M/S. SAMEDEUTZ-FAHR INDIA PVT. LTD.,RANIPET vs. ACIT, VELLORE

आदेश / O R D E R PER D.S.SUNDER SINGH, ACCOUNTANT MEMBER:

ITA No.2666/Mds/2016 :- 2 -:

2.1 The Order of the learned CIT(A) is erroneous in so far as upholding the order AO with respect to Transfer Pricing downward adjustment of ₹1,65,03,225/- the value of the international transactions (i.e. imports) of the Appellant.

2.2 The learned CIT(A) has erred in incorrectly rejecting the adjustment for idle capacity utilization claimed by the Appellant especially given the fact that Appellant’s utilized capacity was only 34% as against 61.36% i.e. capacity utilized by the comparable company selected by TPO. 2.3 The learned CIT(A) has erred in stating that idle capacity would also exist in the non-production department without appreciating the fact that even if such adjustments carried out, the same would further increase the quantum of idle capacity adjustment which would be in favour of Appellant. 2.4 The learned CIT(A) erred in confirming the action of AO/TPO in rejecting M/s.HMT Ltd., which was initially selected by TPO while issuing show cause notice, however, while passing the Transfer Pricing Order rejected the M/s.HMT Ltd., only on the ground that the turnover of the said comparable company was twice that of the Assessee. 2.5 The learned ClT(A) erred in confirming the action of AO/TPO by upholding the arbitrary turnover filter adopted by the TPO. 2.6 Without prejudice to the above, the learned CIT(A) should have at least held that comparable companies which have turnover which is closer to Assessee’s turnover (i.e. within a multiple of ten times the turnover of the Appellant) should be considered as comparable companies. 2.7 The learned CIT(A) erred in confirming the action of’ the AO/TPO in not allowing working capital adjustment.

2.8 The learned CIT(A) erred in confirming the action of AO/TPO in adopting the single year data i.e. FY 2005-06 as against multiple year data without appreciating the fact that the data for FY 2005-06 was not available for all comparable companies at the time of preparation of Transfer Pricing Report. 2.9 The Appellant craves leave to add, alter, amend, substitute, rescind, modify and/or withdraw in any manner whatsoever all or any of the foregoing grounds of appeal at or before the hearing of the appeal.

3.0 Ground No.1 is general in nature which does not require specific adjudication.

4.0 Ground Nos.2.1 to 2.3 are related to idle capacity adjustment.

M/s. SAME Deutz-Fahr India Pvt. Ltd., is a part of the SAME Group which had originally entered into joint venture agreements with M/s.Greaves Limited and had set up two joint venture companies, i.e.

ITA No.2666/Mds/2016 :- 3 -:

M/s.SAME Greaves Limited and M/s.SAME Greaves Tractors Limited. In the year 2002, the SAME Group acquired Greaves Limited’s stake in the Indian entities. Thereafter, the two Indian companies were renamed as M/s.SAME India and M/s.SAME Deutz-Fahr India Private Limited. To achieve operational and financial synergy and minimize operating costs, the approval of the Madras High Court was obtained in February 2003 for amalgamating M/s.SAME Deutz-Fahr India Private Limited into SAME India with effect from April 1, 2002. The company has subsequently renamed as M/s.SAME Deutz-Fahr India Private Limited in April 2004. M/s.SAME-Deutz Fahr India (P) Ltd., is engaged in the manufacture and export of tractors.

4.1 The assessee filed return of income declaring total loss of ₹3,30,16,163/-. In the assessment proceedings, the Assessing Officer (in short ‘AO’) found the international transaction of ₹29,86,30,802/- relating to purchase of raw materials and components net sale of returns, Sale of components, purchase of Dies & Moulds, Interest on External Commercial Borrowing, Interest on business advances received for supply of goods, Reimbursement of expenses borne, reimbursement of expenses charged, re-work cost on exported components & reimbursement of expenses charged, incurred to the tune of ₹29,86,30,802/- and referred the same to Transfer Pricing Officer (in short ‘TPO’) for determining Arms Length Price (in short ‘ALP’) of international transaction.

ITA No.2666/Mds/2016 :- 4 -:

4.2 The assessee adopted TNMM for purchase and sale of raw materials and also cost on exported components adopting PLI of operating profit by operating income(OP/OI). The assessee has identified the following five comparables: Manufacturing Segment (in ₹) VST Tillers 129.99 Punjab Tractors 958.54 Mahindra & Mahindra 7988.76 Escorts Ltd. 1307.88 International tractors 708.94 For purchase transactions, the assessee selected comparables from public domain i.e. prowess and capitaline and made the adjustments of idle capacity and worked out the weighted average of PLI of comparables at (-)8% against the assessee company’s PLI of (-) 3.34% and held the transactions at ALP. The TPO not being convinced with the working made by the assesse and comparables selected by the assessee issued a show cause notice proposing the adjustment of ₹1,65,03,225/-.

The TPO adopted the single year data as per Rule 10B(4), applied turnover filter and selected comparable of VST Tillers with a turnover of ₹129.90 crores, which is very close to the assessee and rejected the multiple year data, idle capacity adjustment, working capital adjustment and arrived at the ALP of purchase from A.E at ₹11,47,85,709/- against the actual purchase price of ₹13,12,88,932/- adopting comparable purchase from AE at PLI of 9.65% in place of (-)3.34% of the assessee comparables and suggested for adjustment of ₹1,65,03,225/- downwards

ITA No.2666/Mds/2016 :- 5 -: from purchases. The AO passed Assessment Order u/s.143(3) of Income Tax Act making addition of ₹1,65,03,225/- reduced the loss to ₹1,65,12,940/- against the loss declared by the assessee amounting to ₹3,30,69,163/-.

5.0 Aggrieved by the order of the AO, the assessee went on appeal before the Commissioner of Income Tax (Appeals) (hereinafter referred to as (CIT(A)’) and the Ld.CIT(A) dismissed the appeal of the assesse and hence the assesse is on appeal before us.

5.1 The assessee has adopted the TNMM as most appropriate method which is not disputed by the TPO. The assessee is engaged in manufacture of tractors. Appearing for the assessee, the Ld.AR argued that the assesse is in the initial stage of business and incurred huge fixed cost and the company could not achieve the optimum capacity utilization.

The company’s utilized capacity was only 34% against the comparable company’s capacity utilization of 61.36%.

5.2 Further, the Ld.AR argued that the assessee also furnished idle capacity details with respect to comparable companies which were taken from the audited financial statements of comparable companies which was available in public domain. Since the Appellant is predominantly manufacturing the tractors, the assessee has furnished details with respect to products manufactured, which are strictly related to the ITA No.2666/Mds/2016 :- 6 -: manufacturing segment. The assesse submitted that the non-production of factors would increase only the quantum of idle capacity adjustment and requested for idle capacity adjustment and relied on the following decision: a) Mando India Steering Systems Pvt. Ltd. (ITA No.2092/Mds/2012). b) Petro Araldite Pvt. Ltd. (ITA No.3782/Mum/2011). c) Panasonic AVC Networks India Co. Ltd. (42 taxmann.com 420). d) Ariston Thermo India Ltd. (ITA No.1455/PN/2010).

5.3 On the other hand, the Ld.DR argued that the assesse has requested for idle capacity adjustment without assigning any reason for non-utilization of the idle capacity. The assesse is a 100% subsidiary of parent AE M/s.SAME Deutz-Fahr India Pvt. Ltd. Further, Ld.DR argued that the assesse claimed the manufacturing and administrative selling expenses for adjustment of idle capacity and the same are not fixed costs relating to idle capacity adjustment. In the absence of details, reasoning for non-capacity utilization merely a startup is not a valid reason for requesting for idle capacity adjustment. The assesse has not submitted all the details leading to non-utilization of the installed capacity and the assesse is not in the first year of business.

6.0 We heard the rival submissions and perused the material placed on record.

The assessee company has requested for idle capacity adjustment as per Rule 10B(1)(e)(iii),10B(2) and 10B(3). The company is not a new company or startup company, It was originally set up as Joint Venture

ITA No.2666/Mds/2016 :- 7 -: with M/s.Greaves Limited and had set up two joint venture companies, i.e. M/s.SAME Greaves Limited and M/s.SAME Greaves Tractors Limited. In the year 2002, the SAME group has entered in Indian entities and the companies are re-named as M/s.SAME Deutz-Fahr India Pvt Ltd. The company got amalgamated with SAME India w.e.f. April 1, 2002 and subsequently re-named as M/s.SAME Deutz-Fahr India Pvt. Ltd. in April, 2004.

6.1 From the above profile, it is clear that the company is not new company and was existing prior to 2002 and only re-named as M/s.SAME Deutz-Fahr India Pvt. Ltd., in April, 2004. The company along with Greaves manufacturing the tractors prior to 2002.The ld A.R has not furnished the details of installed capacity and utilized capacity from the beginning of its operations. Since the company is reasonably old from the profile, justifiable reasons have to be explained for non-utilization of the capacity and the fixed costs incurred from the year of inception, the installed capacity, utilized capacity and capacity of breakeven point.

6.2 Similarly, the Ld.AR of the assesse should have given detailed reasons with particular reference to the availability of raw materials, man power, machinery, capital resources, which have influenced the utilization of maximum capacity and for non-utilization of the installed capacity.

Though, underutilization of production capacity is a vital factor, as per the information available, this is more than five years old company and did

ITA No.2666/Mds/2016 :- 8 -: not explain the reasons leading to underutilization of installed capacity.

Whether it was on account of non-availability of material, electricity, infrastructures, lack of working capital, etc. In the absence of the details, the case laws relied upon by the assessee are of no help to make adjustment of idle capacity. Therefore we are unable accept the assessee’s request for idle capacity adjustment and the same is rejected. Accordingly grounds raised on this issue are dismissed.

7.0 Ground Nos.2.4 to 2.6 are related to rejection of M/s.HMT Ltd., as comparable.

7.1 During the transfer pricing proceedings, the AO selected the M/s.HMT Ltd., as one of the comparables on functional similarity.

However, while determining the ALP, the TPO rejected for inclusion of M/s.HMT Ltd., The TPO has refused to include it comparable since it was notified to the assesse. The assesse company’s turnover was ₹120.00 Cr. and the turnover of the M/s.HMT Ltd., was ₹248.00 Cr. The Ld.AR of the assessee argued that M/s.HMT Ltd., engaged in the manufacture of tractors and functionally comparable to that of the assesse. The turnover of M/s.HMT Ltd., was ₹248.00 Cr. as against the turnover of the assessee ₹120.00 Cr. The assessee was of the view that the criteria for application of turnover filter would be 5 to 10 times of the turnover of the tested party vis-à-vis comparable companies would be reasonable. Further, the Ld.AR of the assesse argued that application of TNMM nullifies the ITA No.2666/Mds/2016 :- 9 -: differences such as turnover. Use of wider range of comparable companies tends to normalize any material effect of such differences of ALP. The Ld.AR contended that the TPO cannot reject M/s.HMT Ltd., as comparable merely because of the turnover. The AO also relied on the decision of the Co-ordinate Bench: i. EGAIN Communications Pvt. Ltd-ITA No.1685/PROVISIONS OF SECTION/2007. ii. Maxim India Integrated Circuit design Pvt. Ltd-(IT(TP)/A

No.28/Bang/2012 7.2 On the other hand, the Ld.DR is relied on the orders of the lower authorities.

7.3 We heard the rival submissions and perused the material placed on record.

M/s.HMT Ltd., is in the segment of manufacturing of tractors and power tillers. The functionality of the M/s.HMT Ltd., and the assesse are more or less in similar. The Ld.AR of the assesse submitted that all the functions of M/s.HMT Ltd., and M/s.VST Tillers are one and the same. The TPO has rejected M/s.HMT Ltd., as comparable merely because of the turnover. The turnover of the M/s.HMT Ltd., for the AY 2005-06 was ₹248.00 Cr. as against the assessee’s company turnover of ₹120.00 Cr. It is impossible to find out comparable with all similarities inclusive of turnover. Even M/s.VST Tiller selected by TPO was with ₹130.00 Cr. The turnover filter with turnover 3-5 times is acceptable for selecting the ITA No.2666/Mds/2016 :- 10 -: comparable as per the decisions of the tribunals. In the Appellant’s case, the TPO has adopted the turnover filter and the M/s.HMT Ltd., being functionally similar and the turnover was only two times of Appellant, we are of the considered opinion that the TPO should include M/s.HMT Ltd., as comparable. The case laws relied upon by the assessee also supports arguments of the assessee. Both the assessee and TPO adopted TNMM as most appropriate method which would neutralize the differences such as turnover, etc. Therefore, we direct the TPO to include M/s.HMT Ltd., as comparable and re-work the comparable margin. This ground of appeal is allowed.

8.0 Ground No.2.7 is related to the working capital adjustment. Before the TPO, the assessee requested for adjustment of working capital. The AO rejected the request made by the assessee stating that the assessee has not furnished the detailed working of such adjustments. The Ld.CIT(A) held that the assessee has not claimed such adjustment in the original TP document. Therefore, the Ld.CIT(A) confirmed the order of the AO.

8.1 Appearing for the assessee, the Ld.DR argued that working capital adjustment required for funding to cover the time gap between the time and investments of money and time it collects the investments i.e. the gap between the collections from the sundry creditors and payment made to the suppliers. The assessee’s AR submitted that there were substantial

ITA No.2666/Mds/2016 :- 11 -: difference between the comparable companies and the assessee company on account of working capital. In order to eliminate the difference, the working capital adjustment is required. Further, the Ld.AR argued that the TPO has in principle accepted adjustment of working capital, however, rejected the same since the assessee has not claimed in the TP document.

The assessee did not claim the working capital adjustment by following TNMM since the purchase price was at Arm’s Length Price. The assessee relied on the following decisions:

This view has been widely accepted in the following cases: a) In the case of EGAIN Communications Private Limited (ITA No. 1685/PN/2007) the Hon’ble Pune Tribunal held as follows - (refer page 3 of the ITAT Order forming part of annexures to the Summary chart)

“In the instant case, the comparable or the tested parties were not scrutinized to find out differences, which needed adjustments. Though the Appellant’s submission could not be accepted that only entities having turnover between Rs. 8 crore and Rs. 18 crore were to be selected for comparison, yet there was also no justification for considering oversized companies as taken by the TPO. The Commissioner (Appeals) was justified in taking entities having turnover between Rs. 5 crore to Rs. 25 crore but he was in error in considering turnover as the only relevant factor needed to be considered for a proper analysis. What about a large number of other factors which materially affect the profit? The function performed; assets employed; risk taken (FAR) analysis, were also required to be undertaken as per the Transfer Pricing Regulation and other guidelines. This was not done, which rendered the comparison as unsound and unreliable one.” b) In the case of Maxim India Integrated Circuit Design Pvt Ltd (IT(TP)A No.28/Bang/2012) - (refer page 6 & 7 of the of the ITAT Order forming part of annexures to the Summary chart)

“.... The turnover, no doubt, is a relevant factor to be taken into account, but there should be some proper and reasonable parameter to apply the difference of turnover between the Appellant and the comparable which may be a multiple in the range of 2 times, 3 times, X times or any other number of times which should be applied to all the comparable companies, instead of taking a slab from Rs.1 crore to Rs.200 crores. Thus, if appropriate multiple to say 10 times is applied, then the Appellant having turnover of Rs.8.15 crores can be compared with a company which is having a turnover of Rs.81.5 crores. Accordingly, in view of the above facts of the case, we set aside this issue to the record of the AO/TPO to apply appropriate multiple or differential factor regarding the turnover of the comparable and the Appellant......”

8.2 We heard the rival submissions and perused the material placed on record.

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Working capital adjustment is necessary to take care of the working capital gap i.e. the difference between the purchase and sales of the company for meeting the payments to the supplier. However, the pricing policy of the assessee and the supplier is required for considering any working capital adjustment i.e. the terms and conditions between the payment and the terms & conditions for recoveries, the interest charged for delayed payment, interest receivable on delayed payments are required for working capital adjustment. In the Appellant’s case, the Appellant has not furnished any such details. The assessee’s AR argued that the TPO has not controverted the fact that working capital difference exists, whether the assessee makes a claim or not, as per Sec.92C (1) & (2) The AO has to determine ALP in accordance with Sub Sec.1 & 2 of Sec.92C of the Act.

8.3 Merely because of the assessee has not claimed the working capital adjustment, the same cannot be rejected by the AO. The AO has to determine the ALP in accordance with the Sub Sec.1&2 of Sec.92Cof ITA.

The factors influencing all material effects of the pricing policy and the margins as provided in Sec.92C required to be considered by the TPO before determining the ALP. In the Appellant’s case, the assessee has furnished the working capital adjustment before Ld.CIT(A) and the Ld.CIT(A) has not considered the same. However, while arguing the case before us, the assessee has not furnished the pricing policy and the interest clauses to make necessary working capital adjustment. This is ITA No.2666/Mds/2016 :- 13 -: one of the important factors to make the necessary working capital adjustment. Further, though the TPO has determined the margin adopting M/s.VST Tillers as comparable, we have directed the TPO to include M/s.HMT Ltd., as additional comparable. The TPO should take both the comparables and re-work the margins and make necessary adjustments for working capital in the light of above discussion. This ground of appeal is allowed for statistical purposes.

9.0 Ground No.2.8 is related to adoption of single year data for the FY 2005-06 as against the multiple year data. The assessee has adopted the multiple year data and the TPO has adopted the single year data. No argument has been made by the Ld.AR during the appeal. The TPO has rejected the assessee’s claim for adopting multiple year data placing reliance on Rule 10B(4) of Income Tax Rules for ready reference, we extract the relevant paragraphs of the TPO Order in Para No.7.1 is as under:

7.1 Rationale for the use of multiple year data: The assesse’s submission that data for F.Y.2005-06 is not available at the time of complying with the documentation requirement is not acceptable since the assessee company has furnished the data for 3 out of 5 of its comparables namely for VST Tillers Tractors Ltd, Punjab Tractors and Mahindra and Mahindra Ltd. for F.Y. 2005-06 The assessee has also stated that it relied on OECD guidelines and hence adopted multiple year data. It is stated in OECD guidelines that the multiple year data may be adopted for both company under examination and for the comparables. It is also only on option i.e. multiple year may be adopted and not mandatory to adopt multiple year data. Whereas as per Rule 10B(4) of IT Rules which is binding on the assessee company it is stated that – “The data to be used in analysing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into: Provided that data relating to a period not being more than two years prior to such financial year may also be considered if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared.

ITA No.2666/Mds/2016 :- 14 -:

Thus, it is clear that provisio, which allows the adoption of prior year data is applicable only when there is influence of such data on determination of transfer prices and not as a blanket rule. The assessee has failed to bring out the impact/influence of such prior year data on its current year data for determination of transfer price. Hence, the submission of the assessee with regard to adoption of multiple year data is rejected. 9.1 As per the discussion made by the TPO and as per the Rule 10B(4) of IT Rules, it is binding of the assessee company to adopt the relevant FY data only in the year in which the international transaction has been entered into. Therefore, the AO has rightly rejected the multiple year data and we do not find any inconformity in the order of the Ld.CIT(A) and TPO. This ground of the appeal is dismissed.

10.0 In the result, the appeal of the assessee is partly allowed.

Order pronounced in the Open Court on 22nd February, 2017, at Chennai.