Income Tax Appellate Tribunal - Pune
Assistant Commissioner Of ... vs M/S. John Deere India Pvt. Ltd.,, Pune on 25 April, 2019
IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH "C", PUNE
BEFORE SHRI R.S. SYAL, VICE PRESIDENT AND
SHRI VIKAS AWASTHY, JUDICIAL MEMBER
आयकर अपील सं. / ITA No.518/PUN/15
िनधा रण वष / Assessment Year : 2010-11
M/s.John Deere India Pvt. Ltd., ACIT, Circle-14,
Cybercity, Magarpatta City, Vs. Pune
Hadapsar, Pune - 411 028
PAN : AAACJ4233B
(Appellant) (Respondent)
आयकर अपील सं. / ITA No.575/PUN/15
िनधा रण वष / Assessment Year : 2010-11
ACIT, Circle-14, M/s.John Deere India Pvt. Ltd.,
Pune Vs. Cybercity, Magarpatta City,
Hadapsar, Pune - 411 028
PAN : AAACJ4233B
(Appellant) (Respondent)
Assessee by Shri Nikhil Pathak
Revenue by Shri Sardar Singh Meena &
Shri Ajay Dhoke
Date of hearing 25-04-2019
Date of pronouncement 25-04-2019
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.
2. 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.
3. 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.
4. 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).
5. 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).
6. 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.) :
7. 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.
8. 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. :
9. 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.
10. 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.) :
11. 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.
12. 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.
13. 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.
14. 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.
15. 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.
16. 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.
17. 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.
18. 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.
19. 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.
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 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.
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.
21
M/s. John Deere India Pvt. Ltd., A.Yr. 2010-11
23. 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 :
24. 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 .
25. 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.
26. 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.
27. 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.
28. 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 :
29. 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.
30. 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.
31. 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
32. 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.
33. 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.
34. 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.
35. 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.
36. 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.
37. 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 ितिलिप अ िे षत/Copy
षत of the Order is forwarded to:
1. अपीलाथ / The Appellant;
2. यथ / The Respondent;
3. आयकर आयु (अपील) /
The CIT (Appeals)-13, Pune
4. The Pr. CIT-5, Pune
5. िवभागीय ितिनिध, आयकर अपीलीय
अिधकरण, पु णे "सी" / DR 'C', ITAT, Pune;
6. गाड फाईल / Guard file. // True copy //
आदेशानुसार/
ार BY ORDER,
// True Copy //
Senior Private Secretary
आयकर अपीलीय अिधकरण ,पु णे / 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.
*