KUBOTA AGRICULTURAL MACHINERY INDIA PRIVATE LIMITED,CHENNAI vs. ACIT CORPORATE CIRCLE 4(2), CHENNAI

PER MANU KUMAR GIRI, JM:

The captioned appeals in ITA No. 3089/Chny/2017 and IT(TP)A No. 62/Chny/2018, filed by the assessee, arise from the final assessment orders dated 10.10.2017 and 03.10.2018, respectively, issued u/s. 143(3) read with Section 92CA(3) of the Income Tax Act, 1961 (“the Act”) for Assessment Years 2013-14 and 2014-15.

IT (TP)A 62/Chny/2018 (AY 2014-15) ITA 3089/Chny/2017 (AY 2013-14) Kubota Agricutlural Machinery India Pvt Ltd VS ACIT CC 4(2) :: - 2 - :: 2. As both appeals involve similar issues based on identical facts, and with the agreement of both parties, they are heard together and disposed of through a common order for convenience. 3. Grounds Nos. 1 and 2 for both years are general in nature and do not require adjudication. However, Grounds Nos. 3 and 4, raised by the assessee for both years, challenge the action of the Assessing Officer (AO), Dispute Resolution Panel (DRP), and Transfer Pricing Officer (TPO) in rejecting the Resale Price Method (RPM) as the Most Appropriate Method (MAM) and in instead applying the Transactional Net Margin Method (TNMM) using the Berry Ratio as the Profit Level Indicator (PLI). These grounds require adjudication. 4. Sans unnecessary details, the TPO and DRP rejected the RPM adopted by the assessee for both years and instead benchmarked the distribution segment using the Berry Ratio (operating profit/value-added expenses) as the PLI under TNMM. The Assessing Officer passed the assessment order confirming the TPO’s adjustments of Rs.14,40,96,317/- for AY 2013-14 and Rs.23,03,68,599/- for AY 2014-15. 5. The sole issue in these appeals concerns the final assessment orders passed by the AO and TPO, in line with the DRP’s directions, wherein transfer pricing adjustments were made to the international transactions involving purchases from Associated Enterprises (AEs) by applying TNMM. The assessee contends that RPM should have been adopted as the most appropriate method, given its role as an independent distributor.

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IT (TP)A 62/Chny/2018 (AY 2014-15) ITA 3089/Chny/2017 (AY 2013-14) Kubota Agricutlural Machinery India Pvt Ltd VS ACIT CC 4(2) :: - 3 - :: 6. Brief facts as emanating from the record are that the Assessee is a Private Limited company, incorporated in the year 2008. Further, its shares were jointly held by Kubota Corporation, Japan and Sumitomo Corporation, Japan having 60% and 40% respectively for that year. The Assessee is engaged in the business with the objective of distribution of agricultural machinery in India. The Assessee preferred resale price method as most appropriate method in respect of transactions pertaining to purchase of goods from its AE for both the years under appeal. According to the TPO, the Assessee is not just a trader, but provides value added services to its AE, which is a prominent factor; the cost incurred for such value-added services is huge and closely interlinked with the distribution function of the Assessee. The TPO held that the RPM is not most appropriate method and proceeded to adopt PLI of Berry Ratio under TNMM as most appropriate method. 7. The Ld. AR stated that the Assessee is an exclusive distributor for India region, dealing in agricultural machinery, such as Tractors, Farm Machineries such as the Combine Harvesters and Rice Planters and related parts. To carry out this activity, the Assessee buys the machinery and the spare parts from the AE and undertakes resale of the same in the Indian market. It bears all the major risks borne by any full- fledged distributor, i.e. marketing risks, price risks, inventory risks, credit risks, foreign exchange risks, etc. and employs tangible assets for the purpose of carrying out its distribution activities. The Ld. AR also prayed

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IT (TP)A 62/Chny/2018 (AY 2014-15) ITA 3089/Chny/2017 (AY 2013-14) Kubota Agricutlural Machinery India Pvt Ltd VS ACIT CC 4(2) :: - 4 - :: that the additional evidence filed for AY 2013-14 may also be considered. 8. Before us, the ld. AR also brought on record a copy of order dated 25.05.2022 in ITA No.739/Chny/2016 passed by this Co- ordinate Bench of Tribunal in Assessee’s own case for AY 2011-12. He also submitted that additional evidence for this were filed for first time and pointed out that the Tribunal has remitted the matter back to the file of TPO for verification to determine the most appropriate method. 9. It was brought on record that during the Assessment Year 2011-12, the Assessee had placed the complete facts along with additional evidence before this Hon’ble Tribunal to prove that the functions carried on by the Assessee are similar to that of a full- fledged distributor and the Assessee in fact holds the title to the goods imported from the AEs and bears substantial risks relating to distribution activities like Price risk, market risk, inventory risk, Forex risk, credit risk etc. 10. In light of the evidence submitted, this Hon’ble Tribunal had held as follows: “…. 4. We have heard the rival contentions and have gone through the facts and circumstances of the case. We noted that the Assessee Company being characterized as a Limited Risk Distributor or a Full-Fledged Distributor and Berry Ratio cannot be applied for distribution activities, if the distributor bears Inventory, Forex and Credit risks” “…10.After hearing the rival contentions and going through the facts and circumstances of the case, the facts are undisputed as the learned CIT-DR has not objected to the admissibility of the additional evidences and we admit these evidences as noted above in paragraph no.4 and we set aside the matter back to the file of the Assessing Officer / Transfer Pricing Officer who will determine the Page - 4 - of 9

IT (TP)A 62/Chny/2018 (AY 2014-15) ITA 3089/Chny/2017 (AY 2013-14) Kubota Agricutlural Machinery India Pvt Ltd VS ACIT CC 4(2) :: - 5 - :: most appropriate method to be adopted for determining the ALP in the given facts and circumstances of the case as per law. Hence, the orders of the lower authorities are set aide and the matter remitted back to the Assessing Officer / Transfer Pricing Officer.”

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IT (TP)A 62/Chny/2018 (AY 2014-15) ITA 3089/Chny/2017 (AY 2013-14) Kubota Agricutlural Machinery India Pvt Ltd VS ACIT CC 4(2) :: - 6 - :: the TPO has already passed a giving effect order wherein he has accepted that RPM is the most appropriate method. 14. We have heard the rival contentions and have gone through the facts and circumstances of the case. We note from the documents submitted by the Assessee that the Assessee is a full- fledged distributor and bears all risks such as inventory risk, forex risk, credit risk, etc. The Ld.AR emphasized that the Assessee purchases goods from its AE and sells them to third parties without any value addition to the product. Hence, the Assessee being an independent full-fledged distributor adopted, the Assessee has rightly adopted RPM as the most appropriate method to benchmark its international transactions. The Assessee is in the business of distribution of tractors and related agricultural machinery in India. The assessee has purchased tractors and related agricultural machinery from its AE. The predominant revenue from operations of the assessee is from trading in tractors and related agricultural machinery. The assessee has filed necessary details to prove that it is only engaged in the business of trading in tractors and related agricultural machinery by taking inventory risk, forex risk, credit risk etc., thereby establishing the fact that Assessee is a full-fledged distributor. Therefore, we are of the considered view that under these circumstances RPM is suitable method for benchmarking international transactions with its AEs. The TPO without considering above method has simply rejected arguments of the assessee and has adopted TNMM with Berry Ratio as PLI and benchmarked transactions of the assessee with AE. The TNMM method is most appropriate method, where Page - 6 - of 9

IT (TP)A 62/Chny/2018 (AY 2014-15) ITA 3089/Chny/2017 (AY 2013-14) Kubota Agricutlural Machinery India Pvt Ltd VS ACIT CC 4(2) :: - 7 - :: other methods cannot be adopted for benchmarking transactions of the assessee with its AEs, however, where other methods can be applied, then there is no need to go for TNMM as most appropriate method. Further, Berry Ratio is ratio of operating profits to operating expenses and Berry Ratio can be applied, where operating expenses are considered as relevant base for determining profitability of any assessee. The Hon'ble Delhi High Court in the case of Sumitomo Corporation India Pvt. Ltd. Vs DCIT (2016) 387 ITR 611 had considered principles based on which Berry Ratio can be applied and after considering relevant facts held that Berry Ratio can only be applied, where value of goods is not directly linked to quantum of profit and profits are mainly dependent on expenses incurred by the assessee. Further, Berry Ratio can effectively be applied only in certain cases such as stripped-down distributors as they have no financial exposure and risk in respect of goods distributed by them. In this case, the major risks are assumed by the assessee and as such Berry Ratio cannot be adopted. Further, the TPO’s assumption that the major expense of marketing is for the benefit of the AE is also not correct as the marketing effort is only going to ultimately benefit the Assessee to augment more sales through distribution. That apart the major expense in the instant case is purchase of tractors. When you compare major expenses of the assessee, other operating expenses is very minimal, when compared to purchase of tractors and other related agricultural machinery. From the above, it is very clear that Berry Ratio cannot be applied to facts of the present case, because as we have already stated in Page - 7 - of 9

IT (TP)A 62/Chny/2018 (AY 2014-15) ITA 3089/Chny/2017 (AY 2013-14) Kubota Agricutlural Machinery India Pvt Ltd VS ACIT CC 4(2) :: - 8 - :: earlier part of this order that Berry Ratio can only be applied where operating expenses is main contributor for determining profitability of an assessee. In this case, operating expenses incurred by the assessee is very less, when compared to total amount paid for purchase of tractors and other related agricultural machinery from its AE. Therefore, we are of the considered view that the TPO has completely erred in adopting TNMM with Berry Ratio as PLI for benchmarking international transactions of the assessee with its AEs and we hold that RPM is the most appropriate method. Our view is supported by the fact, that the TPO himself has arrived at this conclusion (i.e. TPO while giving effect to this Tribunal’s order has held that the RPM is the most appropriate method). The relevant extract is as under: “….Upon perusal of the additional evidences submitted by the assessee before ITAT which was remitted here, it is also noted that the assessee is bearing market risk, price risk, inventory risk, forex risk and Credit & Collection risk. Hence in view of the observations made by the Hon’ble ITAT in para 4 of its order and the evidences submitted by the assessee, the assessee is not a limited risk distributor & Berry Ratio cannot be applied. Hence, RPM method as claimed by the assessee is accepted as the Most Appropriate Method with GP/Sales as PLI. As the PLI of the assessee company is 24.71% and the mean of comparables is 7.86%. Since the margin of the assessee companyis more than the mean margin of the comparables. Hence the international transaction with AE is considered to be at Arm’s Length and no adverse inference is drawn.”(emphasis supplied) 15. The Ld. DR also fairly agreed that the facts in the earlier AY 2011-12 as above and the subject AY are parimateria, however, he pleaded that the subject appeal may also be remanded back. We are not in agreement with such a prayer Page - 8 - of 9

IT (TP)A 62/Chny/2018 (AY 2014-15) ITA 3089/Chny/2017 (AY 2013-14) Kubota Agricutlural Machinery India Pvt Ltd VS ACIT CC 4(2) :: - 9 - :: as we feel that when the facts are identical and the TPO has already given a finding that the Assessee is not a limited risk distributor and berry ration cannot be applied and only RPM is applicable. Further given that all necessary facts and documents are already on record, we are of the view that a further remand would become a futile exercise. Therefore, we are of the considered view that the TPO has completely erred in adopting TNMM with Berry Ratio as PLI for benchmarking international transactions of the assessee with its AEs and we hold that RPM is the most appropriate method. Accordingly, the appeal of the Assessee for both the AY’s are allowed. 16. In the result, both appeals filed by the Assessee are allowed. Order pronounced in open court 09th day of April 2026 in Chennai.

Sd/- Sd/- (एस. आर. रघुनाथा) (मनु कुमार िग�र) (S.R.RAGHUNATHA) (MANU KUMAR GIRI) लेखा सद'य/ACCOUNTANT MEMBER �या(यक सद'य/JUDICIAL MEMBER चे�नई/Chennai, )दनांक/Dated: 09th April, 2026 SNDP, Sr. PS आदेश क� �(त+ल,प अ-े,षत/Copy to: 1. अपीलाथ�/Appellant 2. ��थ�/Respondent 3. आयकरआयु�/CIT, Chennai / Madurai / Salem / Coimbatore. 4. िवभागीय�ितिनिध/DR 5. गाड�फाईल/GF

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