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Income Tax Appellate Tribunal, PUNE BENCH “C”, PUNE
Before: SHRI R.S. SYAL & SHRI VIKAS AWASTHY
आदेश / ORDER PER R.S.SYAL, VP : These two cross appeals – one by the assessee and the other by the Revenue - are directed against the final assessment order dated
2 M/s. John Deere India Pvt. Ltd., A.Yr. 2010-11
26-02-2015 passed by the Assessing Officer (AO) u/s.143(3)
r.w.s.144C (13) of the Income-tax Act, 1961 (hereinafter also called
‘the Act’) in relation to the assessment year 2010-11.
There is a delay of one day in the filing of the appeal by the
Revenue. The ld. AR did not object to the condonation of the delay.
Resultantly, the delay in condoned and the appeal is admitted for
disposal.
The ld. AR did not press ground no. 1 concerning deduction
u/s 10A and ground no. 4 regarding the treatment of foreign
exchange loss/ gain. These grounds are, therefore, dismissed as not
pressed.
The first effective issue raised in the assessee’s appeal is
against the addition on account of transfer pricing addition
amounting to Rs.6,37,64,290/- made in respect of international
transaction of “Provision of Software Development Services” by
the assessee to its Associated Enterprise (AE).
Briefly stated, the facts of the case are that the assessee, an
Indian company, is engaged in providing Software Development
Services and Sales Support Services to Deere and Company, USA
and other group entities. The assessee filed its return declaring total
3 M/s. John Deere India Pvt. Ltd., A.Yr. 2010-11
income of Rs.1,05,28,198/-. Certain international transactions were
reported in Form No. 3CEB. The AO made a reference to the
Transfer Pricing Officer (TPO) for determining the Arm’s Length
Price (ALP) of the international transactions. The assessee reported
the first international transaction of “Provision of Software
Development Services” to Deere & Company with transacted value
of Rs.1,07,58,57,364/-. The assessee applied the Transactional Net
Margin Method (TNMM) for demonstrating that this transaction
was at ALP. It selected 21 companies as comparable with multiple
year data. The TPO did not dispute the correctness of the
application of TNMM as the most appropriate method. He,
however, rejected the assessee’s version of selecting comparables
with multiple year data. After entertaining objections from the
assessee, the TPO selected 11 companies, out of which 7 companies
were from the list of the assessee and 4 new companies were added.
The Dispute Resolution Panel (DRP) directed to exclude Infosys
Technologies Ltd. from the list of comparables drawn by the TPO.
The Panel further directed to include 5 new companies, which
brought total of comparable companies to 15. The Revenue is
aggrieved by certain directions given by the DRP, which we will
advert to a little later. The assessee is aggrieved only by the
4 M/s. John Deere India Pvt. Ltd., A.Yr. 2010-11
inclusion of three companies in the final tally of comparables,
namely, (a) Kals Information Technology Systems Ltd. (Segment);
(b) Thirdware Solutions Ltd.; and (c) Acropetal Technologies Ltd.
(Segment).
In order to analyze as to whether the companies disputed by
the assessee are in fact comparable or not, we need to ascertain the
true nature of the activities done by the assessee under this
international transaction. The TPO has recorded on page 3 of his
order that the assessee rendered Software Development Services to
Deere & Company. The Software Development Services are
mainly in the nature of computer programming and code
development based on the business knowledge provided by the
recipient of the service. The services provided by the assessee are
Software Application Development and Support for various
Business Divisions of Deere and Company; Data and Application
Management Services to various Business units of Deere &
Company; Designing new business solutions by using existing and
new technologies; Development and enhancement; Maintenance;
and Product support. The overall functions performed by the
assessee and Deere & Company in rendering software development
services have been summed up at pages 3 and 4 of the TPO’s order.
5 M/s. John Deere India Pvt. Ltd., A.Yr. 2010-11
The conceptualization and design of the software is done by the
Deere & Company. The assessee has a very limited role in overall
designing of the software. Functional specifications and
requirement analysis of the software is also done by Deere &
Company, which is then communicated to the assessee and the
assessee’s role in this function is also very limited. Thereafter,
starts the role of the assessee with Development of codes and
documentation; Testing and Quality Control. When the Software
Developed by the assessee is passed over to Deere & Company, the
same is integrated by the Deere & Company into the big overall
Software developed by the latter. The assessee entered into
Services agreement with Deere & Company on 26.5.2005, which is
valid for the year under consideration as well. This Agreement
provides that the assessee will render, inter alia, the Information
Technology Services for John Deere business applications. The
services include the development and support of the applications
used in the business outside India, which are wholly owned or
affiliated with Deere. Development of applications includes
providing computer programming and code development etc. with
the business knowledge provided by the recipient of the services.
With the above background of the nature of services provided by
6 M/s. John Deere India Pvt. Ltd., A.Yr. 2010-11
the assessee under this segment, we will endeavour to see if the
disputed companies are in fact, comparable or not.
Kals Information Technology Systems Ltd. (Seg.) :
The TPO included this company in the list of comparables. The
assessee objected to the same by contending that it is functionally
different as it is also engaged in providing Software products since
its inception. The assessee further pointed out some calculation
mistakes in the operating margin of this company. The TPO
rejected the assessee’s contention by observing that nothing was
mentioned in the Profit and loss account of the company about the
sale of products. The DRP upheld the action of the AO in the draft
order, incorporating the inclusion of this company in the final set of
comparables by the TPO. Aggrieved thereby, the assessee is in
appeal before the Tribunal.
We have heard both the sides and gone through the relevant
material on record. We have perused the Annual report of this
company, a copy of which is available at page 475 onwards of the
paper book. Note no.14 to the Notes to financial statements
provides background of this company by stating that : “The
company is engaged in Development of Software and Software
7 M/s. John Deere India Pvt. Ltd., A.Yr. 2010-11
products since its inception”. This company has two major
segments, namely, (a) STPI unit engaged in “Development of
Software and Software products” and (b) “Training Centre”
engaged in training of Software professionals on online products.
Segmental information has been given at page 497 of the paper
book, which shows revenues from the aforenoted two segments,
namely, “Application Software” and “Training”. Profit and loss
account of this company has been set out at page 492 of the paper
book. First item under the head “Income” is “Sales, Services and
Training” with the figure of Rs.2,30,45,144/-. Break-up of this
amount has been given in Schedule No.10 showing `Income from
Software Development–Export’ – Rs.2,16,92,935/-; `Translation
and Interpretation’ – Rs.10,84,248/-; and `Training receipts’ –
Rs.2,67,971/- Under the head “Operating Expenses”, an item of
Rs.11,00,000/- has been shown with narration of “Software
Consumption from Inventory”. Balance sheet of this company
shows `Inventories’ at Rs.60,47,977/-. The above information
clearly deciphers that Kals Information Technology Systems Ltd. is
not only engaged in providing Software Development Services but
is also dealing in Software products under the relevant segment. As
the assessee is not engaged in the business of Software products but
8 M/s. John Deere India Pvt. Ltd., A.Yr. 2010-11
is rendering only Software services on captive basis, in our
considered opinion, this company cannot be considered as
comparable. The Hon’ble jurisdictional High Court in CIT vs. PTC
Software (I) Pvt. Ltd. (2017) 395 ITR 0176 (Bom) has held that a
Software product company cannot be compared with a company
providing software services. As Kals Information Technology
Systems Ltd. was engaged in selling of software products which
was different from activity undertaken by assessee in that case,
namely, rendering of software service to its holding company, the
same was held to be rightly excluded from the list of comparables.
In view of the foregoing discussion, we order to exclude this
company from the final list of comparables.
Thirdware Solutions Ltd. :
The TPO selected this company as comparable. The assessee
objected to its inclusion by contenting that it was functionally
different and also a super profit making company. The assessee
claimed that this company was engaged in offering comprehensive
implementation and Application Management Support Services in
Enterprise Application. The TPO rejected the assessee’s
contentions. The DRP approved the action of the TPO in including
9 M/s. John Deere India Pvt. Ltd., A.Yr. 2010-11
this company in the list of comparables. The assessee has come up
in appeal against the inclusion of this company.
We have heard the rival submissions and gone through the
relevant material on record. The Annual report of this company is
available at page 415 onwards of the paper book. Profit and loss
account of this company shows `Sales’ of Rs.67,56,06,505/-.
Break-up of such sale has been given in Schedule 12, which
records `Export from SEZ units’ – Rs.47,58,40,447/-; `Export from
STPI units’ – Rs.11,20,90,633; `Revenue from subscription’ –
Rs.1,53,13,736/-; `Sale of licence’ – Rs.1,51,38,618/-; and
`Software Services’ – Rs.5,72,23,072/-. This company has
segments only on geographical basis and not on functional level.
As such, there is no bifurcation of operating profit from Software
Services and others including Sale of licence and Revenue from
subscription etc. Even the first two major items of `Exports from
SEZ units’ and `Export from STPI units’ do not show as to whether
these were exports of Software products or Software Services. In
the absence of the availability of any concrete information in respect
of Software Services, we fail to comprehend as to how this
company, also having software products in its portfolio, can be
10 M/s. John Deere India Pvt. Ltd., A.Yr. 2010-11
construed as comparable. The same is accordingly directed to be
excluded.
Acropetal Technologies Ltd. (Seg.) :
This company was also included by the TPO in the list of
comparables. The assessee raised objections to its inclusion by
contending that apart from others, this company was engaged in
providing on-site services which made it functionally different. The
TPO observed that on-site development expenses were less than
50% of total expenses and hence, it was not a significant factor. He,
therefore, proceeded to include it in the list of comparables. The
DRP directed the TPO to take only the IT service segment of this
company as comparable. The assessee is aggrieved by this direction
of the DRP incorporated in the final assessment order.
Having heard both the sides and gone through the relevant
material on record, we find that the Annual report of this company
is available at page 353 onwards of the paper book. Information
regarding segmental reporting has been given at pages 376 and 377
of the paper book. There are only three segments, namely, (a)
Engineering Design Services, (b) Information Technology Services
and (c) Health care. Pursuant to the direction of the DRP, the TPO
11 M/s. John Deere India Pvt. Ltd., A.Yr. 2010-11
has included only Information Technology Services segment in the
final set of comparables. Directors’ report of this company records
that “the company is uniquely placed with readymade Software
products to cater to the needs of Hospitals and Healthcare Centres
both in India and abroad especially in the USA”. Profit and Loss
account of this company appears at page 367 of the paper book,
which records `Decrease in Inventories’ by (Rs.1,50,80,060/-)
under the head “Expenditure”. Balance sheet of this company also
has a figure of `Inventories’. Apart from this company being
engaged in Software products also, it is pertinent to note that it has
rendered on-site services of a greater magnitude. It can be seen from
expenses of Rs.55,85,57,169/- incurred under the head “Employee
related and on-site Development Charges”, this company incurred
“on-site Development Expenses” at Rs.42,32,55,491/-, which
transpires that employees related costs incurred by the company on
on-site development is roughly at 75% of total employees related
costs. As against this, the assessee is not engaged in rendering any
on-site services. A company engaged in providing on-site services
cannot be compared with a company providing similar services
from its own premises (in-house) due to several significant
differences in operating costs and also the revenues apart from vital
12 M/s. John Deere India Pvt. Ltd., A.Yr. 2010-11
differences in the level of assets employed and risks undertaken. In
view of the foregoing, we are satisfied that this company cannot be
considered as comparable as it is not only engaged in the business
of Software products but is also providing on-site services, which
make it distinguishable from the assessee company. We, therefore,
order to exclude this company from the list of comparables.
Now we turn to the Departmental grievance in the segment of
Software Development Services. The DRP directed to include 5
new companies in the list of comparables which, inter alia,
included (a) Akshay Software Technologies Ltd. (b) R.S. Software
Systems rendering on-site services. The TPO had rejected these
companies because they were rendering on-site services. The DRP,
however, did not find anything amiss in including these companies
despite those being engaged in rendering on-site services. The
Revenue is aggrieved by the inclusion of such companies.
We have heard both the sides and gone through the relevant
material on record. While discussing the non-comparability of
Acropetal Technologies Ltd. above, we have held that a company
rendering on-site services cannot be compared with a company
rendering in-house services. The ld. AR has fairly brought to our
13 M/s. John Deere India Pvt. Ltd., A.Yr. 2010-11
notice an earlier order passed by the Pune bench of the Tribunal in
the case of TIBCO Software (India) Pvt. Ltd. Vs. DCIT (2015) 58
taxmann.com 215 (Pune-Tribunal) in which a company rendering
on-site services has been held to be non-comparable with company
rendering in-house services. Incidentally, Akshay Software and
Zylog Systems Ltd. were part of the companies considered by the
Pune Bench in the aforenoted order which were held to be not
comparable. Respectfully following the precedent and adopting our
reasoning given above while dealing with Acropetal Technologies
Ltd., we overturn the impugned order on this score and direct that
such companies providing on-site services cannot be considered as
comparable. The departmental ground is allowed.
Vide Ground No.2, the Revenue has objected to the direction
of the DRP to include certain companies which were initially not
included by the assessee in its list of comparables because the
relevant financial data was not available. However, during the
course of proceedings before the TPO, the assessee could lay its
hands on the data and came up with contention to include them in
the list of comparables, which was not acceded to by the TPO. Here
it is pertinent to mention that similar companies are appearing in
other segments of the assessee as well. The DRP directed the AO to
14 M/s. John Deere India Pvt. Ltd., A.Yr. 2010-11
examine as to whether such companies including three in the extant
segment, namely, (a) E-Zest Solutions Ltd. (b) Evoke Technologies
Pvt. and (c) Maveric Systems Ltd. were part of accept-reject matrix
of the assessee. If the same were found to be part of the same, then
it was directed to consider these companies as comparables in case
they meet all the relevant filters.
The ld. DR contended that the DRP could not have directed to
consider such companies for inclusion as the same were not
originally included in the list of comparables by the assessee.
We are disinclined to sustain the objection taken by the ld.
DR that the assessee should be prohibited from taking a stand
contrary to the one which was taken at the stage of the preparation
of the TP study report. It goes without saying that the object of
assessment is to determine correct income in respect of which the
assessee is chargeable to tax. As the income not originally offered
for taxation, if otherwise chargeable, is required to be included in
the total income, in the same breath, any income wrongly included
in the total income, which is otherwise not chargeable, should be
excluded. There can be no estoppel against the provisions of the
Act. Extending this proposition further in the context of the transfer
15 M/s. John Deere India Pvt. Ltd., A.Yr. 2010-11
pricing, if the assessee fails to report an otherwise comparable case,
then the TPO is obliged to include it in the list of comparables, and
in the same manner, if the assessee failed to report an otherwise
comparable case in its TP study due to one reason or the other and
later on claims that it should be considered, then, there should be
nothing to forbid the assessee from claiming so, provided the
company so reported is, in fact, comparable. Simply because a
company was wrongly ignored by the assessee as comparable,
cannot tie its hands in contending before the authorities that a
particular company was wrongly excluded from the list of
comparable, which is, in fact, comparable. There is no qualitative
difference in a situation where the assessee claims that a wrong
company inadvertently included for the purpose of comparison
should be excluded and the situation in which the Revenue does not
accept a particular comparable company chosen by the assessee,
albeit later, as comparable. The underlying object of the entire
exercise is to determine the correct arm’s length price of an
international transaction. Simply because a company was wrongly
not considered by the assessee as comparable, cannot, act as a
deterrent for claiming that this company is, in fact, comparable and
be considered for evaluation. The Special Bench of the Tribunal in
16 M/s. John Deere India Pvt. Ltd., A.Yr. 2010-11
DCIT vs. Quark Systems Pvt. Ltd. (2010) 132 TTJ (Chd) (SB) 1 has
held that a company which was wrongly included by the assessee
and also by the TPO in the list of comparables at the time of
computing ALP, can be excluded by the Tribunal, if the assessee
proves that the same was wrongly included. Similar view has been
later on taken by the Hon’ble Bombay High Court in CIT Vs. Tata
Power Solar Systems Ltd. (2017) 298 CTR 0197 (Bom) holding that
a party is not barred in law from withdrawing from its list of
comparables, a company included on account of mistake. This ratio
also applies in the reverse direction, that is, where the assessee
wrongly excluded a good comparable from the list of comparables
and then pleads for its inclusion in the final list of comparables.
The Hon’ble Jurisdictional High Court in CIT Vs. Reuters India Pvt.
Ltd. 288 CTR 741 (Bom.) has held that there can be no estoppel in
pointing out the correct facts before the appellate authorities
particularly when all facts are on record. In view of the foregoing
discussion, we do not find any reason to interfere with the direction
given by the DRP on this count in so far as the objection of the
Revenue is concerned. The ld. DRP has simply directed to examine
the comparability of these companies and did not, at the threshold,
throw the assessee out simply on the reasoning that the relevant
17 M/s. John Deere India Pvt. Ltd., A.Yr. 2010-11
information was filed in respect of these companies only during the
course of proceedings before the TPO. In view of the foregoing
discussion, we are satisfied that the direction given by the DRP
cannot be interfered. This ground is, therefore, not allowed.
Ground No.3 of the Departmental appeal is against the
direction of the DRP to exclude the Infosys Technologies Ltd. from
the list of comparables. The TPO included Infosys Technology Ltd.
in the final tally of comparables. The assessee objected to such
inclusion by contending, inter alia, that it is engaged in noteworthy
R&D activities apart from having significant intangible assets and
exceptionally high turnover. The assessee also submitted that this
company is functionally not comparable as it is also having
revenues from software products. Not convinced, the TPO held this
company to be comparable. The ld. DRP directed to exclude this
company, which has been assailed by the Revenue before us.
Having heard both the sides and perused the relevant material
on record, we find that Infosys is also earning revenues from
Licensing of software products. The extent of profit from software
services, in the overall kitty of profits from software services and
software products, cannot be separated because of the merged
18 M/s. John Deere India Pvt. Ltd., A.Yr. 2010-11
expenses. In view of the fact that the total profit of this company
includes profit from software development services as well as
software products and there is no separate profit available for the
software development services, we are unable to find any
comparability of this company. It is further seen that the assessee is
a captive unit rendering services to its AE alone without acquiring
any intellectual property rights in the work done by it in the
development of software, which also makes it distinguishable from
Infosys. The Hon’ble Delhi High Court in CIT vs. Agnity India
Technologies (P) Ltd. (2013) 219 Taxmann 26 (Del) considered the
giantness of Infosys Ltd., in terms of risk profile, nature of services,
number of employees, ownership of branded products and brand
related profits, etc. in comparison with such factors not prevailing in
the case of Agnity India Technologies Pvt. Ltd., being, a captive
unit providing software development services without having any IP
rights in the work done by it. After making comparison of various
factors as enumerated above, the Hon’ble Delhi High Court held
Infosys to be not comparable with Agnity India Technologies Pvt.
Ltd. The facts of the instant case are more or less similar inasmuch
as the extant assessee is also a service provider with a limited
number of employees at its disposal and also not owning any
19 M/s. John Deere India Pvt. Ltd., A.Yr. 2010-11
branded products with no expenditure on R&D etc. When we
consider all the above factors in a holistic manner, there remains
absolutely no doubt that Infosys Technologies Ltd. is incomparable
to the assessee company. Respectfully following the judgment of
the Hon’ble Delhi High Court in Agnity India (supra), we hold that
Infosys Technologies Ltd. cannot be treated as comparable with the
assessee company and the ld. DRP was justified in directing its
exclusion.
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.
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
20 M/s. John Deere India Pvt. Ltd., A.Yr. 2010-11
unallocable expenses to all segments in proportion to segmental
turnover to total turnover and thereafter compute margins”. The
Revenue is aggrieved by such direction.
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.
21 M/s. John Deere India Pvt. Ltd., A.Yr. 2010-11
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
22 M/s. John Deere India Pvt. Ltd., A.Yr. 2010-11
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.
DESIGN ENGINEERING SEGMENT :
The assessee, through ground no. 3 of its appeal, is aggrieved
by the transfer pricing addition of Rs.21,31,640/- in respect of
international transaction of Design Engineering and Testing
Services provided by the assessee company to its AE .
Shorn off unnecessary details, it is found as an admitted
position that the assessee declared margin of 14.10%, which after
the directions given by the DRP, stood computed at Arm’s Length
margin of 14.24%. Though the assessee has raised certain grounds
against difference in its declared margin and that of comparables,
but the same was admitted to have become academic in view of
such difference in the operating margins, being within the
permissible range not warranting any transfer pricing addition. The
ld. AR further conceded that even if the ground of the assessee in
this regard is rejected and all the grounds taken by the Revenue for
this segment are allowed, still the assessee’s operating margin
would be within the permissible range. Without going into the
23 M/s. John Deere India Pvt. Ltd., A.Yr. 2010-11
merits of the ground taken by the assessee, we dismiss the same as
having become academic.
The Revenue’s Ground nos. 2 and 5 are relevant in so far as
this segment is concerned. Ground no. 2 is against the direction of
the DRP to consider certain companies whose final accounts were
not available in the public domain at the time of preparation of
Transfer pricing study report and such companies were excluded
after inclusion of the accept-reject matrix. During the course of
proceedings before the TPO, Annual accounts of such companies
came into being which were relied upon by the assessee and a
prayer was made for the inclusion of such companies in the list of
comparables. Though the TPO refused to oblige, the ld. DRP
directed the TPO to examine the comparability of only such
companies from such a list which were found in the accept-reject
matrix of the assessee.
We have dealt with this issue while dealing with Software
Development Service segment. Following our view taken
hereinabove, we hold that there can be no estoppel against the
assessee in contending before the authorities that a particular
company or companies may be considered as comparable. It is then
24 M/s. John Deere India Pvt. Ltd., A.Yr. 2010-11
for the authorities to examine the comparability and decide as to
whether these are comparable or not. We, therefore, reject the view
point taken by the Department in Ground no.2 of its appeal.
Ground no.5, in so far as it is relevant for this segment, is
against the direction of the ld. DRP to allocate common unallocated
expenses to the relevant segment in proportion of segmental
turnover to total turnover. We have discussed this aspect while
dealing with Software development services segment of the
assessee. The same view is followed here also.
BUSINESS SUPPORT SERVICES SEGMENT :
The assessee reported, inter alia, the international transaction
of “Provision of Business Support Services” to Deere & Company
with transacted value of Rs.8,81,33,662/-. The TNM method was
applied for exhibiting that this transaction was at ALP. The TPO
considered 7 companies, including Asian Business Exhibition and
Conference Ltd., as comparable, which have been listed at page 47
of his order. The assessee’s objection that Asian Business
Exhibition and Conference Ltd. was functionally different did not
find favour with the TPO who held that this company is engaged in
a single segment, i.e. Exhibitions and Event Management and
25 M/s. John Deere India Pvt. Ltd., A.Yr. 2010-11
hence, comparable. On the basis of their overall operating margin
of 24.13%, the TPO recommended a transfer pricing adjustment of
Rs.89,85,865/-. The AO passed the order making the above
addition. The ld. DRP gave certain directions, including the
exclusion of Asian Business Exhibition and Conference Ltd. from
the list of comparables by observing that it was engaged only in
organization of Exhibitions and Conferences which was different
from the assessee’s business of providing Sales Support Services.
The Revenue is aggrieved by such direction of the ld. DRP.
We have heard both the sides and gone through the relevant
material on record. In order to appreciate the comparability or
otherwise of Asian Business Exhibition and Conference Ltd., it is
sine qua non to consider the functional profile of the assessee under
this segment. It has been recorded on page 14 of the TPO’s order
that Deere & Company develops a business plan in order to
ascertain its requirements which involves market demand and
supply analysis. Thereafter, Deere & Company intimates to the
assessee about the materials required by it from time to time. The
assessee, in turn, discusses and confirms its understanding of the
requirements and the type of material with the respective Deere &
Company before commencing work to identify the supplier. The
26 M/s. John Deere India Pvt. Ltd., A.Yr. 2010-11
assessee is responsible for co-ordinating and liaising with the
suppliers after undertaking a detailed enquiry about them and their
due diligence. Thereafter, Deere & Company carries out inquiries to
a limited extent about the quality and rates etc. and then conducts its
own evaluation before utilizing the services of a specific supplier.
Deere & Company procures the material from the suppliers and
makes payment directly to them without any involvement of the
assessee except for follow up with the suppliers to ensure that a
delivery to Deere & Company is made on time. Apart from this,
the assessee is also providing account payable and other services
under this segment which include providing transactional services
for paying invoice for their activities outside India and other
services including payroll, employees record keeping, healthcare
transactions.
With the above understanding of the nature of the transaction
undertaken by the assessee under this segment, we now proceed to
examine as to whether the DRP was justified in directing to exclude
Asian Business Exhibition and Conference etc. which was included
by the TPO in the list of comparables. We have gone through the
Annual report of the company which is available at page 503
onwards of the paper book. In the Directors’ report, it has been
27 M/s. John Deere India Pvt. Ltd., A.Yr. 2010-11
mentioned that “the main area of operations of the company is
organizing Exhibitions and Conferences”. Profit and Loss account
of this company has been placed at page 514 of the paper book,
which shows “Direct Income” of Rs.53,18,30,655/-. Bifurcation of
the income has been given in Schedule 12 which reveals that the
Revenue from “Exhibitions and Events” is Rs.50,94,41,029/-;
`Delegate Fee’ is Rs.7,000/-; `Sponsorship/Promotional Charges’
are Rs.88,67,639/-; `Miscellaneous Receipts’ are Rs.7,57,747/- and
`Entry Charges’ are Rs.1,27,57,240/-. It is obvious from the
bifurcation of the `Direct Income’ that the entire income pertains to
Exhibitions and Events as has also been accepted by the TPO in his
order. The revenue recognition of this company has been given on
page 523 of the paper book, which mentions that it is earning
revenue from sale of stall space in exhibitions and events. On going
through the functional profile of this company, it becomes explicitly
clear that it is nowhere close to the assessee’s activities under this
segment, which are confined to maintenance/updation of suppliers
record and providing pay roll services etc. In our considered
opinion, the ld. DRP was fully justified in directing to exclude this
company from the list of comparables.
28 M/s. John Deere India Pvt. Ltd., A.Yr. 2010-11
Other grounds of the Revenue in so far as the selection of
comparables by the assessee during the course of transfer pricing
proceedings, which were earlier excluded because of the non-
availability of the relevant financial data and allocation of
unallocated expenses are similar to those discussed in the context of
Software Development Services segment of the assessee. We adopt
our view taken hereinabove on these two aspects in the context of
this international transaction as well.
The only issue which remains in the assessee’s appeal is
against the confirmation of disallowance u/s.40(a)(i) of the Act in
relation to payments of Rs.24,88,60,369/- made to Deere &
Company, USA towards Information System charges;
Telecommunication charges; and also IT Software Licenses;
Internet Access charges; and IT Support Services. Similarly, there
is another confirmation of disallowance u/s.40(a)(ia) amounting to
Rs.75,48,813/- on account of failure to deduct tax at source.
Briefly stated, the facts of these grounds are that the assessee
paid a total sum of Rs.24,88,60,369/- towards Information Systems
and Telecommunications etc. without any deduction of tax at source
to its foreign/AE. On being called upon to explain as to why
29 M/s. John Deere India Pvt. Ltd., A.Yr. 2010-11
disallowance should not be made for the failure to on the part of the
assessee to deduct tax at sources before making such payments, the
assessee submitted that it received IT Support Services and also
paid for use of Software Licenses and Lease Rent charges to Deere
& Company without any deduction of tax at source as there was no
such requirement. Similar position was stated in respect of
payments made in India amounting to Rs.75,48,813/- without
deduction of tax at source. The AO held that the amount paid by
the assessee was chargeable to tax in the hands of the recipients as
Royalty. He, therefore, disallowed the said amount u/s.40(a)(i)/(ia)
of the Act because the assessee failed to deduct tax at source on
such payments. The DRP did not interfere with the order passed by
the AO.
We have heard both the sides and gone through the relevant
material on record. The ld. AR, at the very outset, submitted that
the assessee made payments pursuant to certain agreements, some
of which were filed by him as additional evidence. He further stated
that similar issue came to be considered by the Tribunal in
assessee’s own case for the A.Yrs. 2007-08 and 2008-09 in which
the matter was decided in favour of the assessee. The ld. AR
submitted that he would be satisfied if the impugned order is set
30 M/s. John Deere India Pvt. Ltd., A.Yr. 2010-11
aside and the matter is restored to the file of AO for deciding this
issue afresh in the light of the additional evidence filed by the
assessee. The ld. DR did not raise any objection to the restoration
of the issue.
In view of the rival but common submissions, we set-aside
the impugned order on the question of disallowance u/s.40(a)(i)/(ia)
and remit the matter to the file of AO for deciding it afresh as per
law in the light of additional evidence filed by the assessee.
Needless to say, the assessee will be allowed reasonable opportunity
of hearing.
In the result, both the appeals are partly allowed.
Order pronounced in the Open Court on 25th April, 2019.
Sd/- Sd/- (VIKAS AWASTHY) (R.S.SYAL) JUDICIAL MEMBER VICE PRESIDENT
पुणे Pune; �दनांक Dated : 25th April, 2019. सतीश
31 M/s. John Deere India Pvt. Ltd., A.Yr. 2010-11
आदेश क� क� क� �ितिलिप क� �ितिलिप �ितिलिप अ�ेिषत �ितिलिप अ�ेिषत अ�ेिषत/Copy of the Order is forwarded to: अ�ेिषत आदेश आदेश आदेश 1. अपीलाथ� / The Appellant; 2. ��यथ� / The Respondent; 3. आयकर आयु�(अपील) / The CIT (Appeals)-13, Pune 4. The Pr. CIT-5, Pune िवभागीय �ितिनिध, आयकर अपीलीय 5. अिधकरण, पुणे “सी” / DR ‘C’, ITAT, Pune; 6. गाड� फाईल / Guard file. // True copy //
आदेशानुसार आदेशानुसार आदेशानुसार/ BY ORDER, आदेशानुसार
// True Copy // Senior Private Secretary आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune
Date 1. Draft dictated on 25-04-2019 Sr.PS 2. Draft placed before author 25-04-2019 Sr.PS 3. Draft proposed & placed JM before the second member 4. Draft discussed/approved JM by Second Member. 5. Approved Draft comes to Sr.PS the Sr.PS/PS 6. Kept for pronouncement on Sr.PS 7. Date of uploading order Sr.PS 8. File sent to the Bench Clerk Sr.PS 9. Date on which file goes to the Head Clerk 10. Date on which file goes to the A.R. 11. Date of dispatch of Order. *