DEPUTY COMMISSIONER OF INCOME TAX,, PUNE vs. JOHN DEERE INDIA (P) LTD.,, PUNE

Both these appeals filed by the Revenue and the assessee, respectively against the common order dated 10-08-2016 passed by the Commissioner of Income Tax (Appeals)-13, Pune [„CIT(A)‟] for assessment year 2011-12.

Since, the facts relating to the issues in both the appeals are identical and therefore, with the consent of both the parties, we proceed to hear both the appeals together and to pass a consolidated order for the sake of convenience.

First we shall take up the appeal filed by the Revenue in .

Heard both parties and perused the materials available on record. The assessee claimed exemption of Rs.33,45,80,074/- on account of Sales Tax and Purchase Tax subsidy and treated the same as capital receipt. The AO held the same as revenue in nature. The CIT(A) in its impugned order at para No. 2.1.4 held the same is capital receipt, by taking support from the order of this Tribunal in assessee‟s own case for A.Ys. 2006-07, 2007-08 and 2008-09. We find the order of this Tribunal in assessee‟s own case for A.Y. 2009-10 held that the receipt on account of Sales Tax and Purchase Tax is capital in nature which is at page No. 45 of the paper book. As discussed above, the CIT(A) while adjudicating the issue placed reliance on the order of this Tribunal in assessee‟s own case for A.Ys. 2006-07, 2007-08 and 2008-09 held that the assessee is entitled to claim exemption on account of Sales Tax and Purchase Tax, therefore, we find no infirmity in the order of CIT(A) and it is justified. Thus, ground Nos. 1 to 6 raised by the Revenue are dismissed.

Ground No. 7 raised by the Revenue questioning the action of CIT(A) in excluding the functionally comparable companies is general in nature, as agreed by both the parties, hence, does not require any adjudication, is dismissed.

Ground No. 8, it was agreed by both the parties, that the issue raised therein is wrongly taken, hence, it is dismissed.

Ground No. 9 raised by Revenue challenging the action of CIT(A) in excluding functionally companies in the field of software services.

Heard both parties and perused the material available on record. We note that the CIT(A) in its order at page No. 30 dealt the comparability of Infosys Technology Ltd. The CIT(A) by placing reliance on the decision of Hon‟ble High Court in the case of Agnity India Technologies Pvt. Ltd. reported in (2013) 219 Taxman 26 (Del.) and held the giant companies such as Infosys Technology Ltd. and Wipro Ltd. cannot be compared with the smaller size of companies. It is needless to mention the assessee‟s turnover is Rs.107.58 crores and the turnover of Infosys Technologies Ltd. is at Rs.21,140 crores. We find this Tribunal in assessee‟s own case for A.Y. 2010-11 dealt the similar issue in its order which is at page No. 65 of the paper book. We find the relevant portion at page No. 85 of the paper book wherein the Tribunal also placed reliance in the case of Agnity India Technology Pvt. Ltd. (supra) and held the Infosys Technology Ltd. cannot be compared with the assessee vide para 19. Therefore, we hold that the Infosys Technology Ltd. cannot be treated as comparable with the assessee. Thus, we find no infirmity in the order of CIT(A) in excluding Infosys Technology Ltd.

Regarding the exclusion of 8K Miles Software company as a comparable.

Heard both parties and perused the material available on record. We note that before the TPO, the assessee contended the companies having substantial high turnover should be excluded from the final set of comparables, but, however, the AO rejected the submissions of assessee for not demonstrating as to how the turnover affects the profitability. To come to such conclusion the TPO placed reliance in the case of M/s. Symantec Corporation Solutions Pvt. Ltd. of Mumbai ITAT. The assessee objected the inclusion of 8K Miles Software before the CIT(A). We note that the assessee contended that the 8K Miles Software fails the basic filter of foreign exchange earnings being less than 75%. The year of activity of 8K Miles Software under consideration is the first year of its operations and it earned abnormal profitability in the said year under consideration. The CIT(A) considering the submissions of assessee held the 8K Miles Software cannot be comparable and also fails the basic filter of minimum 75% export revenue. We note that the assessee is 100% export company and the particulars of exports of 8K Miles Software services is only Rs.58,500/- which is 1% of its turnover as it is evident from the small compilation in the which the balance sheet of 8K Miles Software is placed. Further, we note that the 8K Miles Software commenced its activities from F.Y. 2010-11 (A.Y. 2011-12) where it is observed that it has shown 42.23% profits, which is in our opinion, abnormal profitable trend in the first year of its activities. The CIT(A) placed reliance on the orders of ITAT, Pune in the case of PTC Software (India) Pvt. Ltd., QLogic India Pvt. Ltd., Cummins Turbo Technologies Ltd. held the companies having abnormal profitability trend cannot be included in the final set of comparables. Therefore, we find no infirmity in the order of CIT(A) in excluding 8K Miles Software as comparable. Thus, we hold accordingly.

Regarding the exclusion of E-Infoship Ltd.

Heard both parties and perused the material available on record. The TPO had taken the comparability of e-infochip Ltd. on the ground that its revenue is more than 50% is from the provision of software and software consultancy services. The assessee contended it cannot be taken as comparable as there is functional differences and it is providing services in software products and applications and embedded systems. Further, it was contended no segmental data was available and it is engaged in the sale of software products. The TPO considering the income from software services and consultancy charges involving A.Ys. 2008-09 to 2010-11 and observed that the 70% of revenue in A.Y. 2010-11 is from software services which is more than the acceptance criteria of 50% and held the e-infochip Ltd. is a comparable company. The CIT(A) in its order at page 35 agreed with the contention of assessee that e-infochip Ltd. is engaged in many activities with the software development services, ITES and sells software products and hardware products and excluded e-infochip Ltd. from the set of final comparables. We find at page No. 450 of the paper book wherein the financial statements as on 31-03-2011 is placed, particularly the profit and loss account at page No. 451 clearly shows the total income consisting of operating revenue and other income. We note that the expenditure incurred by the said company regarding consumption of materials changes inventory to an extent of Rs.2,65,92,550/- whereas in the manufacturing of other operative expenses is Rs.16,76,98,890/- which clearly shows that the said company is engaged in manufacturing company than software development which is the main activity of assessee. We find the director‟s report is placed on record from pages 459 to 518 wherein at page No. 495 of para 12 is it clearly stated that the e-infochip Ltd. is primary engaged in software development and ITES and products which is considered only reportable business segment. Therefore, it is clear that the comparable company as taken by the TPO in his study and its activity are not only software development but also includes ITES and its products. Therefore, in our opinion, when the functions of comparable company is different from the assessee who is engaged in software development cannot be a comparable company for benchmarking the ALP. Further, we find bifurcation of income of e-infochip Ltd. is at page No. 488 of the paper book wherein it is bifurcated revenue from software development and revenue from sale of products which support the argument of ld. AR that the activity and functions of e-infochip Ltd. is different from assessee‟s activities and its functions. Therefore, we hold that the e-infochip Ltd. cannot be a comparable company. Therefore, we find no infirmity in the order of CIT(A) and it is justified in excluding e-infochip Ltd. from the final set of comparable companies.

Regarding outsourced back office support services.

Heard both parties and perused the material available on record. The assessee in order to benchmark the international transactions in respect of outsourced back office support services identified 14 comparables at mean margin of 14.16% and worked out Profit Level Indicator (PLI) at 17.57%. The AO amongst 14 comparables accepted only four i.e. Informed Technologies India Ltd., Infosys BPO Ltd., Jindal Intellicom Pvt. Ltd. and e4e Health Care Business Solutions and added five more comparables that are Caliber Point Business Solutions Ltd. (Seg), Fortune Infotech Ltd., Microgenetics Systems Ltd., Accentia Technologies Ltd. and Eclerx Services Ltd. totaling to nine and proposed PLI at 24.43%. The assessee objected the inclusion of Fortune Infotech Ltd. and Eclerx Services Ltd. The CIT(A) in his impugned order discussed in detail and directed the AO to exclude both Fortune Infotech Ltd. basing on its related party transactions at 98.68%. In respect of Eclerx Services Ltd. the CIT(A) held it is a Knowledge Process Outsourcing (KPO) company and it cannot be compared with functions of assessee. We find the CIT(A) excluded Fortune Infotech Ltd. on the basis of Related Party Transaction (RPT) at 98.68%. We note that the accepted filter to take RPT is only 25% whereas, the RPT of Fortune Infotech Ltd. is at 98.68% involving sales of Rs.11,56,14,146/- with RPT. Therefore, in our opinion the Fortune Infotech Ltd. fails the accepted filter of 25% on RPT sales. Therefore, we find no infirmity in the order of CIT(A) and it is justified in excluding Fortune Infotech Ltd. as comparable in the final set of comparables.

Heard both parties and perused the material available on record. We note that there is no dispute that the assessee is Business Process Outsourcing (BPO) whereas this company is a Knowledge Process Outsourcing (KPO). This Tribunal in the case of Macom Technology Solutions (India) Private Limited Vs. DCIT in for A.Y. 2013-14, vide its order dated 08-08-2019 discussed the definitions as provided under Rule 10TA of Part-II-DB wherein the definition of Information Technology Enabled Services are provided. The business process outsourcing is defined under clause (e) which provides mainly with assistance or use of Information Technology, such as, back office operations, call centre, data processing or insurance claim processing. Further, the definition of KPO is provided under clause (g) Rule 10TA mainly with the assistance or use of information technology requiring application of knowledge and advanced analytical and technical skills, such as, geographic information system, human resource services, business analytics services, financial services or engineering and design services. Therefore, the Tribunal held being a KPO, it cannot be compared be that of company which is into business BPO. Further, the Eclerex Services Ltd. underwent extraordinary financial events during the year due to merger and therefore, taking into consideration the findings of this Tribunal in the case of Macom Technology Solutions (India) Private Limited (supra), we hold that Eclerex Services Ltd. cannot be a comparable company be that of assessee. Therefore, the order of CIT(A) is justified in excluding the Eclerex Services Ltd. from the final set of comparables.

Ground Nos. 10 and 11 raised by the Revenue questioning the exclusion of Asian Business Exhibition & Conferences Limited being functionally different in the segment of support services.

Heard both parties and perused the material available on record. The assessee in order to benchmark international transactions in respect of service segment preferred five comparables which earned mean margin at 12.42% and worked out PLI at 15.04%. The TPO, out of five comparables accepted only four and rejected IDC (India) Ltd. as there was no data provided by the assessee. Further, the TPO added three companies that are Asian Business Exhibition & Conferences Limited, Airtravel Enterprise and ICC International Agencies Limited and proposed PLI at 37.72% as against the 12.42% of assessee. We note that no discussions were made by the TPO in respect of inclusion of three companies selected. The CIT(A) basing on order of DRP in assessee‟s own case for A.Y. 2010-11 excluded Asian Business Exhibition & Conferences Limited. We note that the Tribunal in assessee‟s own case for A.Y. 2010- 11 justified the exclusion of said company being functionally different from the assessee in its order dated 25-04-2019 vide para 30. Therefore, we find no infirmity in the order of CIT(A) in excluding Asian Business Exhibition & Conferences Limited and it is justified.

Ground No. 12 raised by the Revenue questioning the action of CIT(A) in excluding the company having higher turnover and higher assets being not comparable be that of having less turnover. We find that the issue of excluding companies being comparable to companies having less turnover is discussed in aforementioned paragraphs. Therefore, in our opinion any further discussion is not required, hence, dismissed.

Ground No. 13 is challenging the action of CIT(A) in directing the AO to allocate unallocable expenses to each segment in proportion to segmental turnover to total turnover.

Heard both parties and perused the material available on record. We note that the similar issue arose for consideration of this Tribunal in assessee‟s own case in A.Y. 2010-11. On perusal of the para 21 the TPO included certain companies on segmental basis in the list of comparables in the software development services segment as well as the other segments of the assessee. While calculating the operating profits of the relevant segments of these companies, the TPO did not take into their unallocated expenses. The Tribunal held all common expenses cannot be apportioned in the universal ratio of sales or gross revenue from different segments, each having its own separate features and characteristics and the allocation depending upon the nature of expenses and appropriate allocation key and directed the AO/TPO to allocate common unallocated expenses on the basis of relevant keys as the case may be after allowing an opportunity of hearing to the assessee. The relevant portion of which is reproduced here-in-under : “20. Ground no.5 of the Revenue’s appeal is against the direction of the DRP to the AO for allocating unallocable expenses to each segment in proportion to segmental turnover to total turnover. 21. The facts of this ground are that the TPO included certain companies on segmental basis in the list of comparables in the Software Development Services segment as well as the other segments of the assessee. For example, under the Software Development Services segment, the TPO considered R Systems International Ltd., Kals Information Technology Systems Ltd., and Acropetal Technologies Ltd. on segmental basis. However, while calculating the operating profits of the relevant segments of these companies, the TPO did not take into consideration their unallocated expenses. The DRP directed the AO “to allocate unallocable expenses to all segments in proportion to segmental turnover to total turnover and thereafter compute margins”. The Revenue is aggrieved by such direction. 22. Having heard both the sides, we notice that certain companies included by the TPO in the final list of comparables under all the segments of the assessee, including Software Development Segment, have been taken on segmental level. Common unallocated operating expenses of such companies were not taken into consideration in determining their respective profit margins. It is but natural that while calculating operating profit margin of such companies, effect of unallocated operating expenses qua relevant segments has to be given. It is so because the assessee’s corresponding profit margin has been determined after considering all the relevant operating expenses and the comparison can be done only on level playing field. We, therefore, agree in principle with the ld. DRP that allocation of common unallocated expenses is required to be made. However, we do not subscribe to the view canvassed by the DRP that all such common unallocated expenses should be apportioned on the basis of segmental turnover to total turnover.

Unallocated expenses obviously comprise several items of distinct nature and hence there cannot be a uniform key of apportionment. For example, `Rent’ paid by an assessee cannot be bifurcated on the basis of sales or revenue from different segments, such as, Manufacturing, Trading and services. The extent of area used by each business segment varies as per the nature of transaction, which may have no relation with the gross revenue. For example, a manufacturing unit will need relatively more space than a trading unit. Similarly, a service unit will need still lesser space. In such a scenario, apportioning common Rent expenditure on the basis of sales or gross revenue from such varied divisions, will give skewed results of segment profitability. Similarly, contribution of various segments to other items of expenses varies depending upon the nature of transaction, extent of capital employed and labour required etc. etc. So all common expenses cannot be apportioned in the universal ratio of sales or gross revenue from different segments, each having its own separate features and characteristics. One can logically make allocation depending upon the nature of expenses and appropriate allocation key. As the assessee is not aggrieved by the otherwise inclusion of such companies on the ground of allocation of unallocated expenses, we set aside the impugned order and direct the AO/TPO to allocate common unallocated expenses on the basis of relevant keys as the case may be after allowing an opportunity of hearing to the assessee.”

Ground Nos. 14 and 15 are general in nature, hence, require no adjudication and are dismissed.

In the result, the appeal of Revenue is dismissed.

Now, we shall take up the appeal of assessee in for A.Y. 2011-12.

The assessee has raised ground Nos. 1 to 1.7 involving the sole issue challenging the action of CIT(A) in confirming that the disallowance made u/s. 40(a)(i) of the Act.

Heard both parties and perused the material available on record. The ld. AR referred to page No. 97 of the paper book which is an order of this Tribunal in assessee‟s own case for A.Y. 2010-11 and submitted that in the earlier years for A.Ys. 2007-08 and 2008-09 this Tribunal remanded the similar issue to the file of AO for deciding the same afresh in the light of filing of additional evidences by the assessee and prayed to remand the same to the file of AO. On perusal of the same and with the consent of both the parties, we deem it proper to remand the issue raised in ground Nos. 1 to 1.7 to the file of AO for its fresh consideration. The assessee is liberty to file all the evidences in support of its claim. Accordingly, ground Nos. 1 to 1.7 raised by the assessee is allowed for statistical purpose.

Ground No. 2 is general in nature, hence, requires no adjudication and is dismissed.

Further, the assessee has raised additional grounds in respect of action of CIT(A) for confirming the report of TPO for inclusion of M/s. Thirdware Solutions Ltd. and M/s. Acropetal Technologies Ltd. being comparables while determining the ALP of Software Development segments.

Heard both parties and perused the material available on record. On perusal of the order of this Tribunal for A.Y. 2010-11 the relevant portion at page regarding M/s. Thirdware Solutions Ltd. held the said company functionally different and also a super profit making company and cannot be comparable company in the list of comparables be that of assessee. Further, regarding M/s. Acropetal Technologies Ltd. this Tribunal held that the said company is not comparable for the reason that is engaged in the business of on-site services apart from software products vide para 12 at page 80 of the paper book. Therefore, in view of the findings of this Tribunal in assessee‟s own case for A.Y. 2010-11, we direct the AO to exclude above said two companies as comparables in the software development segment. Accordingly, additional ground Nos. 1 and 2 raised by the assessee are allowed.

In the result, the appeal of assessee is partly allowed for statistical purpose.

To sum up, the appeal of Revenue is dismissed and the appeal of assessee is partly allowed for statistical purpose.

The Pr. Commissioner of Income Tax-6, Pune ववभागीय प्रतततनधध, आयकर अऩीऱीय अधधकरण, “सी” बेंच, 5. ऩुणे / DR, ITAT, “C” Bench, Pune. गार्ड फ़ाइऱ / Guard File. 6. //सत्यावऩत प्रतत// True Copy// आदेशानुसार / BY ORDER,