when the facts involved are similar in various years and the

Revenue has accepted the method adopted by the assessee in some years

then there is no reason to take a different stand in the subsequent years

without explaining the reasons how the facts in the said year are

different than the preceding years:

i. Alfa Laval (I) Ltd. 149 ITD 285 (Pune).

ii. H.A. Shah & Co. Vs. CIT 30 ITR 618 (Bom).

iii. Brintons Carpets Asia (P) Ltd. 139 TTJ 177 (Pune) iv. Drilbits International Pvt. Ltd. 62 DTR 171 (Pune).

v. Agility Logistics (P) Ltd. 145 ITD 566 (Mum). vi. Skol Breweries Ltd. 153 TTJ 257 (Mum).

18. Now, let us look into the T.P. study report filed by the assessee

before the TPO. The TPO has rejected the comparable entities selected

by the assessee company. It is seen that in the A.Y. 2005-06 out of the 8

comparable selected by the assessee, 7 comparable were common and

the TPO has not disputed those in that year. In this year, the TPO

expressed the reservation on the comparable selected by the assessee to

support his working of the ALP. There cannot be two standards for the

Assessing Officer one standard in one assessment year and different

standard in the subsequent year without explaining how facts differ. It

is seen that the TPO has gone on the turnover for rejecting the

comparable of the assessee but in the preceding year A.Y. 2005-06 the

TPO had accepted the very same companies as comparable. If TPO

desires to reject the comparable as there is a change in the parameters

or FAR analysis then he should have brought on record how the

parameters of the FAR are different in this year as compared to A.Y.

2005-06. There is a merit in the contention of the assessee that the 33 ITA Nos. 1476/PN/2010 & 1686/PN/2011, John Deere India Pvt. Ltd., Pune

tractors segment is niche segment and there is no much difference in the

turnover of the comparable entities selected by the assessee.

19. The TPO has expressed his reservation on the Escorts Ltd. and

HMT Ltd. comparable selected by the assessee on the ground that those

two companies have incurred losses. It is seen that in the A.Y. 2005-06

those two companies has incurred the losses but in spite of the losses in

that year, the TPO has not rejected those two companies as a

comparable. We fail to understand why there is inconsistency approach

of the TPO in the next assessment year i.e. A.Y. 2006-07 which is before

us, even though there is no change in the parameters of the FAR. The

Ld. Counsel argues that those two companies had incurred losses in

their normal day to functioning and the losses were not on account of

any exceptional factors. In our opinion the approach of the TPO in

respect of those two comparable companies selected by the assessee is

erroneous and there is no justification for the TPO to reject those two

comparable. The TPO has also objected to the inclusion of another

entity i.e. Kerala Agro Machinery Corporation Ltd. (KAMCL) on the

ground that the said company is manufacturing power tillers and power

reapers and not engaged in the business of manufacturing tractors.

According to the TPO the said company cannot be considered as a

comparable for determining the ALP in the case of the assessee. The

TPO has also stated that KAMCL is a PSU and hence, on the point of

management, the TPO expressed his reservation to accept the said

company as a comparable. In respect of HMT Ltd., the TPO states that

the said company is not only manufacturing of tractors but also engaged

in other activity. The TPO has further noted that VST Tillers is also

engaged in different business and therefore and cannot be accepted as a

comparable. On one more comparable entity i.e. a Escorts Ltd. the TPO

has stated that Escort is also selling farm equipments along with 34 ITA Nos. 1476/PN/2010 & 1686/PN/2011, John Deere India Pvt. Ltd., Pune

tractors and therefore the said company cannot be considered as a

comparable entity.

20. The main objection of the assessee is on the approach of the TPO it

is submitted that in the preceding year the TPO accept those companies

as a comparable have determining the ALP when in that year also all the

facts and figures were before him in the A.Y. 2006-07 the TPO adopt the

different approach. In respect of the reservation of the TPO to accept the

Escorts as a comparable, the assessee's contention is that the main

business is of selling tractors and hence, the assessee has considered

said company as a comparable entity and this was demonstrated before

the TPO also. In respect of the HMT also the turnover of the tractors

accounts for 90% of the total turnover hence, even in the business of the

segmental results HMT should be considered as a comparable entity.

The alternate contention of the assessee is that even if the TPO is correct

with regard to the four companies cited (supra) but still balance four

companies are comparable to the assessee company and in the same

business as no specific objection is noted by the TPO, those companies

should be considered as comparable. The assessee states that net

operating margins (NOM) of the balance four companies is within plus or

minus 5% of the net operating margin of the export segment and hence,

the transactions are at ALP. The assessee has filed the working on the

above contention which is as under:

Sr. No. Name of the company Net operating margin 1 Tractors & Farm Tractor Ltd. 11.90% 2 Mahindra & Mahindra Ltd. 8.65% 3 Punjab Tractors Ltd. 11.50% 4 International Tractors Ltd. 15.41% Average net operating margin 11.87% Net operating margin of export segment 11.17% 35 ITA Nos. 1476/PN/2010 & 1686/PN/2011, John Deere India Pvt. Ltd., Pune

21. It is seen that out of the 8 companies selected as a comparable in

this year i.e. A.Y. 2006-07, 7 companies were also selected in A.Y. 2005-

06 and only KAMCL is added as a new comparable companies in this

year. On perusal of the data in our opinion KAMCL cannot be

considered as a comparable in the A.Y. 2006-07 as said company is not

admittedly in the business of manufacturing tractors. But in respect of

the remaining 7 companies as per the data placed before us, all those

companies are in the line of same business i.e. tractor manufacturing. If

we put the remaining 7 companies selected by the assessee, the picture

is as under:

Sr. No. Name of the company Operating Profit Margin Turnover

1 Escorts Ltd. 1320.32 -12.02% 2 Tractors & Farm Tractor Ltd. 1391.20 11.90% 3 Mahindra & Mahindra Ltd. 3441.82 8.65% 4 VST Tillers Tractors Ltd. 131.14 9.40% 5 Punjab Tractors Ltd. 958.55 11.50% 6 International Tractors Ltd. 953.25 15.41% 7 HMT Ltd. 281.24 -4.84% Average 5.71

The average operating margin of 7 companies is at 5.71% as against

11.17% of the export segment of the assessee company. It is also seen

that the assessee has share in the sale of tractors in domestic market

also. We, accordingly, hold that the transaction of export of tractors to

its AEs is at ALP within the settle parameters.

22. Let us deal with another objection of the TPO on the appropriate

method whether the TNMM which is adopted by the assessee is a correct

appropriate method or CUP which is applied by the TPO. This issue

stands covered in favour of the assessee by the decision of the ITAT,

Pune in the case of Drill bits International Pvt. Ltd. (supra). In the said 36 ITA Nos. 1476/PN/2010 & 1686/PN/2011, John Deere India Pvt. Ltd., Pune

case the TPO had rejected TNMM method and had computed the ALP by

adopting the CPM. The assessee explained that there are various

differences in the two segments in the form of marketing functions,

credit risk, types of customers, etc. etc. and hence, the CPM could not

applied. The Tribunal held that considering the differences in the

functions performed and the assets utilized, suitable adjustments are

not possible to be made and hence, the said case CPM was not the most

appropriate method for determining the ALP. The operating part of the

discussion in the said decision is as under:

"50. Considering the above submissions, vis-à-vis the method i.e. CPM (cost plus method) adopted by the learned TPO to determine the ALP, which has been relied upon by the learned Departmental Representative, we find that the learned TPO while adopting CPM has failed to appreciate several material aspects of the issue as discussed above. In our view, the learned TPO was not justified in comparing the gross margin in export segment vis-a-vis gross margins in domestic segment. There are various differences in the functions performed and the risk assumed in these two segments and therefore, the same cannot be considered as comparable cases for determining the ALP. There is no marketing risk in the export segment, no risk of bad debts, no product liability risk in export segments whereas the assessee has to bear all these risks in the domestic segment. The contractual statements also defer in the domestic segment vis-a-vis export segments. There are different characteristics and contractual terms in the two segments and further geographical and marked differences are also present. Thus, we are of the view that it is very difficult to make suitable adjustments for these differences, hence the CMA method is not appropriate method for determining the ALP. The learned TPO, in our view, has thus erred in adopting the CMA method as appropriate method.

51. We also find substance in the alternative plea of the learned Authorised Representative in the defective working out of the total of production of the goods sold to the AE by the learned TPO. The learned TPO has computed gross profit margins in the domestic 37 ITA Nos. 1476/PN/2010 & 1686/PN/2011, John Deere India Pvt. Ltd., Pune

segment at 23.54 per cent while in the export segment at 5.42 per cent. The difference between the two has been calculated at 18.12 per cent and the same is employed to the total cost of production of the goods sold to the AE and addition of Rs. 58,54,128 has been made. In this working, the learned TPO has failed to appreciate that during the year, the assessee has paid processing charges to the local contractors of Rs. 16,98,742 i.e. in respect of products sold in the domestic segment, hence the same should not have been allocated to the export segment. Besides, there is no reason to doubt the submission of the assessee that major time of the junior and serior staff is utilized for the domestic segment since while dealing with various public sector units by the assessee several follow ups like collection of the orders, physical despatch of goods, follow up for the payment etc., are required to be done, hence major part of the total expenditure is to be allocated to the domestic unit and balance to the export segments. We are thus of the view that learned TPO was not justified in rejecting such submission of the assessee treating the same as having no basis. In our view, the apportionment of these costs is justified because major time of the employees is devoted towards the domestic segment. We also find substance in the submission of the learned Authorised Representative that assessee has also to incur selling and administrative expenses, freight expenses, bank interests etc., which cannot be ignored as ultimately the income-tax is levied on net profit and therefore, comparison of the net profit of the domestic export segment is more proper. The assessee at page No. 141 of the paper book has given working of the net profit of the two divisions as per which, the net profit of the domestic segment is 13.04 per cent and that of the export segment is 12.55 per cent. We find that there is hardly any difference between two segments. We also find substance in the submission of the learned Authorised Representative that in respect of transaction with AE, the assessee also does not have to bear bad debt risks, product/warranty risks etc., hence some percentage of reduction should he given in the margin computed for the domestic segment for the above risk.

52. Considering the above material facts in totality, we are of the view that the learned TPO was not justified in adopting the CPM as the most appropriate method. On the basis that the assessee had a joint facility arrangement or a long-term buy and supply 38 ITA Nos. 1476/PN/2010 & 1686/PN/2011, John Deere India Pvt. Ltd., Pune

arrangement with its AE, as we have discussed hereinabove, we find that there was no sufficient reasons with the learned TPO to reject CUP method or TNMM adopted by the assessee to determine the arm's length price (ALP). We thus hold that the addition made by the learned TPO as a result of incorrect application of CPM is not justified. It is pertinent to note that in the succeeding asst. yr. 2007- 08, the assessee has adopted TNMM for determining the ALP, which has been accepted by the learned TPO. In the case of Brintons Carpets Asia (P) Ltd. vs. Dy. CIT (supra), Pune Bench of the Tribunal has followed the decision of Mumbai Bench of the Tribunal in the case of Asstt. CIT vs. NGC Network (India) (P) Ltd. ITA No. 5307/Mum/2006, dt. 23rd Feb., 2011 (para 15) [reported at (2011) 56 DTR (Mumbai)(Trib) 1--Ed.] on the rule of consistency and need for not taking the domestic comparables and need for taking up the external comparable in matters of the 'transfer pricing' adjustments. It was held further that the uncontrolled transactions and the external comparables which was adopted by the officer in subsequent year holds relevant for current assessment year as well. We thus while setting aside order in question of the learned TPO, direct the learned TPO to accept claim of the assessee regarding the ALP based on TNMM. The issue raised in the related grounds is decided in favour of the assessee.

23. The Ld. Counsel has also placed his reliance on the decision of the

ITAT, Pune in the case of Alfa Laval (I) Ltd. (supra). In the said case also

the assessee had exported industrial products to its AEs as well as sold

in the domestic market. The assessee had adopted TNMM but the said

method was rejected by the TPO, and TPO substituted CPM in the place

of TNMM. When the matter reached before the Tribunal it is held that

CPM cannot be applied since there were various differences in the export

segment and domestic segment such as market functions, geographic

difference, volume difference, credit risk, related party transactions etc.

In our opinion the said principles are clearly applicable in the present

case. As we have already observed that the assessee has also share in

the domestic market and we again compared the parameters of the 39 ITA Nos. 1476/PN/2010 & 1686/PN/2011, John Deere India Pvt. Ltd., Pune

domestic market with the export market as there is a difference in the

export segment and domestic segment on account of credit risks,

marketing, warranty, etc. etc. We, therefore, hold that on principles as

well as on the rule of consistency, the TPO/DRP are not justified in

holding that the CPM is an appropriate method for determining the ALP

in respect of export of the tractors to the AEs and we approve TNMM as a

most appropriate method adopted by the assessee for determining the

ALP. We also hold that even after excluding KAMCL the average

operating profit margin of the 7 companies are at 5.71% as against the

11.70% of the export segment of the assessee company. The ALP

declared by the assessee is well within the limit. We, accordingly, hold

so. In the result, the Ground No. 4 is allowed.

24. Now, we take up the assessee's appeal for the A.Y. 2007-08 being

ITA No. 1686/PN/2011. The assessee has filed the concise grounds.

Ground No. 1 reads as under:

1. The learned A.O. / DRP erred in holding the sale tax / purchase tax subsidy of Rs.9,51,40,606/- received by the assessee from SICOM as a revenue receipt on the ground that the subsidy given was for increasing the profitability of the assessee.

25. The facts which revealed from the record as under. The assessee

had established an unit at Sanaswadi near Pune in 1998. The

Government of Maharashtra had introduced a Maharashtra's "1993

Package Scheme of Incentives". This scheme was introduced for giving

incentive to the units for setting up units in backward areas. As per this

scheme, the assessee was eligible for either sales tax and purchase tax

exemption or deferment of the sales tax and purchase tax payment

collected by the units for a period of 15 years. Initially, the assessee

opted for deferral scheme. As per the Scheme, the assessee was

authorized to collect sales tax but payment was to be made after 15 40 ITA Nos. 1476/PN/2010 & 1686/PN/2011, John Deere India Pvt. Ltd., Pune

years. Later on, in September, 2001, the assessee shifted from Deferral

Scheme to Exemption Scheme. Accordingly, the assessee was entitled to

exemption from payment of sales tax and purchase tax. Thus, the

assessee by opting for exemption option was exempted from its sales tax

and purchase tax liability. The assessee treated the sales tax and

purchase tax subsidy of Rs.9,51,40,606/- as a capital receipt in its

return of income for A.Y. 2007-08, but the Assessing Officer held that

the sale tax/purchase tax subsidy was a revenue receipt/reason for such

change in character of income was because the subsidy given was for

increasing the profitability of the assessee. The DRP confirmed the

action of the Assessing Officer.

26. We have heard the parties. On the identical set of facts, we have

decided the same issue in the A.Y. 2006-07. We, therefore, to avoid the

repetition adopt the reasons given by us in the A.Y. 2006-07 for deciding

this issue in favour of the assessee. We hold that the sales tax/purchase

tax subsidy received by the assessee under the "1993 Package Scheme of

Incentive" is in the nature of the capital receipt and cannot be taxed

under the charging provisions of the Income-tax Act. Accordingly,

Ground No. 1 is allowed.

27. Ground No. 2 reads as under:

2. The learned A.O. / DRP erred in recomputing the transfer price of the international transactions relating to exports of tractors despite the fact that none of the conditions as prescribed in Section 92C(3) of the Income Tax Act, 1961 ('the Act'), had been violated by the appellant. Thus, the A.O. / DRP erred in making an addition of Rs.48,39,38,670/- u/s 92C on the basis of the order of the TPO u/s 92CA(3) dated 21.10.2009 in the case of the appellant company.

28. The assessee had considered TNMM as the most appropriate

method for determining the ALP for international transactions relating to 41 ITA Nos. 1476/PN/2010 & 1686/PN/2011, John Deere India Pvt. Ltd., Pune

exports of tractors. For determining ALP, the assessee company had

considered the following companies as comparable entities:

S. No. Name of the Company 1 Escorts Ltd. 2 Tractors & Far Equipment Ltd. 3 Mahindra & Mahindra Ltd. 4 VST Tillers Tractors Ltd. 5 Punjab Tractors

29. The PLI taken for the purpose by the assessee was net operating

profit margin (0PM) to total sales. It was contended by the assessee

company that its PLI was much more than the average 0PM of the

comparable entities. Based on the above calculations, the assessee had

submitted that the international transactions relating to export of

tractors to its AEs were at ALP. It was also submitted by the assessee

that TNMM was the most appropriate method for determining the ALP in

respect of the international transactions relating to export of tractors in

the earlier years also by the assessee. But the AO/TPO adopted Cost

Plus Method (CPM) and made an upward adjustment of

Rs.49,18,60,160/- to the value of the international transactions relating

to export of tractors. The reason for adoption of CPM as opposed to

TNMM, according to the assessee, was that (a) there were functional and

corresponding differences in assets and risk between the assessee

company and the comparable entities, and (b) the comparable entities

had substantial related party transactions. But to the above, the

assessee submitted that simply because there were related party

transactions carried out by the comparable entities, there was no reason

to hold that the said companies could not be considered as comparable

with the assessee company. The assessee also submitted that comparing

the gross margin to total costs of the domestic and export segment by

the TPO/AO was also not correct. The turnover from sale of tractors in 42 ITA Nos. 1476/PN/2010 & 1686/PN/2011, John Deere India Pvt. Ltd., Pune

the domestic market was Rs.439.77 Crores while that of spares was

Rs.28.26 Crores, whereas the exports by the assessee were for

Rs.3,73,69,21,591/- and that of spares for Rs.10,23,96,574/-. The

assessee also submitted that it had been clarified before the TPO that the

CPM could not be adopted as the most appropriate method since the

gross profit markup of the comparable entities was difficult to be

determined because of the manner of presentation of the financial

statement of the comparable companies. It was stated by the assessee

that because of lack of proper information and also absence of adequate

details for making the adjustments, the CPM was not considered as the

most appropriate method. But the TPO did not agree with the above

contention and instead stated that CPM could be adopted for

determining the ALP by considering internal comparables, and also

stated that the gross margin of the domestic segment can be compared

with the gross margin of the export segment. The assessee further

submitted that the TPO justified the adoption of CPM as the most

appropriate method on the ground that the assessee had joint facility

arrangement and long term buy & supply arrangement with the AE in

respect of export of tractors. In this context, the assessee submitted that

a joint facility arrangement is where a company purchases semi-finished

goods from the principal, carries out operations and sells the finished

goods back to the principal, involving in some cases the transfer or

licensing of intangible property from the principal to the manufacturer.

Joint facility arrangements/long term buy & supply arrangements,

where the associated enterprise is a contract manufacturer carrying low

risks and carrying out low-level functions. In such cases, transfer pricing

determination involves intangible property or pricing of manufacturing

arrangements. But there was no such arrangement between the assessee

and the AEs. The sale to the AEs was purely governed by the demand

and supply mechanism and there was no contract of whatsoever nature 43 ITA Nos. 1476/PN/2010 & 1686/PN/2011, John Deere India Pvt. Ltd., Pune

wherein the AEs had agreed to purchase a fixed quantity of tractors

produced by the assessee company. The assessee sought to demonstrate

that through on the fact that its domestic sales were increasing year-to-

year and also there was considerable increase in the assessee's share in

the domestic market, the assessee company had also purchased its raw

material from local vendors and it was not a case of job work being

carried out by the assessee for its AEs. The assessee also stated that

just because 48% of the total revenue of the assessee was from exports,

it did not mean that the assessee was a contract manufacturer.

30. The assessee submitted that it had requested for adjustment on

account of following differences -

 Adjustment on account of difference in the level of value chain.

 Adjustment on account of sales and marketing functions and

associated risks.

 Adjustment on account of warranty functions and associated

risks.

 Adjustment on account of credit terms and associated risks.

 Adjustment on account of bad debt risks,

31. We have heard the parties. In the A.Y. 2006-07 the Assessing

Officer has changed the TNMM appropriate method adopted by the

assessee to CPM. In this year also the TP adjustment is made to the

transaction of export of tractors. While adjudicating the assessee's

appeal for the A.Y. 2006-07, we have held that the TPO was not justified

in changing the appropriate method from TNMM to CPM as in the

preceding years, the TPO has accepted the TNMM as most appropriate

method. On the rule of consistency, we have decided this issue in favour

of the assessee. So far as the reservation of the TPO on the comparable

entity selected by the assessee company are concerned we have held that

the operative net margin of profit of the assessee is much lesser than the 44 ITA Nos. 1476/PN/2010 & 1686/PN/2011, John Deere India Pvt. Ltd., Pune

operative margin of the comparable. As the facts as well as the reasons

of the TPO/DRP are identical in this year as in the A.Y. 2006-07, to avoid

the repetition we adopt the reasons given in the A.Y. 2006-07 for holding

that TPO/DRP were not justified to switchover of CPM as an appropriate

method in place of TNMM adopted by the assessee. Same way so far as

the margin is concerned in this year also we hold that all the

transactions of export of the tractors to the AEs are well within ALP and

no adjustment is required to be made. Accordingly, Ground No. 2 is

allowed.

32. In the result, both the appeals of the assessee are allowed.

Pronounced in the open Court on 20-02-2015

Sd/- Sd/- (G.S. PANNU) (R.S. PADVEKAR) ACCOUNTANT MEMBER JUDICIAL MEMBER

Pune, Dated: 20th February, 2015 RK/PS

Copy to

1 Assessee 2 Department 3 The DRP, Pune 4 The CIT/DIT (International Taxation), Pune 5 The DR, ITAT, "A" Bench, Pune. 6 Guard file.

//True Copy//

By Order

Assistant Registrar, Income Tax Appellate Tribunal, Pune