John Deere India Ltd., Pune V. DCIT,Cir.-11(1), Pune

ITA 1476/PUN/2010

• Counselvise Citation: 147624514 RSA 2010
• Duration Of Justice: 4 year(s) 1 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-02-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 07-01-2014
• Assessment Year: 2006-2007
• Appeal Filed On: 29-12-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: VERMA
• Keywords: Related party transaction; Business income; Transfer pricing; International transaction; Rule of consistency; Wholly owned subsidiary; Bad and doubtful debts; Capital receipt; Revised return; Revenue expenditure; Capital expenditure
• Section: 92C; 143(3); 32; 37; 12; 28; 2

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A , PUNE BEFORE: SHRI G.S. PANNU, ACCOUNTANT MEMBER AND SHRI R.S. PADVEKAR, JUDICIAL MEMBER ITA NO . 1476 /PN/20 1 0 ASSESSMENT YEAR: 200 6 - 07 JOHN DEERE INDIA PVT. LTD., (JOHN DEE RE EQUIPMENT PVT. LTD.), (FORMERLY KNOWN AS L &T JOHN DEERE PVT. LTD.), MERGED WITH JOHN DEERE INDIA PVT. LTD. W.E.F. 1 ST APRIL, 2010, OFF. PUNE NAGAR ROAD, SANASWADI, TAL. - SHIRUR, PUNE - 412208 VS. DY. CIT, CIRCLE - 11(1), PUNE (APPELLANT) (RESPONDENT) PAN NO. AAACL7331A ITA NO . 1686 /PN/201 1 ASSESSMENT YEAR: 200 7 - 08 JOHN DEERE EQUIPMENT PVT. LTD., (NOW AMALGAMATED WITH JOHN DEERE (INDIA) PVT. LTD.) CYBER CITY, MAGARPATTA CITY, HADAPSAR, PUNE - 411013 VS. ITO, WARD - 11(2), PUNE (APPELLANT) (RES PONDENT) PAN NO. AAACL7331A REVENUE BY: SMT. M.S. VERMA ASSESSEE BY: SHRI NIKHIL PATHAK ORDER PER R.S . PADVEKAR , JM : - TH ESE TWO APPEALS ARE FILED BY THE ASSESSEE CHALLENGING THE IMPUGNED ORDER S OF THE ASSESSING OFFICER PASSED U/S. 143(3 ) R.W.S. 144C AND 115WE(3) OF THE INCOME - TAX ACT AND THESE APPEALS PERTAIN TO THE A. YRS. 2006 - 07 AND 2007 - 08. 2. WE FIRST TAKE THE APPEAL FOR THE A.Y. 2006 - 07 BEING ITA NO. 1476/PN/2011 FOR DISPOSAL. THE ASSESSEE HAS FILED THE CONCISE GROUNDS IN PLACE O F DESCRIPTIVE GROUNDS. THE CONCISE GROUNDS READ AS UNDER : 2 ITA NO S. 1476 /PN/2010 & 1686/PN/2011, JOHN DEERE INDIA PVT. LTD., PUNE 1. THE LEARNED A.O. / DRP ERRED IN DISALLOWING THE PAYMENTS MADE TO JOHN DEERE INDIA PVT . LTD. OF RS.1,62,80,699 / - . 2. THE LEARNED A.O. / DRP ERRED IN DISALLOWING THE EXPENDITURE INCURRED ON SOFTWARE MAI NTENANCE AND OTHER SYSTEM OF RS.75,72,755 / - AS A CAPITAL EXPENDITURE WITHOUT APPRECIATING THAT THE SAME WAS REVENUE EXPENDITURE IN NATURE. 3. THE LEARNED A.O. / DRP ERRED IN HOLDING THE SALE TAX / P URCHASE TAX SUBSIDY OF RS.6,91,61,972 / - RECEIVED BY THE ASSES SEE FROM SICOM AS A REVENUE RECEIPT ON THE GROUND THAT THE SUBSIDY GIVEN WAS FOR INCREASING THE PROFITABILITY OF THE ASSESSEE. 4. THE LEARNED A.O. / DRP ERRED IN RECOMPUTING THE TRANSFER PRICE OF THE INTERNATIONAL TRANSACTIONS RELATING TO EXPORTS OF TRACTORS DESPITE THE FACT THAT NONE OF THE CONDITIONS AS PRESCRIBED IN SECTION 92C(3) OF THE INCOME TAX ACT, 1961 ('THE ACT'), HAD BEEN VIOLATED BY THE APPELLANT. THUS, THE A.O. / DRP ERRED IN MAKING AN ADDITION OF RS.33,59,50,091 / - U/S 92C ON THE BASIS OF THE ORDE R OF THE TPO U/S 92CA(3) DATED 21.10.2009 IN THE CASE OF THE APPELLANT COMPANY. 3. THE GROUND NOS. 1 IS IN RESPECT OF PAYMENTS MADE TO JOHN DEERE INDIA PVT. LTD. (IN SHORT JDIPL). THE FACTS WHICH REVEALED FROM THE RECORD ARE AS UNDER. THE ASSESSEE COM PANY IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND SELLING AGRICULTURAL FARM EQUIPMENTS LIKE TRACTORS, AGGREGATES, PART AND COMPONENTS. THE ASSESSEE WAS A JOINT VENTURE COMPANY BETWEEN LARSEN & TURBO LIMITED (L&T), INDIA AND DEERE & CO. BOTH JOINT VENT URE PARTNERS HAD AN EQUAL STAKE IN ASSESSEE COMPANY. SUBSEQUENTLY, THERE WAS CHANGED IN THE L&TS STAKE IN THE ASSESSEE COMPANY AND IT BECAME A WHOLLY OWNED SUBSIDIARY OF JOHN DEERE INDIA PVT. LTD. WHICH IS A WHOLLY OWNED SUBSIDIARY OF DEERE & CO. US A . S O FAR AS ISSUE BEFORE US IS CONCERNED, IN THIS YEAR THE ASSESSEE HAS CLAIMED THE EXPENDITURE OF RS. 1,62,80,699/ - WHICH WAS IN RESPECT OF PROFESSIONAL FEES TO JDIPL. IT IS CLAIMED BY THE ASSESSEE THAT THE SAID EXPENSES REPRESENT S THE RE IMBURSEMENT OF THE S ALARY PAYABLE FOR THE JOHN DEERE EXPATRIATES IN INDIA. MOREOVER, THOSE PAYMENTS WERE MADE TOWARDS THE 3 ITA NO S. 1476 /PN/2010 & 1686/PN/2011, JOHN DEERE INDIA PVT. LTD., PUNE SERVICES OF CEO, QUALITY MANAGER AND MANUFACTURING ENGINEER. THE ASSESSEE ALSO STATED THAT AN IDENTICAL ADDITION WAS MADE IN THE PRECEDING YEARS I.E. A. YRS. 2002 - 03 TO 2005 - 06 AND LD. CIT(A) HAS GIVEN THE RELIEF TO THE ASSESSEE AND THE REVENUE HAD CARRIED THE ISSUE BEFORE THE ITAT, PUNE . I T WAS PLEADED BEFORE THE ASSESSING OFFICER THAT NO ADDITION CAN BE MADE. THE ASSESSING OFFICER MADE THE ADDITION BY GIVING THE REASON THAT AS THE DEPARTMENT HAS NOT ACCEPTED DECISION OF LD. CIT(A) AND TOOK ISSUE BEFORE THE ITAT, PUNE. 4. WE HAVE HEARD THE PARTIES AND PERUSED THE RECORD. THE LD. COUNSEL SUBMITS THAT THE ISSUE STANDS COVERED IN FAVOUR OF THE ASSESS EE BY THE DECISION OF THE HON'BLE ITAT, PUNE IN THE ASSESSEES OWN CASE IN PRECEDING YEAR I.E. A.Y. 2001 - 02. THE ASSESSEE ALSO FILED THE COPY OF THE TRIBUNALS ORDER IN ITA NO. 1658/PN/2004 DATED 30 - 11 - 2009. WE FIND THAT THE IDENTICAL ISSUE HAS COME FOR THE CONSIDERATION IN THE ASSESSEES OWN CASE IN THE A.Y. 2001 - 02 AND THE ISSUE WAS DECIDED IN FAVOUR OF THE ASSESSEE CONFIRMING THE ORDER OF LD. CIT(A) ALLOWING THE RELIEF TO THE ASSESSEE IN THAT ASSESSMENT YEAR. THE OPERATIVE PART OF THE DECISION IS AS U NDER: 6. ON HEARING ME SUBMISSIONS OF BOTH THE SIDES WE HAVE FOUND THAT THE NATURE OF EXPENDITURE PERTAINED TO THE YEAR UNDER CONSIDERATION OF 'TECHNICAL CONSULTANCY FEES' WAS MADE IN ACCORDANCE OF AN AGREEMENT DATED 31 - 03 - 2000 WHICH WAS SIGNED BY ONE MD OF JOHN DEERE INDIA PVT. LTD. ON THE OTHER HAND; FROM THE SIDE OF THE ASSESSEE IT WAS SIGNED BY ONE DEPUTY CHO. THE SAID AGREEMENT HAD PROVIDED AS PER THE TERMS FOR REIMBURSEMENT OF MONTHLY SALARY. OUR ATTENTION HAS ALSO BEEN DRAWN ON THE BILLS WHICH WERE RAISED BY JOHN DEERE WHEREIN AS WELL THERE WAS A REFERENCE OF REIMBURSEMENT OF EXPENSES. IT HAS ALSO BEEN PRODUCED ON RECORD THAT THE COMPANY HAD ENTERED INTO AN AGREEMENT DATED 10 - 02 - 1998 WITH ITS JOINT VENTURE COMPANY I.E. JOHN DEERE INDIA PVT. LTD. AND THAT AGREEMENT WAS FOR RENDERING KNOW HOW AND OTHER ACTIVITIES RELATED TO MANUFACTURING OF TRACTORS. THERE WAS A CLAUSE AS PER THE SAID AGREEMENT THAT IN CONSIDERATION OF TECHNICAL 4 ITA NO S. 1476 /PN/2010 & 1686/PN/2011, JOHN DEERE INDIA PVT. LTD., PUNE CONSULTANCY SERVICES RENDERED OR TO BE RENDERED BY THE CONSULTANT A LUMPSU M PAYMENT OF RS.4 LAKHS TO BE MADE BY THE ASSESSEE COMPANY FOR THE PERIOD FROM THE DATE OF INCORPORATION UP TO 31 - 03 - 1998. THEREFORE IT WAS ARGUED THAT AFTER THE SAID PERIOD I.E. 31 - 03 - 1998 THE PAYMENT WAS NOTHING BUT REIMBURSEMENT OF SALARY TO EXPATRIATE. CONSIDERING ALL THESE EVIDENCES SUCH AS THE TERMS OF THE AGREEMENT, BILLS RAISED ETC. IT CLEARLY INDICATES THAT THE EXPENDITURE WAS TOWARDS REIMBURSEMENT OF SALARY HENCE THE VIEW TAKEN BY LD CIT(A) THAT IT WAS REVENUE IN NATURE DESERVES TO BE AFFIRMED. WE UPHOLD THE SAID VIEW AND DISMISS THIS PART OF GROUND OF THE REVENUE. 4.1 WE, THEREFORE, FOLLOWING THE DECISION OF THE TRIBUNAL IN THE ASSEESSEES OWN CASE IN THE A.Y. 2001 - 02, WE REVERSE THE ORDER OF THE LD. CIT(A) ON THIS ISSUE IN THIS YEAR AND ALLOW THE GROUND NO. 1. 5. THE NEXT G ROUND NO. 2 IS IN RESPECT OF THE DISALLOWANCE OF EXPENDITURE OF RS.75,72,755/ - . IN THIS YEAR THE ASSESSEE HAS CLAIMED THE EXPENDITURE TOWARDS SAP MAINTENANCE CHARGES AND OTHER SYSTEM EXPENSES TOTALING RS.75,72,755/ - . THE IDENTICAL ADDITION WAS MADE BY THE ASSESSING OFFICER IN THE PRECEDING YEARS I.E. A. YRS. 2002 - 03 TO 2004 - 05 BY HOLDING THAT THE SAID EXPENDITURE IS IN THE NATURE OF CAPITAL EXPENDITURE AND COULD NOT BE ALLOWED AS A REVENUE EXPENDITURE. IN THE PRECED ING YEARS THE IDENTICAL ADDITION WAS DELETED BY LD. CIT(A) AND ORDER OF LD. CIT(A) HAS BEEN CONFIRMED BY THE TRIBUNAL. THE ASSESSEE HAS FILED THE COPY OF THE TRIBUNALS ORDER IN THE ASSESSEES OWN CASE IN ITA NO. 1508/PN/2005 (A.Y. 2002 - 03) WHICH IS A COM MON ORDER ALSO IN RESPECT OF A. YRS. 2003 - 04 AND 2004 - 05. THIS ISSUE IS DISCUSSED IN PARA NOS. 11 TO 14 OF THE ORDER WHICH IS AS UNDER: 11. DURING THE YEAR, THE ASSESSEE HAD MADE PAYMENT TO JOHN D EERE EQUIPMENT PVT. LTD. ON ACCOUNT OF SAP MAINTENANCE AND LICENSE FEE AS WELL AS THE CONSULTANCY CHARGES. THE A.O DISALLOWED EXPENDITURE ON THE GROUND THAT SIMILAR EXPENDITURE WAS 5 ITA NO S. 1476 /PN/2010 & 1686/PN/2011, JOHN DEERE INDIA PVT. LTD., PUNE DISALLOWED IN A.Y. 2001 - 02. THE LD . CIT(A) HAS ALLOWED THE CLAIM OF THE ASSESSEE BY FOLLOWING HIS ORDER FOR A.Y. 2001 - 02. 12. AT TH E OUTSET OF HEARING, THE LD. A.R. POINTED OUT THAT THE ISSUE RAISED IN THE GROUND IS FULLY COVERED BY THE DECISION OF PUNE BENCH OF THE TRIBUNAL IN THE CASE OF ASSESSEE ITSELF FOR A.Y. 2001 - 02 (SUPRA). HE SUBMITTED THAT THE TRIBUNAL HAS HELD THAT THE CONS ULTANCY FEE IS ALLOWABLE AS A REVENUE EXPENDITURE. REGARDING SAP MAINTENANCE AND LICENSE FEES, THE TRIBUNAL HAS SET ASIDE THE MATTER TO DECIDE IT AFRESH IN VIEW OF THE DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF AMWAY INDIA ENTERPRISES , 111 ITD 112 (SB). THE LD. A.R. SUBMITTED FURTHER THAT THE A.O. IN THE ORDER PASSED U/S. 143(3) R.W.S. 254 OF THE ACT AFTER VERIFYING THE CLAIMS OF THE ASSESSEE HAS HELD THE SAID EXPENDITURE AS REVENUE IN NATURE. 13. THE LD. D.R. HAS NOT DISPUTED THE AB OVE FACT. HE, HOWEVER, PLACED RELIANCE ON THE ASSESSMENT ORDER. 14. HAVING GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW, WE FIND THAT THE A.O MADE ADDITION OF RS.79,62,000/ - ON ACCOUNT OF PAYMENT MADE TO JOHN DEERE (INDIA) PVT. LTD. THE SAID EXPEND ITURE CONSISTED OF CONSULTANCY CHARGES AT RS.40,80,000/ - , SYSTEM MAINTENANCE & DEVELOPMENT AT RS.36,00,000/ - AND SAP LICENCE FEES AT RS. 2,82,000/ - . THE LD . CIT(A) HAS ALLOWED THE CLAIM OF THE ASSESSEE BY FOLLOWING HIS ORDER FOR THE A.Y. 2001 - 02. THE A .O IN COMPLIANCE OF THE DIRECTION OF THE TRIBUNAL FOR A.Y. 2001 - 02, IN HIS ORDER PASSED U/S. 143(3) R.W.S. 254 OF THE ACT AFTER VERIFYING THE CLAIM HAS ALSO HELD THAT THE SAID EXPENDITURE IS REVENUE IN NATURE. THE TRIBUNAL HAD SET ASIDE THE MATTER TO THE FILE OF THE A.O. TO DECIDE THE MATTER AFRESH IN VIEW OF THE DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF AMWAY INDIA ENTERPRISES (SUPRA). WE THUS DO NOT FIND INFIRMITY IN THE FIRST APPELLATE ORDER IN THIS REGARD. THE SAME IS UPHELD. GROUND NO. 1 IS ACCORDINGLY REJECTED. 5.1 WE, THEREFORE, FOLLOWING THE ORDER IN THE ASSEESSEES OWN CASE IN A.Y. 2002 - 03 ALLOW THE GROUND NO. 2 AND DELETE THE ADDITION. IT IS PERTINENT TO NOTE HERE THAT IN THE A.Y. 2002 - 03 THE TRIBUNAL HAS CONSIDERED THE ORDER PASSED BY THE ASSESSING OFFICER IN THE A.Y. 2001 - 02 6 ITA NO S. 1476 /PN/2010 & 1686/PN/2011, JOHN DEERE INDIA PVT. LTD., PUNE U/S. 143(3) R.W.S. 254 OF THE ACT. AS THE FACTS ARE IDENTICAL IN THIS YEAR, THERE IS NO REASON TO TAKE DIFFERENT VIEW. ACCORDINGLY, GROUND NO. 2 IS ALLOWED. 6. THE NEXT ISSUE WHICH ARISES FROM GROUND NO. 3 , T HE SUBSIDY RECEIVED FROM THE SICOM BY THE ASSESSEE . I N THIS YEAR IT I S CLAIMED BY THE ASSESSEE AS A CAPITAL RECEIPT. THE FACTS WHICH REVEALED FROM THE RECORD ARE AS UNDER. THE ASSESSEE COMPANY WAS ESTABLISHED IN 1998 AND HAS SET UP ITS UNIT AT SANASWADI NEAR PUNE. IT IS CLAIMED BY THE ASSESSEE THAT IN RESPONSE TO 1993 PACKAGE SCHEME OF INCENTIVES INTRODUCED BY THE GOVT. OF MAHARASHTRA GIVING INCENTIVE TO THE UNITS FOR SETTING UP UNITS IN BACKWARD AREAS , T HE ASSESSEE SET UP ITS UNIT I N THE SANASWADI, PUNE WHICH IS NOTIFIED AS A BACKWARD AREA. IT IS STATED THAT AS THE ASSESSEE HAS SET UP UNIT IN NOTIFIED BACKWARD AREA I.E. SANASWADI , T HE ASSESSEE WAS ELIGIBLE FOR EITHER PAYMENT FROM SALES TAX AND PURCHASE TAX OR DEFERMENT OF SALES TAX AND PURCHASE TAX COLLECTED BY IT FOR A PERIOD OF 15 YEARS. INITIALLY, THE ASSESSEE OPTED FOR DEFERRAL SCHEME AS PER WHICH, THE ASSESSEE WAS AUTHORIZED FOR COLLECTION OF SALES TAX BUT PAYMENT WAS TO BE MADE AFTER 15 YEARS TO THE GOVT. BUT SUBSEQUENTLY FROM THE MONTH OF SEPTEMBER, 2001, THE ASSESSEE DECIDE D TO OPT FOR THE EXEMPTION SCHEME AND SHIFTED FROM DEFERRAL SCHEME. AS A PART OF THE SAID SCHEME THE ASSESSEE IS EXEMPTED FROM PAYMENT OF THE SALES TAX AS WELL AS PURCHASE TAX ON ITS PURCHASE. AS PER THE PACKAGE SCHEME 1993 , THERE WAS A CEILING ON THE BENEFIT OF THE EXEMPTION TO THE EXTENT OF ITS CAPITAL INVESTMENT . THE ASSESSEE GOT BENEFIT OF RS.6,91,61,972/ - AND THE ASSESSEE COMPANY TREATED THE SAID AS A SUBSIDY AND ALSO DECLARED AS A REVENUE RECEIPT IN ORIGINAL RETURN . 7. HOWEVER, THE ASSESSEE FILED REVISED RETURN AND CLAIMED THE SAID AMOUNT AS CAPITAL RECEIPT , R ELYING ON THE DECISION OF THE ITAT, SPECIAL BENCH, MUMBAI IN THE CASE OF CIT VS. RELIANCE INDUSTRIES LTD. 88 ITD 7 ITA NO S. 1476 /PN/2010 & 1686/PN/2011, JOHN DEERE INDIA PVT. LTD., PUNE 273 (SB), MUMBAI AND CIT VS. PONNI SUGAR AND CHEMICALS LTD. 219 CTR 105 (SC). THE CLAIM OF THE ASSESSEE WAS REJECTED BY THE ASSESSING OFFICER. THE ASSESSING OFFICER RELIED ON THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF SAHANEY STEELS AND PRESS WORK LTD. 228 ITR 253 AND HELD THAT THE SALES TAX SUBSIDY TO THE EXTENT OF RS.6,91,61,972/ - IS A REVENUE RECEIPT AND THE SAME WAS TAXABLE IN THE HANDS OF THE ASSESSEE. THE ASSESSEE HAS FIELD THE OBJECTIONS BEFORE THE DISPUTE RESOLUTION PANEL (DRP) BUT WITHOUT SUCCESSES. THE MAIN CRUX OF THE REASONS GIVEN BY THE DRP IS THAT IN THE PRECEDING YEAR , THE ASSESSEE HAS TREATED THE SAID SUBSIDY AS A REVENUE RECEIPT AND FOR THE FIRST TIME IN THIS YEAR THE ASSESSEE HAS CLAIMED IT A CAPITAL RECEIPT. NOW, THE ASSESSEE IS IN APPEAL BEFOR E US. 8. WE HAVE HEARD THE RIVAL SUBMISSIONS OF THE PARTIES AND PERUSED THE RECORD. THE MAIN PLANK OF THE ARGUMENT OF THE LD. AR IS THAT THE ASSESSEE BECOME ELIGIBLE FOR THE SALES TAX SUBSIDY AS IT COMPLIED WITH THE TERMS AND CONDITIONS OF 1993 PACKAGE SCHEME OF INCENTIVES INTRODUCE BY THE GOVT. OF MAHARASHTRA FOR ENCOURAGING THE INDUSTRIALIZATION OF THE BACKWARD AREA AND DISPERSAL OF INDUSTRIES FROM THE DEVELOPED AREA. HE REFERRED TO TH E 1993 PACKAGE SCHEME OF INCENTIVES AND SUBMITS THAT THE PACKAGE SCHEME OF INCENTIVE INTRODUCED BY THE GOVT. OF MAHARASHTRA HAS BEEN EXAMINED BY THE HON'BLE ITAT, SPECIAL BENCH, MUMBAI IN THE CASE OF RELIANCE INDUSTRIES LTD. (SUPRA). HE SUBMITS THAT THE MATTER WAS CARRIED BEFORE THE HON'BLE HIGH COURT OF BOMBAY IN THE CASE OF CIT VS. RELIANCE INDUSTRIES LTD. 339 ITR 632 AND THE DECISION OF THE HON'BLE ITAT, SPECIAL BENCH, MUMBAI HAS AFFIRMED BY HOLDING THAT THE SALES TAX SUBSIDY RECEIVED BY THE ASSESSEE IN THE SAID CASE PARTAKES CHARACTER OF THE CAPITAL RECEIPT . HE SU BMITS THAT IN THE CASE OF RELIANCE INDUSTRIES LTD. (SUPRA) , THE PACKAGE SCHEME OF INCENTIVES 19 79 INTRODUCED BY THE GOVT. OF MAHARASHTRA WAS BEFORE THE HON'BLE SPECIAL BENCH, ITAT, 8 ITA NO S. 1476 /PN/2010 & 1686/PN/2011, JOHN DEERE INDIA PVT. LTD., PUNE MUMBAI. HE SUBMITS THAT SO FAR AS 1993 PACKAGE SCHEME OF INCENTIVE IS CO NCERNED, THE BASIC OBJECT AND PURPOSE FOR GIVING THE BENEFIT TO INDUSTRIES ARE THE SAME AS PER PACKAGE SCHEME OF 1979 AND THOSE ARE FOR DEVELOPING THE INDUSTRIES IN THE BACKWARD AREA TO REMOVE IMBALANCE AND TO MAINTAIN THE REGIONAL ECONOMIC GROWTH. HE SUB MITS THAT 1993 PACKAGE SCHEME OF INCENTIVE IS ONLY THE EXTENSION OF ORIGINAL SCHEME WITH MINOR MODIFICATION BUT OTHERWISE THE OBJECT AND PURPOSE FOR GIVING THE INCENTIVES ARE THE SAME. HE ALSO PLACED HIS RELIANCE ON THE FOLLOWING PRECEDENTS: A. PONNI SUGAR & CHEMICALS LTD. 306 ITR 392 (SC). B. RELIANCE INDUSTRIES LTD. 88 ITD 273 (SB) (MUM). C. FORD INDIA PVT. LTD. ITA NO. 2089/MDS./2011. D. BIRLA VXL LTD. 90 DTR 376 (GUJ) (HC). E. MUNJAL AUTO INDUSTRIES LTD. 90 DTR 369 (GUJ) (HC). 9. HE SUBMITS THAT IT IS TRUE THAT TH E ASSESSEE HAD IN THE PRECEDING YEAR DECLARED THE SAID SUBSIDY AS A REVENUE RECEIPT BUT BEFORE THE ITAT, PUNE THE ASSESSEE TOOK THE ADDITIONAL GROUND AND HENCE, THE MATTER WAS SET ASIDE TO THE ASSESSING OFFICER. HE ARGUES THAT I T IS A PURELY LEGAL ISSUE A ND IT CAN BE DECIDED IN THIS YEAR ALSO. HE SUBMITS THAT E VEN THOUGH IN THE PRECEDING YEAR THE MATTER HAS BEEN SET ASIDE , DOCTRINE OF ESTOPPEL IS NOT APPLICABLE TO THE LEGAL ISSUE AND MOREOVER , THE ISSUE IS SEIZED WITH THE AUTHORITIES BELOW FOR DECIDING TH E SAME AFRESH AS PER DIRECTIONS OF THE TRIBUNAL IN THE PRECEDING YEAR. WE HAVE ALSO HEARD THE LD. DR, WHO SUPPORTED THE ORDER OF THE DRP AND ASSESSING OFFICER. HE REITERATED THE REASONS GIVEN BY THE ASSESSING OFFICER AS HIS ARGUMENT TO SUPPORT IMPUGNED O RDER AND PLEADED FOR CONFIRMING THE ADDITION. 10. IN THE CASE OF RELIANCE INDUSTRIES LTD. (SUPRA) THE SAID ASSESSEE WAS EXEMPTED FROM PAYMENT OF THE SALES TAX AS PER 1979 PACKAGE SCHEME OF THE GOVT. OF MAHARASHTRA , FOR SETTING UP A NEW INDUSTRIAL UNIT 9 ITA NO S. 1476 /PN/2010 & 1686/PN/2011, JOHN DEERE INDIA PVT. LTD., PUNE IN THE NOTIFIED BACKWARD AREA OF PATALGAN GA IN RAIGARH DISTRICT. IT WAS CLAIMED BY THE ASSESSEE THAT THE AMOUNT OF SALES TAX EXEMPTION /SUBSIDIARY SHOULD BE TREATED AS A CAPITAL RECEIPT IN THE HANDS OF THE ASSESSEE. THE ASSESSEE WAS COVERED FOR GETTING TH E SAID INCENTIVE UNDER THE PACKAGE SCHEME OF INCENTIVE 1979 DECLARED BY THE GOVT. WHICH WAS NOTIFIED IN THE GR DATED 05 - 01 - 1980. IT WAS A CONTENTION OF THE SAID ASSESSEE THAT THE EARLIER INCENTIVE SCHEMES WERE FINE - TUNED TO MAKE 1979 PACKAGE SCHEME SO AS TO MAKE THEM MORE EFFECTIVE, EMPLOYMENT ORIENTED AND TO ENCOURAGE ECONOMIC GROWTH OF BACKWARD AREAS. I T APPEARS THAT THERE WAS A CONFLICTING DECISION ON THIS ISSUE DECISION IN THE CASE OF M/S . BAJAJ AUTO LTD. (ITA NO. 49/BOM/91 AND 1101/BOM/91) DATED 31.1 2.2002 AND MATTER WAS REFERRED TO THE SPECIAL BENCH. THE OPERATIVE PART OF THE DISCUSSION AND FINDING OF THE HON'BLE ITAT, SPECIAL BENCH IN RELIANCE INDUSTRIES LTD. (SUPRA) IS AS UNDER: 35. COMING TO THE FACTS OF THE CASE, THEY HAVE ALL BEEN ADVERTED TO IN THE TRIBUNAL'S ORDERS, BOTH FOR THE ASST. YRS. 1984 - 85 AND 1985 - 86. WHEN THE ASSESSEE APPLIED FOR THE SUBSIDY ON 16TH DEC., 1980, IT DID NOT HAVE ANY INDUSTRIAL UNIT IN THE STATE OF MAHARASHTRA, BUT WAS RUNNING A SYNTHETIC TEXTILE MILL AT NARODA, AHMEDA BAD. IT HAS BEEN OBSERVED BY THE TRIBUNAL THAT THE ASSESSEE HAD TAKEN POSSESSION OF THE LAND IN JUNE, 1980 IN PATALGANGA INDUSTRIAL AREA AND SPENT RS.1.40 CRORES FOR THAT PURPOSE. IT HAD ALSO OBTAINED REGISTRATION FROM THE MINISTRY OF INDUSTRY, GOVERNMENT OF INDIA, FOR THE MANUFACTURE OF POLYESTER FILAMENT YARN WITH LICENCED ANNUAL CAPACITY OF 10,000 TONS. THE ASSESSEE INFORMED THE IMPLEMENTING AGENCY (SICOM) THAT THE ESTIMATED COST OF THE PROJECT WAS RS.66.21 CRORES AND IT WAS PROPOSED TO BE MET BY VARIOUS MEANS OF FINANCE. ON 27TH JAN., 1981, SICOM ISSUED A LETTER OF INTENT IN WHICH THE ASSESSEE WAS DIRECTED TO ENSURE THAT THE UNIT COMMENCED COMMERCIAL PRODUCTION ON OR BEFORE 26TH JAN., 1984. WHEN THE FIRST PHASE OF THE UNIT HAD COMMENCED PRODUCTION ON 24T H MARCH, 1983, SICOM ISSUED ELIGIBILITY CERTIFICATE ON 6TH JUNE, 1983 UNDER THE 1979 SCHEME WHICH WAS VALID FOR A PERIOD OF 5 YEARS FROM 8TH JUNE, 1983 TO 7TH JUNE, 1988. SINCE THE UNIT HAD UNDERGONE HUGE 10 ITA NO S. 1476 /PN/2010 & 1686/PN/2011, JOHN DEERE INDIA PVT. LTD., PUNE EXPANSION, ANOTHER ELIGIBILITY CERTIFICATE WAS ISSU ED ON 22ND OCT., 1983, WHICH WAS VALID UPTO 30TH SEPT., 1993, BY WAY OF DEFERRAL AND FROM 1ST OCT., 1993 TO 30TH JUNE, 1997, BY WAY OF EXEMPTION. IT HAS BEEN FOUND BY THE TRIBUNAL THAT THE INCENTIVE WAS THUS GIVEN IN SEVERAL INSTALMENTS DEPENDING ON THE SE TTING UP AND EXPANSION OF THE INDUSTRIAL UNIT. IT WAS ALSO ONE OF THE CONDITIONS OF THE ELIGIBILITY CERTIFICATE ORIGINALLY ISSUED THAT IN THE MATTER OF EMPLOYMENT OF PERSONNEL FOR THE UNIT, CANDIDATES FROM SCHEDULED CASTES AND SCHEDULED TRIBES AND LOCAL PE OPLE SHOULD BE GIVEN PREFERENCE. ALL THESE FACTS HAVE NOT BEEN DISPUTED BEFORE US. THE DEPARTMENTAL AUTHORITIES HAVE RELIED ON THE ASSESSMENT AND APPELLATE ORDER FOR THE EARLIER YEARS THEY HAVE NOT BROUGHT ANY NEW FACT OR MATERIAL ON RECORD. EVEN BEFORE US , WITH RESPECT TO COUNSEL WHO APPEARED FOR BOTH THE SIDES, NO NEW ARGUMENTS WERE ADVANCED OTHER THAN THE ARGUMENTS WHICH HAD BEEN ADVANCED BY THE ASSESSEE AND THE DEPARTMENT BEFORE THE TRIBUNAL IN THE APPEAL FOR ASST. YR. 1985 - 86. THE PRELIMINARY ARGUMENT OF THE DEPARTMENT BEFORE US THAT THE ASSESSEE DID NOT COLLECT ANY SALES - TAX AND THEREFORE THERE IS NO QUESTION OF ANY EXEMPTION OR INCENTIVE BEING GIVEN IS AN ARGUMENT WHICH HAS BEEN ADVANCED BEFORE THE TRIBUNAL BOTH IN THE ASST. YRS. 1984 - 85 AND 1985 - 86. IN FACT, IN PARA 74 OF ITS ORDER FOR THE ASST. YR. 1985 - 86, THE TRIBUNAL HAS REFERRED TO THIS ASPECT OF THE MATTER AND AFTER NOTING THAT THE ARGUMENT HAS ALREADY BEEN FOUND AGAINST THE DEPARTMENT IN THE ORDER FOR THE ASST. YR. 1984 - 85, FURTHER OBSERVED THA T NO FRESH MATERIAL WAS BROUGHT TO THEIR NOTICE EITHER IN THE COURSE OF THE ARGUMENTS OR IN THE ORDERS OF THE DEPARTMENTAL AUTHORITIES. THE POSITION BEFORE US, WITH RESPECT, IS THE SAME. EVEN WITH REGARD TO THE OTHER QUESTION AS TO WHETHER THE TRIBUNAL ERR ONEOUSLY INTERPRETED THE JUDGMENT OF THE SUPREME COURT IN SAHNEY STEEL (SUPRA), THE ARGUMENTS OF THE DEPARTMENT WERE THE SAME IN THE SENSE THAT EVEN IN THE APPEAL BEFORE THE TRIBUNAL FOR THE ASST. YR. 1985 - 86, AS WE FIND FROM THE ORDER OF THE TRIBUNAL, THE ARGUMENTS WERE FOCUSED UPON THE PIVOTAL POINT THAT THE RATIO LAID DOWN BY THE SUPREME COURT IN SAHNEY STEEL (SUPRA) WAS THAT IF THE SUBSIDY IS RECEIVED AFTER AND CONDITIONAL UPON THE COMMENCEMENT OF PRODUCTION, IRRESPECTIVE OF THE OBJECT FOR WHICH THE SUB SIDY IS GIVEN, IT CONSTITUTES A REVENUE RECEIPT IN THE ASSESSEE'S HANDS. THIS ARGUMENT HAS BEEN REJECTED BY THE TRIBUNAL IN ITS ORDER FOR THE ASST. YR. 1985 - 86 FOR REASONS WHICH WE HAVE ALREADY DISCUSSED IN SOME DETAIL AND THE SAME ARGUMENTS HAVE BEEN PRES SED INTO SERVICE 11 ITA NO S. 1476 /PN/2010 & 1686/PN/2011, JOHN DEERE INDIA PVT. LTD., PUNE BEFORE US ALSO. ADDITIONALLY, THE ORDER OF THE TRIBUNAL IN BAJAJ AUTO LTD. (SUPRA) WAS ALSO HEAVILY RELIED UPON. WE HAVE ALREADY EXPRESSED OUR INABILITY TO SHARE THE VIEW EXPRESSED IN BAJAJ AUTO LTD. THAT THE TRIBUNAL IN THE CASE OF RIL FO R THE ASST. YR. 1985 - 86 ERRONEOUSLY INTERPRETED OR APPRECIATED THE RATIO LAID DOWN IN SAHNEY STEEL (SUPRA). WE HAVE ALSO GIVEN REASONS FOR OUR VIEW. THEREFORE, NO SEPARATE DISCUSSION OF THE ARGUMENTS ON THIS POINT BEFORE US IS CONSIDERED NECESSARY. 36. HO WEVER, SOME RECENT DECISIONS WHICH WERE CITED BEFORE US ON BEHALF OF THE DEPARTMENT REQUIRE TO BE CONSIDERED. THE FIRST IS THE JUDGMENT OF THE MADRAS HIGH COURT IN TAMIL NADU SUGAR CORPORATION LTD. VS. CIT (2001) 165 CTR (MAD) 276 : (2003) 130 TAXMAN 348 ( MAD). IN THIS CASE, THE ASSESSEE, A SUGAR FACTORY OWNER, RECEIVED PURCHASE TAX SUBSIDY EQUIVALENT TO THE QUANTUM OF PURCHASE TAX, FROM THE STATE GOVERNMENT FOR A PERIOD OF 5 YEARS FROM THE DATE OF COMMENCEMENT OF PRODUCTION. IT RETURNED THE SUBSIDY AS BUSI NESS INCOME FOR THE ASST. YRS. 1986 - 87 AND 1987 - 88 BUT LATER FILED REVISION APPLICATIONS BEFORE THE CIT UNDER S. 264 OF THE IT ACT CONTENDING THAT THE SUBSIDY SHOULD BE TREATED AS CAPITAL RECEIPT. THE APPLICATIONS WERE REJECTED BY THE CIT, AGAINST WHICH TH E ASSESSEE MOVED THE MADRAS HIGH COURT BY WAY OF WRIT PETITIONS. THE MADRAS HIGH COURT HELD THAT A FAIR READING OF THE GOVERNMENT ORDER SHOWED THAT THE SUBSIDY WAS GIVEN BY WAY OF ASSISTANCE TO THE SUGAR FACTORIES ON THE COMMENCEMENT OF PRODUCTION AND NOT FOR THE SETTING UP OF THE FACTORIES AND IT WAS GIVEN ONLY TO TIDE OVER THE DIFFICULTIES THAT MIGHT BE EXPERIENCED BY THE MANAGEMENT IN THE ACTUAL RUNNING OF THE SUGAR FACTORIES. IT WAS FURTHER HELD THAT THOUGH THE AMOUNT OF SUBSIDY IS EQUIVALENT TO THE QUA NTUM OF PURCHASE TAX, THE OBJECT BEHIND THE GRANT OF THE SUBSIDY IS NOT TO SET UP A NEW SUGAR FACTORY, BUT TO RUN THE FACTORY EFFICIENTLY. IN OTHER WORDS, THE SUBSIDY IS GIVEN SO THAT THE MANAGEMENT MAY NOT BE IN TROUBLE IN RUNNING THE FACTORIES IN THE INI TIAL YEAR. IN THIS BACKGROUND OF FACTS, THE MADRAS HIGH COURT APPLIED THE DECISION OF THE SUPREME COURT IN SAHNEY STEEL. IN DOING SO, THE HIGH COURT NOTED THAT IN SAHNEY STEEL'S CASE, THE PAYMENTS WERE MADE DIRECTLY OR INDIRECTLY NOT FOR THE SETTING UP OF THE INDUSTRIES, BUT WERE MADE ONLY AFTER THE PRODUCTION WAS COMMENCED. IT WAS THEREFORE HELD, APPLYING THE RULING OF THE SUPREME COURT, THAT THE SUBSIDY RECEIVED BY THE ASSESSEE, WHICH WAS NOT FOR THE SETTING UP OF THE SUGAR FACTORY, IS A 12 ITA NO S. 1476 /PN/2010 & 1686/PN/2011, JOHN DEERE INDIA PVT. LTD., PUNE REVENUE RECEIPT. IN THE OTHER JUDGMENT, WHICH IS OF THE MADHYA PRADESH HIGH COURT IN CIT VS. S. KUMAR'S TYRE MANUFACTURING CO. (2003) 183 CTR (MP) 590, THE SUBSIDY WAS EXPRESSLY GIVEN TO MEET EXPENDITURE ON POWER. THE MADHYA PRADESH HIGH COURT HELD, FOLLOWING THE JUDGMENT OF THE SUPREME COURT IN SAHNEY STEEL (SUPRA) AND IN CIT VS. RAJARAM MAIZE PRODUCTS (SUPRA) THAT SINCE THE SUBSIDY IS GIVEN FOR THE PURPOSE OF MEETING A PART OF THE EXPENDITURE ON POWER, IT WAS REVENUE RECEIPT IN THE ASSESSEE'S HANDS. IN BOTH THE CASES, THE OBJECT OF THE SUBSIDY WAS NOT TO ENCOURAGE THE SETTING UP OF FACTORIES OR FOR INDUSTRIALIZATION OF ANY PARTICULAR AREA OF THE STATE. THE OBJECT WAS TO ASSIST OR LEND A HELPING HAND TO THE CONCERNED ASSESSEES AFTER THEY COMMENCED PRODUCTION SO THAT THEY TI DE OVER THE INITIAL DIFFICULTIES IN RUNNING THE FACTORIES. THE SUBSIDY IN BOTH THE CASES WAS AN OPERATIONAL SUBSIDY. THE FACTS IN THESE TWO CASES BEING DIFFERENT FROM THE FACTS OF THE PRESENT CASE, THEY ARE NOT APPLICABLE. 37. IN THE PAPER BOOK FILED BY TH E DEPARTMENT CONTAINING THE ABOVE JUDGMENTS, WE NOTICED A JUDGMENT OF THE MADRAS HIGH COURT IN CIT VS. PONNI SUGARS & CHEMICALS LTD. (2003) 179 CTR (MAD) 477 : (2003) 260 ITR 605 (MAD). IN THIS CASE, THE ASSESSEE RECEIVED TWO TYPES OF SUBSIDIES. ONE WAS UN DER A SCHEME OF THE GOVERNMENT FRAMED WITH THE OBJECT OF AUGMENTING INDIGENOUS SUGAR PRODUCTION AND TO PROVIDE INCENTIVES TO NEW SUGAR FACTORIES AND EXPANSION PRODUCTS. THE SCHEME ENABLED THE ENTREPRENEUR TO INITIALLY FUND THE CAPITAL COST BY OBTAINING LOA NS FROM PUBLIC FINANCIAL INSTITUTIONS AND DISCHARGING THEM WITH THE HELP OF THE INCENTIVES AFTER THE COMMENCEMENT OF PRODUCTION. THE INCENTIVES WERE PROVIDED EXCLUSIVELY FOR THE PURPOSE OF REPAYMENT OF LOANS FOR MEETING THE CAPITAL COSTS. THESE INCENTIVES WERE HELD BY THE HIGH COURT TO BE CAPITAL IN NATURE. THE OTHER TYPE OF INCENTIVES WAS THE SUBSIDY WHICH WAS LINKED TO THE PURCHASE TAX AND WAS IN NO WAY LINKED TO THE EXPENDITURE INCURRED IN SETTING UP THE SUGAR INDUSTRY. THE OBJECT OF THE SUBSIDY WAS TO G IVE A CONCESSION TO THE ASSESSEE FOR MEETING THE COST OF RUNNING THE BUSINESS AFTER PRODUCTION. THERE WAS ALSO NO CONDITION TO THE EFFECT THAT THE SUBSIDY SHALL BE USED FOR A PARTICULAR PURPOSE ONLY. IN THESE CIRCUMSTANCES, THE HIGH COURT HELD THAT THIS SU BSIDY WAS A TRADING RECEIPT IN THE HANDS OF THE ASSESSEE. THIS CASE EMPHASISES THAT THE OBJECT WITH WHICH THE SUBSIDY IS GIVEN IS 13 ITA NO S. 1476 /PN/2010 & 1686/PN/2011, JOHN DEERE INDIA PVT. LTD., PUNE THE PRIME OR FOREMOST CONSIDERATION WHILE DETERMINING THE NATURE OF THE RECEIPT. THE HIGH COURT HELD AS UNDER: 'THE NATURE OF THE RECEIPT OF THE INCENTIVE, THEREFORE, HAS TO BE EXAMINED IN THE LIGHT OF THAT OBJECT. LAW HAS TO KEEP UP WITH THE NEWER DEVICES AND METHODS ADOPTED IN THE WORLD OF BUSINESS AS ALSO IN THE SEVERAL SCHEMES THAT POLICY MAKERS DRAW UP FROM TIME TO TIME TO E NSURE THE DESIRED DEVELOPMENT IN THE DIFFERENT SECTORS OF INDUSTRY. IF THE GOVERNMENT FOUND IT CONVENIENT TO ADOPT A POLICY OF ENABLING THE ENTREPRENEURS TO INITIALLY FUND THE CAPITAL COST OF THE PROJECT BY OBTAINING LOANS FROM THE PUBLIC FINANCIAL INSTITU TIONS BY INDUCING THE ENTREPRENEUR AND THE LENDER INSTITUTION TO RELY UPON THE INCENTIVES PROVIDED UNDER THE SCHEME FOR DISCHARGING SUCH LOANS, IT CANNOT BE SAID THAT THE INCENTIVE GIVEN BEING POST PRODUCTION, THOUGH MEANT EXCLUSIVELY FOR MEETING THE CAPIT AL COST, THE AMOUNT OF THE INCENTIVE WOULD BE A TRADING RECEIPT IN THE HANDS OF THE RECIPIENT. THE FACT THAT THE TIME OF PAYMENT IS SUBSEQUENT TO THE COMMENCEMENT OF PRODUCTION WOULD NOT IN THE LARGER PERSPECTIVE MAKE A DIFFERENCE. AS OBSERVED BY THE SUPRE ME COURT IN THE CASE OF K.C.P. LTD. VS. CIT (2000) 162 CTR (SC) 320 : (2000) 245 ITR 421 (SC), IT IS NOT THE NAME GIVEN BY THE ASSESSEE OR EVEN THE REVENUE OR ANYONE ELSE THAT MATTERS, BUT IT IS THE TRUE CHARACTER OF THE RECEIPT THAT DETERMINES ITS TAXABIL ITY AND BEING REGARDED AS FALLING WITH THE CAPITAL FIELD OR OUT OF IT. IF THE TRUE CHARACTER OF THE INCENTIVE HERE IS TO ENABLE THE ASSESSEE TO MEET THE CAPITAL COST, THEN THAT TRUE CHARACTER MUST BE GIVEN FULL RECOGNITION AND THE FACT THAT THE RECEIPT WAS SUBSEQUENT TO THE COMMENCEMENT OF PRODUCTION (CAN) NOT BE ALLOWED TO STAND IN THE WAY OF ITS PROPER TREATMENT AS A RECEIPT IN THE CAPITAL FIELD MEANT TO MEET A CAPITAL COST. THE LINE SEPARATING 'CAPITAL' FROM 'REVENUE' IS A LINE WHICH IS NOT FIXED AND UNA LTERABLE, BUT ONE WHICH SHIFTS FROM TIME TO TIME DEPENDING UPON THE PECULIAR FACTS OF A GIVEN CASE. IT IS THE SUM TOTAL OF ALL THE RELEVANT FACTS OF A GIVEN CASE, WHICH WILL DETERMINE THE ULTIMATE DECISION AS TO WHETHER A PARTICULAR ITEM OF RECEIPT OR EXPE NDITURE IS TO BE REGARDED AS BEING IN THE CAPITAL OR IN THE REVENUE FIELD..................... THE PURPOSE AND OBJECT OF THE SCHEME, THEREFORE, IS OF VITAL SIGNIFICANCE AND DECIDED CASES WHICH TURN UPON THE SPECIAL FACTS CANNOT PRE - DETERMINE THE OUTCOME OF ANOTHER CASE MERELY ON THE 14 ITA NO S. 1476 /PN/2010 & 1686/PN/2011, JOHN DEERE INDIA PVT. LTD., PUNE GROUND THAT POST PRODUCTION RECEIPTS ARE NORMALLY REGARDED AS TRADING RECEIPTS.' THE MADRAS HIGH COURT ALSO REFERRED TO THE JUDGMENT OF THE SUPREME COURT IN SAHNEY STEEL (SUPRA) AND HELD THAT THE SUPREME COURT 'CLEARLY RECOGNIS ED THE POSSIBILITY OF THE PAYMENTS BEING MADE NOT DIRECTLY BUT INDIRECTLY FOR THE SETTING UP OF THE INDUSTRIES' AND THAT SINCE IN THE CASE BEFORE THE SUPREME COURT THE PAYMENTS 'HAD BEEN MADE POST - PRODUCTION AND WERE IN NO WAY LINKED TO THE STEPS THAT HAD BEEN TAKEN BY THE ASSESSEE THEREIN IN SETTING UP THE INDUSTRY, IT WAS OBSERVED THAT THE INCENTIVES HAD BEEN GIVEN ONLY AFTER PRODUCTION HAD COMMENCED'. THESE OBSERVATIONS OF THE MADRAS HIGH COURT (AT P. 612 OF THE REPORT) RECOGNISE THE POSSIBILITY, DEPENDI NG UPON THE NATURE AND OBJECT OF THE SCHEME, OF EVEN POST - PRODUCTION PAYMENTS BEING LINKED, ALBEIT INDIRECTLY, TO THE STEPS TAKEN BY THE ASSESSEE TO SET UP THE INDUSTRY. THE HIGH COURT ALSO OBSERVED EARLIER AT P. 611 OF THE REPORT, WHICH WE HAVE EXTRACTED ABOVE, THAT WHAT IS OF VITAL SIGNIFICANCE IS THE PURPOSE AND OBJECT OF THE SCHEME AND THAT THE DECIDED CASES WHICH TURN UPON THE SPECIAL FACTS CANNOT PREDETERMINE THE OUTCOME OF ANOTHER CASE MERELY ON THE GROUND THAT POST - PRODUCTION RECEIPTS ARE NORMALLY R EGARDED AS TRADING RECEIPTS. IN OTHER WORDS, THE HIGH COURT HAS HELD THAT MERELY BECAUSE THE MONIES ARE RECEIVED AFTER PRODUCTION COMMENCES, IT CANNOT BE SAID, IRRESPECTIVE OF THE PURPOSE AND OBJECT OF THE SCHEME, THAT THE RECEIPT IS OF REVENUE NATURE. THI S OBSERVATION OF THE MADRAS HIGH COURT AND THE MANNER IN WHICH THE JUDGMENT OF THE SUPREME COURT IN SAHNEY STEEL (SUPRA) HAS BEEN EXPLAINED AT P. 612 OF THE REPORT ALSO SHOW THAT THE TRIBUNAL IN THE CASE OF RIL FOR THE ASST. YR. 1985 - 86 CORRECTLY INTERPRET ED THE JUDGMENT OF THE SUPREME COURT IN SAHNEY STEEL (SUPRA). THE OBSERVATIONS OF THE MADRAS HIGH COURT LEND SUPPORT TO THE VIEW THAT THE PURPOSE AND OBJECT OF THE SCHEME UNDER WHICH THE SUBSIDY IS GIVEN IS OF MORE FUNDAMENTAL IMPORTANCE THAN THE FACT THAT THE SUBSIDY WAS RECEIVED AFTER THE COMMENCEMENT OF PRODUCTION OR CONDITIONAL UPON IT. THEREFORE, IN OUR VIEW AND WITH RESPECT, THE TRIBUNAL IN THE CASE OF RIL HAD CORRECTLY INTERPRETED AND UNDERSTOOD THE RATIO OF THE JUDGMENT OF THE SUPREME COURT IN SAHNE Y STEEL (SUPRA). 38. IN THIS VIEW OF THE MATTER, WE ANSWER THE QUESTION REFERRED TO US IN THE AFFIRMATIVE. SINCE THERE ARE OTHER GROUNDS IN THE APPEAL OF THE 15 ITA NO S. 1476 /PN/2010 & 1686/PN/2011, JOHN DEERE INDIA PVT. LTD., PUNE ASSESSEE AND SINCE THERE IS ALSO AN APPEAL BY THE DEPARTMENT, THEY WILL GO BACK TO THE DIVISION BE NCH FOR BEING DISPOSED OF IN ACCORDANCE WITH LAW. 11. IT IS PERTINENT TO NOTE HERE THAT THE HON'BLE SPECIAL BENCH, ITAT HAS CONSIDERED THE DECISION OF THE HON'BLE SUPREME COURT RELIED ON BY THE ASSESSING OFFICER IN THE CASE OF SAHANEY STEELS AND PRESS WO RK LTD. (SUPRA). IT IS ALSO PERTINENT TO NOTE HERE THAT THE SAID ISSUE WAS FURTHER CARRIED BY WAY OF APPEAL BY THE REVENUE BEFORE THE JURISDICTIONAL HIGH COURT AND THE HON'BLE HIGH COURT HAS AFFIRMED THE ORDER OF THE ITAT, SPECIAL BENCH, MUMBAI IN CASE OF RELIANCE INDUSTRIES LTD. (SUPRA) BY HOLDING THAT THE SUBSIDY IS CLEARLY ON THE CAPITAL ACCOUNT . WE HAVE ALSO CONSIDERED THE 1979 PACKAGE SCHEME OF INCENTIVES AND AS WELL AS PACKAGE SCHEME OF 1993 INTRODUCED BY THE GOVT. OF MAHARASHTRA . A S RIGHTLY ARGU ED BY THE LD. AR THE OBJECT AND PURPOSE FOR WHICH THE INCENTIVE BY WAY OF SALES TAX SUBSIDY IS GIVEN ARE THE IDENTICAL IN BOTH THE INCENTIVE SCHEMES . IT IS TRUE THAT IN THE PRECEDING YEARS THE TRIBUNAL HAS SET ASIDE THE ISSUE TO THE FILE OF THE ASSESSING OFFICER FOR THE FRESH ADJUDICATION BUT IN OUR OPINION AS THE ISSUE HAS BEEN SETTLED BY THE JURISDICTIONAL HIGH COURT ON THE IDENTICAL SUBSIDY , W E DO NOT CONSIDER IT NECESSARY TO AGAIN SET ASIDE THE ISSUE TO THE FILE OF THE ASSESSING OFFICER AND TO CREATE T HE COMPLEXITY OF THE LITIGATION. WE, THEREFORE, FOLLOWING THE DECISION OF THE RELIANCE INDUSTRIES LTD. (SUPRA) HOLD THAT THE SALES TAX SUBSIDY AVAILED IN PACKAGE SCHEME OF INCENTIVES 1993 IS A CAPITAL RECEIPT AND CANNOT BE TAXED AS A REVENUE RECEIPT IN THE HANDS OF THE ASSESSEE. ACCORDINGLY, GROUND NO. 3 IS ALLOWED. 12. GROUND NO. 4 IS IN RESPECT OF THE ADJUSTMENT MADE BY THE TPO AND CONFIRMED BY THE DRP U/S. 92CA(3) OF THE ACT TO THE EXTENT OF RS.33,59,50,091/ - . THE ORDER OF THE TPO WHICH IS AS UNDER : 16 ITA NO S. 1476 /PN/2010 & 1686/PN/2011, JOHN DEERE INDIA PVT. LTD., PUNE S. NO. DESCRIPTION OF TRANSACTION AMOUNT (IN RS.) METHOD APPLIED 1 IMPORT OF COMPONENTS 20,21,13,641 TNMM 2 EXPORT OF TRACTORS 431,87,60,634 - DO - 3 EXPORT OF SPARES 3,19,86,815 - DO - 4 EXPORT OF AGGREGATES 25,09,79,676 - DO - 5 PAYMENT OF ROYALTY 22,6 3,82,683 - DO - /CUP 6 CATALOGUE UPDATION SERVICES 38,95,688 - DO - 7 REIMBURSEMENT EXPENSES 2,00,73,737 ACTUALS AT COST TOTAL 505,41,92,874 13. THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF MANUFACTURE OF TRACTORS, AGGREGATES AND SPARE PARTS WHI CH ARE SOLD IN THE DOMESTIC MARKET AS WELL AS THE FOREIGN MARKET. FOR THIS YEAR, THE TOTAL SALES OF THE ASSESSEE COMPANY ARE AROUND RS.808 CRS . AND THE PROFIT BEFORE TAX WAS RS. 64.67 CRS. IN THIS YEAR, THE ASSESSEE ENTERED INTO VARIOUS INTERNATIONAL TRAN SACTIONS WITH ITS ASSOCIATED ENTERPRISES (AES) AND THE DETAILS OF THE SAME ARE GIVEN ON PAGE 2, PARA 4 OF THE ORDER OF THE TRANSFER PRICING OFFICER (IN SHORT TPO ) . 13.1 IT WAS SUBMITTED BY THE ASSESSEE TO THE TPO THAT THE VARIOUS TRANSACTIONS ENTERED INTO BY IT WITH ITS AES WERE AT ARMS LENGTH PRICE (ALP) AND HENCE, NO ADDITION IS WARRANTED. THE COPY OF THE FORM NO. 3CEB FILED BY THE ASSESSEE IS ON PAGES 149 169 OF THE PAPER BOOK 1. THE COPY OF THE TRANSFER PRICING STUDY REPORT IS ALSO ENCLOSED ON PAGES 173 279 OF PAPER BOOK 1. IT WAS SUBMITTED BY THE ASSESSEE THAT ALL ITS INTERNATIONAL TRANSACTIONS WERE AT ALP AND NO ADJUSTMENT S WERE REQUIRED TO BE MADE. THE TPO ACCEPTED THE CONTENTIONS OF THE ASSESSEE IN RESPECT OF THE VARIOUS INTERNATIONAL TRANSACTI ONS SAVE FOR THE EXPORT OF TRACTORS BY THE ASSESSEE COMPANY TO ITS AES OF RS.431.87 CRS. THE TPO HELD THAT THE TRANSACTIONS OF EXPORT OF TRACTORS BY THE ASSESSEE COMPANY 17 ITA NO S. 1476 /PN/2010 & 1686/PN/2011, JOHN DEERE INDIA PVT. LTD., PUNE TO ITS AES WERE NOT AT ALP AND THEREFORE, THE ADDITION WAS REQUIRED TO BE MADE. 13.2 ACCORDING TO THE TPO, THE ASSESSEE COMPANY HAD ADOPTED TRANSACTIONAL NET MARGIN METHOD (TNMM) FOR DETERMINING THE INTERNATIONAL TRANSACTION OF EXPORTS OF TRACTORS. THE ASSESSEE COMPANY HAD SELECTED 8 COMPANIES AS COMPARABLE AND CONTENDED THAT THE NET OPER ATING MARGIN EARNED BY IT IN EXPORT SEGMENT WAS MUCH HIGHER THAN THE AVERAGE OPERATING MARGIN OF 8 COMPARABLE COMPANIES. ACCORDINGLY, THE ASSESSEE CLAIMED THAT IT S TRANSACTIONS OF EXPORT OF T RACTORS TO ITS AES WERE AT ALP. THE ASSESSEE ALSO FILED THE CHA RT OF THE OPERATING MARGINS OF THE COMPARABLE ENTITIES AND SINCE THE OPERATING MARGIN OF THE ASSESSEE COMPANY WAS MUCH HIGHER, IT WAS CLAIMED THAT THE TRANSACTIONS ARE AT ARMS LENGTH PRICE (ALP). 13.3 THE TPO HAS HELD THAT THE TNMM IS NOT THE MOST APPROP RIATE METHOD FOR DETERMINING THE ALP AND IN HIS OPINION THAT THE COST PLUS METHOD (CPM) IS THE MOST APPROPRIATE METHOD FOR DETERMINING THE ALP. THE TPO HAS OBSERVED THAT THE ASSESSEE HAS ALSO SOLD TRACTORS IN THE DOMESTIC MARKET AND HENCE, HE HAS COMPARED THE GROSS MARGIN EARNED BY THE ASSESSEE ON SALE OF TRACTORS IN THE DOMESTIC SEGMENT VIS - - VIS THE GROSS MARGIN EARNED BY THE ASSESSEE ON SALE OF TRACTORS TO THE AES. THE TPO HAS DISCUSSED THE ISSUE REGARDING THE APPLICABILITY OF THE METHOD IN PARAS 4 TO 5 .3 OF HIS ORDER. HE HAS HELD THAT THE COMPARABILITY OF THE DOMESTIC SEGMENT AND THE EXPORT SEGMENT OF SALE OF TRACTORS WOULD GIVE A BETTER PICTURE. 13.4 T HE TPO IN PARA 4.2.1, PAGE 36 AND PARA 6.1, PAGE 65 OF HIS ORDER HAS JUSTIFIED THE ADOPTION OF CPM AS THE MOST APPROPRIATE METHOD ON THE GROUND THAT THE ASSESSEE HAS SORT OF JOINT FACILITY ARRANGEMENT AND LONG TERM BUY AND SUPPLY ARRANGEMENT WITH THE AE IN RESPECT OF EXPORT OF 18 ITA NO S. 1476 /PN/2010 & 1686/PN/2011, JOHN DEERE INDIA PVT. LTD., PUNE TRACTORS. HE HAS OBSERVED THAT CPM IS THE MOST APPROPRIATE METHOD FOR MANUFACTU RE, ASSEMBLY OR OTHER PRODUCTION OF GOODS THAT ARE SOLD TO RELATED PARTIES. THE TPO HAS REFERRED TO THE TP STUDY REPORT WHEREIN IT HAS BEEN STATED THAT THE ASSESSEE COMPANY IS THE LARGEST INDIAN EXPORTER OF TRACTORS TO USA AND EXPORTS CONTRIBUTED 57% OF TH E TOTAL TURNOVER OF THE ASSESSEE COMPANY. ACCORDING TO THE TPO, THE FUNCTIONS PERFORMED AND THE ASSETS UTILIZED FOR MANUFACTURING TRACTORS IN THE DOMESTIC AND EXPORT SEGMENTS ARE THE SAME. THE TPO HAS MENTIONED THAT THE VARIOUS DIFFERENCES IN THE EXPORT AND DOMESTIC SEGMENT ARE NOT MATERIAL AND THEY DO NOT AFFECT THE GROSS PROFIT OF THE TWO SEGMENTS. T HE TPO HAS NOTED THAT THE AES OF THE ASSESSEE ARE ENJOYING LOCATIONAL SAVINGS SINCE THE COST OF MANUFACTURE OF TRACTORS IS LOWER THAN THE COST OF MANUFACTU RE OF TRACTORS IN THE AE S COUNTRIES. THUS, ACCORDING TO HIM, THE DOMESTIC SEGMENT IS A MUCH BETTER COMPARABLE VIS - - VIS THE EXTERNAL COMPARABLES IN THE FORM OF 8 COMPANIES ADOPTED BY THE ASSESSEE. T HE TPO HAS FINALLY ADOPTED CPM AS THE MOST APPROPRIATE METHOD FOR DETERMINING THE ALP BY DISCARDING TNMM ME THOD ADOPTED BY THE ASSESSEE FOR DETERMINING ALP OF EXPORT OF TRACTORS TO AES AS APPROPRIATE METHOD . 13.5 THE TPO HAS ALSO REJECTED SOME OF THE COMPARABLES SELECTED BY THE ASSESSEE COMPANY. THE TPO HAS R EJECTED THE VARIOUS COMPANIES SELECTED BY THE ASSESSEE FOR THE REASONS GIVEN ON PAGES 5 6 OF THE TPOS ORDER. T HE TPO HAS REJECTED 2 COMPANIES, NAMELY, ESCORTS LTD. AND HMT LTD. ON THE GROUND THAT THESE COMPANIES HAVE INCURRED EXCESSIVE LOSSES [REFER PARA 3 3.2 ON PAGES 31 33 OF THE TP ORDER]. THE TPO HAS FURTHER HELD THAT THE TOTAL TURNOVER OF THE ASSESSEE COMPANY IS RS.808 CRS. AND HENCE, THE COMPANIES WITH TURNOVER RANGING BETWEEN RS.500 CRS. TO RS.1,000 CRS. ONLY SHOULD BE CONSIDERED AS COMPARABLE WITH THE ASSESSEE . IN SHORT, THE TPO APPLIED TURNOVER FILTER. ACCORDINGLY, HE HAS HELD THAT AFTER APPLYING THE ABOVE FILTERS, THE ONLY TWO COMPANIES LEFT 19 ITA NO S. 1476 /PN/2010 & 1686/PN/2011, JOHN DEERE INDIA PVT. LTD., PUNE WOULD BE PUNJAB TRACTORS LTD. (OPM - 11.5%) AND INTERNATIONAL TRACTORS LTD. (OPM 15.41%). 13.6 FINALLY , AFTER REJECTION OF SOME OF THE COMPARABLES AND HOLDING THAT CPM IS THE MOST APPROPRIATE METHOD, THE TPO WORKED OUT THE G.P. OVER COST IN THE EXPORT SEGMENT AT 18.52% AND IN THE DOMESTIC SEGMENT AT 27.65% (PAGE NO. 21 OF TPO ORDER). HE COMPUTED THE DIFFER ENCE BETWEEN THE TWO AT 9.13% AND ACCORDINGLY, HE HAS MADE AN ADJUSTMENT OF RS.33.59 CRS. WHICH IS BEING CHALLENGED BY THE ASSESSEE COMPANY IN THIS APPEAL. 14. THE ASSESSEE COMPANY STRONGLY OBJECTED TO THE ADDITION MADE BY THE TPO. LD. A .R. SUBMIT TED THA T THE ASSESSEE COMPANY HAD ADOPTED TRANSACTIONAL NET MARGIN METHOD (TNMM) FOR DETERMINING THE ALP IN RESPECT OF EXPORT OF TRACTORS TO ITS AES. IT IS SUBMITTED THAT THE NET OPERATING MARGIN EARNED BY IT IN RESPECT OF THE EXPORT OF TRACTORS WAS MUCH HIGHER THAN THE AVERAGE OPERATING MARGIN EARNED BY THE COMPARABLE ENTITIES AND ACCORDINGLY, THERE WAS NO REASON TO MAKE ANY ADDITION. 14.1 LD. AR FURTHER SUBMITTED THAT THAT THE TPO HAS GROSSLY ERRED IN REJECTING THE TNMM METHOD. IT IS ARGUED THAT THE ASSESSEE COMPANY HAS EXPORTED TRACTORS TO AES FOR LAST SEVERAL YEARS AND FROM A.Y. 2004 - 05 ONWARDS, THE ASSESSEE HAS ADOPTED TNMM METHOD AS THE MOST APPROPRIATE METHOD FOR DETERMINING THE ALP IN RESPECT OF THE TRANSACTION OF EXPORT OF TRACTORS TO THE AES. FOR ALL TH O SE YEARS STARTING FROM 2004 - 05 ONWARDS AND ALSO FOR A.Y. 2008 - 09, THE D EPT. HAS ACCEPTED TNMM METHOD AS THE MOST APPROPRIATE METHOD FOR DETERMINING THE ALP IN RESPECT OF THE SALE OF TRACTORS TO THE AES. HE SUBMITTED THAT T HE COPIES OF THE ORDERS PASSE D FOR A.Y. 2004 - 05 TO 2005 - 06 ARE PLACED AT PAGES 282 285 OF THE PAPER BOOK - 2 WHEREAS THE COPY OF TP ORDER FOR A.Y. 20 ITA NO S. 1476 /PN/2010 & 1686/PN/2011, JOHN DEERE INDIA PVT. LTD., PUNE 2008 09 IS PLACED AT PAGES 353 354 OF THE PAPER BOOK - 2. THE LD. AR SUBMITTED THAT FOR LAST SEVERAL YEARS, THE D EPT. HAS ACCEPTED TNMM AS THE MOST APPROPRIATE METHOD FOR DETERMINING ALP IN RESPECT OF THE TRANSACTIONS OF EXPORT OF TRACTORS. IN SUCH A SCENARIO AND AS THE FACTS FOR THIS YEAR ARE SIMILAR TO THE FACTS INVOLVED FOR THE EARLIER YEARS AND THE SUBSEQUENT YEAR I.E. A.Y. 2008 - 09 THAT ON THE PRINCIPLE OF CONSISTENCY, THE TPO SHOULD NOT HAVE REJECTED TNMM AS THE MOST APPROPRIATE METHOD. LD. AR PLACED HIS RELIANCE ON THE FOLLOWING DECISIONS AND ACCORDING TO HIM THE COURTS HAVE HELD THAT WHEN THE FACTS INVOLVED ARE SIMILAR FOR VARIOUS YEA RS AND THE D EPT. HAS ACCEPTED A PARTICULAR STAND IN SOME OF THE YEARS, THERE IS NO REASON TO TAKE A DIFFERENT STAND IN THE SUBSEQUENT YEARS A. ALFA LAVAL (I) LTD. [149 ITD 285 (PUNE)] B. RADHASOAMI SATSANG V. CIT [193 ITR 321 (SC)] C. H. A. SHAH & CO. V. CIT [30 ITR 618 (BOM)] D. BRINTONS CARPETS ASIA (P) LTD. [139 TTJ 177 (PUNE)] E. DRILBITS INTERNATIONAL PVT. LTD. [62 DTR 171 (PUNE)] F. AGILITY LOGISTICS (P) LTD. [145 ITD 566 (MUM)] G. SKOL BREWERIES LTD. [153 TTJ 257 (MUM)] 14.2 THE LD. AR FOR THE ASSESSEE FURTHER SUBMI TTED THAT THE TPO HAS MERELY REJECTED THE TNMM ON THE GROUND THAT THE COMPARABILITY OF THE DOMESTIC SEGMENT AND THE EXPORT SEGMENT WOULD GIVE A BETTER PICTURE. IN THIS CONTEXT, LD. AR SUBMITTED THAT THE TNMM WAS ACCEPTED AS THE MOST APPROPRIATE METHOD FOR DETERMINING THE ALP FOR ALL THE EARLIER YEARS AND ALSO ACCEPTED FOR THE SUBSEQUENT YEAR I.E. A.Y. 2008 0 9 AND HENCE, THE TPO HAS CONVENIENTLY IGNORED THIS ASPECT. IT IS ARGUED THAT THE TPO HA S NOT STATED AS TO HOW THE FACTS OF THE CURRENT YEAR ARE DIFFEREN T THAN THOSE IN THE EARLIER YEARS. LD. AR SUBMITTED THAT SINCE THE TPO HAS NOT BEEN ABLE TO DEMONSTRATE AS TO HOW THE FACTORS WHICH WERE RELEVANT FOR THE 21 ITA NO S. 1476 /PN/2010 & 1686/PN/2011, JOHN DEERE INDIA PVT. LTD., PUNE EARLIER YEARS HAVE CHANGED IN THIS YEAR, THE TPO HAS NOT BEEN ABLE TO DISCHARGE THE BURDEN PLACED ON H IM BY SEC. 92C(3) AND HENCE, THE ADOPTION THE CPM METHOD IS WITHOUT ANY BASIS AND NOT JUSTIFIED AT ALL. IN THIS CONTEXT, LD. AR RELIED UPON THE FOLLOWING DECISIONS TO SUPPORT HIS ARGUMENT THAT IF THE TPO WANTS TO DETERMINE THE PRICE UNDER A DIFFERENT METHO D, HE HAS TO DEMONSTRATE THAT THE PRICE DETERMINED BY HIM RELIABLE AND REASONABLE BY ADOPTING THE DIFFERENT METHOD A. AZTEC SOFTWARE TECHNOLOGY SERVICES LTD. V. ACIT [107 ITD 141 (BANG) (SB)] B. MSS INDIA PVT. LTD. [123 TTJ 657 (PUNE)] LD. AR VEHEMENT LY SUBMITTED THAT AS THE FACTS FOR THIS YEAR ARE SIMILAR TO THE FACTS INVOLVED IN THE EARLIER YEARS, THE TPO IS NOT JUSTIFIED IN REJECTING TNMM AS THE MOST APPROPRIATE METHOD. LD. AR FURTHER STRESSED THAT FOR A.Y. 2008 - 09, THE TPO HAD AGAIN ACCEPTED ITS T RANSACTIONS ON ACCOUNT OF EXPORT OF TRACTORS TO ITS AES WERE AT ALP AND HAD NOT DISTURBED THE TNMM ADOPTED BY THE ASSESSEE FOR DETERMINING THE ALP. ACCORDINGLY, HE CONTENDED THAT SINCE EVEN IN THE LATER YEAR, THE TPO HAS ACCEPTED TNMM AS THE MOST APPROPRIA TE METHOD, THE SAME SHOULD HAVE BEEN ACCEPTED FOR THIS YEAR ALSO FOR DETERMINING THE ALP. 14.3 AS REGARDS THE ISSUE OF COMPARABLES, LD. AR SUBMITTED THAT THE ASSESSEE COMPANY HAD SELECTED THE FOLLOWING 8 COMPANIES AS COMPARABLE ENTITIES SR. NO. NAME OF THE COMPANY OPERATING TURNOVER PROFIT MARGIN 1 ESCORTS LTD. 1320.32 - 12.02% 2 TRACTORS & FARM TRACTOR LTD. 1391.20 11.90% 3 MAHINDRA & MAHINDRA LTD. 3441.82 8.65% 4 VST TILLERS TRACTORS LTD. 131.14 9.40% 5 PUNJAB TRACTORS LTD. 958.55 11.50% 22 ITA NO S. 1476 /PN/2010 & 1686/PN/2011, JOHN DEERE INDIA PVT. LTD., PUNE 6 INTERN ATIONAL TRACTORS LTD. 953.25 15.41% 7 KERALA AGRO MACHINERY CORP. LTD. 80.15 - 0.54% 8 HMT LTD. 281.24 - 4.84% MEAN 4.93% 14.4 LD. A.R. SUBMITTED THAT THE REASONS GIVEN BY THE TPO FOR REJECTING THE COMPARABLE COMPANIES ARE NOT CORRECT. FIRSTLY, IT IS STATED THAT THE TPO IS NOT JUSTIFIED IN HOLDING THAT THE COMPANIES WITH EXCESSIVE LOSSES SHOULD BE EXCLUDED. IN THIS RESPECT, IT IS SUBMITTED THAT IN A.Y. 2005 - 06, ESCORTS LTD. AND HMT LTD. WERE CONSIDERED AS COMPARABLE ENTITIES. IN FACT, THE OPERATING P ROFIT MARGIN OF ESCORTS LTD. FOR A.Y. 2005 - 06 WAS (10.62%) AND THE SAID COMPANY WAS ACCEPTED AS COMPARABLE BY THE SAME TPO IN A.Y. 2005 - 06. LD. AR STATED THAT THERE WAS NO REASON FOR THE TPO TO REJECT ESCORTS LTD. AND HMT LTD. AS COMPARABLE ENTITIES ON TH E GROUND THAT THEY HAD INCURRED SUBSTANTIAL LOSSES. LD. AR SUBMITTED THAT TH O SE TWO COMPANIES HAD INCURRED LOSSES IN THEIR NORMAL DAY TO DAY FUNCTIONING AND THE LOSSES WERE NOT ON ACCOUNT OF ANY EXCEPTIONAL FACTORS AND HENCE, THERE WAS NO REASON TO REJECT TH O SE TWO COMPANIES AS COMPARABLES. 14.5 SECONDLY, LD. AR SUBMIT TED T HAT THE TPO HAS STATED THAT THE TURNOVER OF THE ASSESSEE IS RS.808 CRS. AND HENCE, HE HAS HELD THAT COMPANIES WITH TURNOVER WITHIN THE RANGE OF RS.500 CRS. TO RS.1,000 CRS. SHOULD ONLY B E CONSIDERED AS COMPARABLE. THE ASSESSEE CONTENDED THAT OUT OF THE 8 COMPANIES SELECTED IN THIS YEAR, BARRING FOR KERALA AGRO MACHINERY CORP. LTD., ALL THE OTHER 7 COMPANIES WERE SELECTED BY IT AS COMPARABLE ENTITIES IN A.Y. 2005 - 06 AND THE SAME WERE ACCEP TED BY THE TPO. IT IS WAS POINTED OUT THAT IN A.Y. 2005 - 06, THE TURNOVER OF THE ASSESSEE COMPANY WAS RS.633 CRS. WHEREAS THE TURNOVER OF THE COMPARABLE ENTITIES WAS RANGING FROM RS.285.7 CRS. TO RS.2543.03 CRS. LD. AR SUBMITTED THAT COMPANY WISE TURNOVER FOR A.Y. 2005 06 IS GIVEN 23 ITA NO S. 1476 /PN/2010 & 1686/PN/2011, JOHN DEERE INDIA PVT. LTD., PUNE ON PAGE 27 OF DRP APPLICATION FILED IN FORM NO. 35A FOR THIS YEAR. IT WAS CLARIFIED THAT THE TPO HAS ACCEPTED ALMOST SIMILAR TURNOVER RANGE IN A.Y. 2005 - 06, THERE IS NO REASON AS TO WHY HE SHOULD OBJECT TO THE SET OF COMPARABLES ADOPTED BY THE ASSESSEE IN THE CURRENT YEAR. THE ASSESSEE STATED THAT THERE IS NO REASON TO DISTURB THE SET OF COMPARABLES ON THE REASON OF TURNOVER FILTER, PARTICULARLY BECAUSE OF THE FACT THAT SIMILAR TURNOVER FILTER WAS ADOPTED IN A.Y. 2005 - 06 AND WAS ACCEPTED BY THE SAME TPO WHILE DETERMINING THE ALP. 14.6 THE ASSESSEE FURTHER SUBMITTED THAT THE TPO HAD ADOPTED A VERY NARROW TURNOVER FILTER OF COMPANIES HAVING TURNOVER OF RS.500 CRS. TO RS.1000 CRS. IT IS STATED THAT THE TURNOVER OF THE ASSESSEE WAS RS.808 C RS. AND HENCE, THE COMPANIES SELECTED BY IT WERE COMPARABLE. IT WAS EXPLAINED THAT THERE IS NOT VAST DIFFERENCE IN TURNOVER OF THE COMPARABLES AND ACCORDINGLY, THE REJECTION OF THE COMPANIES ON TURNOVER FILTER WAS NOT JUSTIFIED. LD. AR ALSO CONTEND ED THAT TRACTOR SEGMENT IS A VERY NICHE SEGMENT AND IT IS NOT A CASE OF SOFTWARE BUSINESS WHEREIN THE NUMBER OF COMPANIES INVOLVED ARE HUGE AND THE TURNOVER PLAYS AN IMPORTANT ROLE IN DETERMINING THE COMPARABILITY OF THE COMPANIES. LD. AR PLACED HIS RELIAN CE ON THE DECISION OF ITAT , BANGALORE IN THE CASE OF GENISYS INTEGRATING SYSTEMS (INDIA ) PVT. LTD. [152 TTJ 215]. IN THAT CASE, THE TURNOVER OF THE ASSESSEE WAS RS.8.15 C RS. AND ITAT HELD THAT COMPANIES WHOSE TURNOVER RANGES BETWEEN 1 - 200 CRS. SHOULD BE S ELECTED. LD. AR SUBMIT TED THAT THE TURNOVER THE VARIOUS COMPANIES SELECTED BY IT WAS IN COMPARABLE RANGE AND THERE IS NO REASON TO REJECT ANY COMPANY ON THE BASIS OF TURNOVER FILTER. 14.7 IT IS FURTHER ARGUED THAT THE TPO HAD ALSO RAISED OBJECTIONS IN RES PECT OF A FEW COMPARABLES VIDE HIS LETTER DATED 13.04.2012. IN THE SAID LETTER, THE TPO HAS OBJECTED TO THE INCLUSION OF KERALA AGRO MACHINERY CORPORATION LTD. ON THE GROUND THAT THE SAID COMPANY WAS 24 ITA NO S. 1476 /PN/2010 & 1686/PN/2011, JOHN DEERE INDIA PVT. LTD., PUNE MANUFACTURING POWER TILLERS AND POWER REAPERS AND NOT EN GAGED IN THE BUSINESS OF MANUFACTURING TRACTORS. ACCORDINGLY, HE STATED THAT THE SAID COMPANY CANNOT BE CONSIDERED AS COMPARABLE. FURTHER, THE TPO HAS FURTHER STATED THAT KERALA AGRO MACHINERY CORPORATION IS A PSU AND HENCE, CANNOT BE CONSIDERED AS A COMPA RABLE. SIMILARLY, THE TPO HAS STATED THAT HMT LTD. IS ALSO ENGAGED IN VARIOUS ACTIVITIES AND HENCE, COMPARISON OF HMT ENTITY AS A WHOLE IS NOT CORRECT. THE TPO HAS FURTHER MENTIONED THAT VST TILLERS IS ALSO ENGAGED IN DIFFERENT BUSINESS AND THEREFORE, SHOU LD BE REJECTED AS A COMPARABLE. FINALLY, IN RESPECT OF ESCORTS LTD., THE TPO HAS STATED ESCORTS IS ALSO ENGAGED IN SELLING FARM EQUIPMENTS ALONG WITH TRACTORS AND THEREFORE, CANNOT BE CONSIDERED AS A COMPARABLE ENTITY. 14.8 LD. AR ARGUED THAT THE VARIOUS CONTENTIONS RAISED BY THE TPO ARE NOT CORRECT. FIRSTLY, IT IS SUBMITTED THAT ESCORTS, VST TILLERS AND HMT WERE CONSIDERED AS COMPARABLES IN THE EARLIER YEARS AND HENCE, THERE WAS NO REASON OF REJECTING TH O SE COMPANIES IN THIS YEAR CONSIDERING THE FACT THAT THE FACTS OF THIS YEAR ARE SIMILAR TO THE EARLIER YEARS. SECONDLY, IN RESPECT OF ESCORTS, IT IS STATED THAT THE MAIN BUSINESS IS OF SELLING TRACTORS AND THEREFORE, THE ASSESSEE HAS CONSIDERED IT AS A COMPARABLE ENTITY AND THIS POINT WAS CLARIFIED TO THE T PO. THE ASSESSEE WOULD CLARIFIED THAT IN RESPECT OF HMT, MORE THAN 90% OF THE TOTAL TURNOVER WAS ON ACCOUNT OF SALE OF TRACTORS AND HENCE, EVEN IN THE ABSENCE OF THE SEGMENTAL RESULTS, HMT SHOULD BE CONSIDERED AS A COMPARABLE ENTITY. WITHOUT PREJUDICE, THE ASSESSEE CONTENDED THAT ASSUMING WITHOUT ADMITTING THAT THE CONTENTION OF THE TPO IS CORRECT WITH REGARD TO THE 4 COMPANIES, STILL THE BALANCE 4 COMPANIES ARE COMPARABLE TO THE ASSESSEE COMPANY AND IN THE ABSENCE OF ANY OBJECTION RAISED BY THE TPO, THE SA ME SHOULD BE CONSIDERED AS COMPARABLES. LD. AR STATED THAT THE NET OPERATING MARGINS OF THE BALANCE 4 COMPANIES IS WITHIN PLUS OR MINUS 25 ITA NO S. 1476 /PN/2010 & 1686/PN/2011, JOHN DEERE INDIA PVT. LTD., PUNE 5% OF THE NET OPERATING MARGIN OF THE EXPORT SEGMENT AND HENCE, THE TRANSACTIONS ARE AT ALP AND THE RELEVANT WORKING IS AS UNDER - SR. NO NAME OF THE COMPANY NET OPERATING MARGIN 1 TRACTORS & FARM TRACTOR LTD. 11.90% 2 MAHINDRA & MAHINDRA LTD. 8.65% 3 PUNJAB TRACTORS LTD. 11.50% 4 INTERNATIONAL TRACTORS LTD. 15.41% AVERAGE NET OPERATING MARGIN 11.87% NET OPERATING MARGIN OF EXPORT SEGMENT 11.17% 14.9 LD. AR ALTERNATIVELY SUBMITTED THAT THE TPO HAD COMPARED THE MARGINS OF THE DOMESTIC AND EXPORT SEGMENT. IT IS ARGUED THAT THE TPO SHOULD HAVE COMPARED THE NET OPERATING MARGINS OF THE TWO SEGMENTS AND NOT THE GROSS MARGINS. HE SUBMITTED THAT AS PER RULE 10B, TNMM CAN BE APPLIED EITHER BY ADOPTING EXTERNAL COMPARABLES OR INTERNAL COMPARABLES. IT IS CONTENDED THAT IF AT ALL, THE DOMESTIC SEGMENT IS TO BE COMPARED WITH THE EXPORT SEGMENT, THEN IT SHOULD BE AT NET PROFI T LEVEL AND NOT GROSS MARGIN LEVEL. IT IS SUBMITTED THAT AFTER ALL, EVERY COMPANY IS CONCERNED ABOUT ITS NET PROFIT AND INCOME TAX IS ALSO LEVIED ON THE NET PROFIT AND NOT ON GROSS PROFIT. THERE ARE CERTAIN EXPENSES WHICH ARE INCURRED BY THE COMPANIES WHIC H HAVE A MAJOR IMPACT ON ITS BUSINESS. BUT SOME OF SUCH EXPENSES ARE NOT CONSIDERED WHILE DETERMINING THE GROSS MARGIN. LD. AR ACCORDINGLY SUBMITTED THAT THE COMPARABILITY OF THE GROSS MARGIN GIVES A DISTORTED PICTURE SINCE CERTAIN IMPORTANT COSTS AND ELEM ENTS ARE IGNORED. 14.10. LD. AR ARGUED THAT IN CASE OF GROSS MARGINS, ONLY THE DIRECT AND INDIRECT COSTS OF MANUFACTURING ARE CONSIDERED. BUT, CERTAIN VITAL COSTS LIKE MARKETING, SALES AND PROMOTION, INTEREST, BAD DEBTS, ETC. ARE TOTALLY IGNORED. TH O SE CO STS HAVE VITAL IMPACT ON THE BUSINESS. BY 26 ITA NO S. 1476 /PN/2010 & 1686/PN/2011, JOHN DEERE INDIA PVT. LTD., PUNE INCURRING HIGHER SALES AND ADVERTISEMENT COSTS, THE COMPANIES TRY TO BOOST THEIR SALES. THUS, SALES AND MARKETING COSTS ARE AN IMPORTANT COG IN ANY BUSINESS. SIMILARLY, IF THE BAD DEBTS ARE PRETTY HIGH, IT WOULD RE SULT IN LOWER PROFITABILITY IRRESPECTIVE OF INCREASE IN SALES. HENCE, IT IS CONTENDED THAT COMPARISON OF NET MARGIN IS ALWAYS PROPER AND FEASIBLE VIS - - VIS THE GROSS MARGINS. THE ASSESSEE CONTENDED THAT IF THE NET MARGINS OF THE TWO SEGMENTS ARE COMPARED, THE TRANSACTIONS RELATING TO SALE OF TRACTORS TO THE AES IS AT ALP. LD. AR POINTED OUT THAT THE NET MARGIN IN EXPORT SEGMENT IS 11.17% WHILE THE NET MARGIN IN DOMESTIC SEGMENT IS 8.33% AS PER CHART GIVEN ON PAGE 327 OF PAPER BOOK - 2. IT IS SUBMITTED THAT SI NCE THE NET MARGIN OF THE EXPORT SEGMENT IS MUCH MORE THAN THE DOMESTIC SEGMENT, THE TRANSACTIONS RELATING TO EXPORT OF TRACTORS ARE AT ALP. 14.11 AS REGARDS ADOPTION OF CPM, LD. AR SUBMITTED THAT BOTH THE EXPORT AND DOMESTIC SEGMENTS HAD CONTROLLED TRAN SACTIONS, SUCH AS IMPORT OF COMPONENTS, PAYMENT OF ROYALTY AND REIMBURSEMENT OF EXPENSES, AND THEREFORE, COMPARISON OF EXPORT AND DOMESTIC PROFITABILITY WOULD BE COMPARISON OF ONE CONTROLLED TRANSACTION WITH ANOTHER CONTROLLED TRANSACTION, WHICH IS NOT ENV ISAGED IN CPM . IT IS CONTENDED THAT INTERNAL CPM ALSO IS REQUIRED TO BE REJECTED. IT IS THUS SUBMITTED THAT FOR THE PURPOSES OF APPLICATION OF ANY METHOD, WHETHER IT BE CPM OR TNMM, THE TRANSACTION BEING CONSIDERED AS BENCHMARK SHOULD BE BOTH UNCONTROLLED AND COMPARABLE. 14.12 LD. AR ALSO CONTENDED THAT THE TPO WAS NOT JUSTIFIED IN ADOPTING THE CPM ON THE GROUND THAT THE ASSESSEE HAD A JOINT MANUFACTURING FACILITY AND THE AES HAD AGREED FOR LONG TERM BUY AND SUPPLY ARRANGEMENT. IT IS SUBMITTED THAT A JOI NT FACILITY ARRANGEMENT IS WHERE A COMPANY PURCHASES SEMI - FINISHED GOODS FROM THE PRINCIPAL, CARRIES OUT OPERATIONS AND SELLS THE FINISHED GOODS BACK TO THE PRINCIPAL, 27 ITA NO S. 1476 /PN/2010 & 1686/PN/2011, JOHN DEERE INDIA PVT. LTD., PUNE INVOLVING IN SOME CASES THE TRANSFER OR LICENSING OF INTANGIBLE PROPERTY FROM THE PRINCI PAL TO THE MANUFACTURER. IT IS SUBMITTED BEFORE US THAT A JOINT FACILITY ARRANGEMENTS / LONG TERM BUY AND SUPPLY ARRANGEMENTS ARE THE ONES WHERE THE ASSOCIATED ENTERPRISE IS A CONTRACT MANUFACTURER CARRYING LOW RISKS AND CARRYING OUT LOW LEVEL FUNCTIONS. 14.13 IT IS STATED THAT THERE WAS NO JOINT FACILITY ARRANGEMENT BETWEEN THE AES AND THE ASSESSEE COMPANY. FURTHER, LD. AR SUBMITTED THAT THERE WAS NO SUCH AGREEMENT FOR PURCHASE AND SALE OF TRACTORS ON A LONG TERM BASIS WITH THE AE. HE FURTHER STATED THA T THE ASSESSEE COMPANY IS ALSO SELLING THE TRACTORS IN THE DOMESTIC MARKET AND THE SALES TO THE AES ARE PURELY GOVERNED BY THE DEMAND AND SUPPLY MECHANISM. LD. AR POINTED OUT THAT THERE WAS NO CONTRACT OF WHATSOEVER NATURE WHEREIN THE AES HAVE AGREED TO PU RCHASE A FIXED QUANTITY OF TRACTORS PRODUCED BY THE ASSESSEE COMPANY AND ON THE CONTRARY, THE ASSESSEES DOMESTIC SALES WERE INCREASING YEAR TO YEAR AND THERE WAS CONSIDERABLE INCREASE IN THE ASSESSEES SHARE IN THE DOMESTIC MARKET. ACCORDINGLY, THE ASSESS EE SUBMITTED THAT THE TPO HAS ERRED IN HOLDING THAT THE ASSESSEE HAD A JOINT MANUFACTURING FACILITY WITH ITS AES AND THERE WAS A LONG TERM BUY AND SUPPLY ARRANGEMENT WITH THE AES. THE ASSESSEE HAS SUBMITTED THE DETAILS OF ITS SALES IN DOMESTIC MARKET AND T HE SAME ARE AS UNDER : FIG. IN UNITS PARTICULARS F.Y. ENDING 31.3.2009 F.Y. ENDING 31.3.2008 F.Y. ENDING 31.3.2007 F.Y. ENDING 31.3.2006 SALE OF TRACTORS IN DOMESTIC MARKET. 17,920 13,395 11,624 9,132 SALE OF TRACTORS IN EXPORT MARKET 12,877 15, 227 8,060 10,625 28 ITA NO S. 1476 /PN/2010 & 1686/PN/2011, JOHN DEERE INDIA PVT. LTD., PUNE 14.14 LD. AR TRIED TO EXPLAIN THAT CONSIDERING THE ABOVE CHART, IT IS APPARENT THAT THE SALES IN THE DOMESTIC MARKET ARE INCREASING YEAR AFTER YEAR. AND IN FACT, IN F.Y. 2006 07, THE NUMBER OF TRACTORS SOLD IN THE DOMESTIC MARKET WERE MUCH MORE THAN THE TRACTORS SOLD IN THE EXPORT MARKET. SIMILAR WAS THE POSITION IN F.Y. 2008 09. ACCORDINGLY, IT IS SUBMITTED THAT THE ASSESSEE IS NOT A CONTRACT MANUFACTURER NOR IS THERE ANY ARRANGEMENT BETWEEN THE ASSESSEE AND ITS AES. THE ASSESSEE AL SO SUBMITTED THAT THE TPO HAD BROUGHT UP THE ISSUE OF LOCATIONAL SAVINGS ON THE GROUND THAT THE MANUFACTURE OF TRACTORS IN INDIA IS LESS COSTLIER THAN TO MANUFACTURE THE TRACTORS IN AE COUNTRIES. THE ASSESSEE CONTENDED THAT SAID CONTENTION OF THE TPO IS WI THOUT ANY MERITS AND HE HA S NOT BROUGHT ON RECORD ANY FACTS TO SUBSTANTIATE THE INFERENCE. THUS, LD. AR STATED THAT THE BASIC PREMISE OF THE TPO FOR ADOPTING CPM THAT THE ASSESSEE WAS HAVING A JOINT FACILITY ARRANGEMENT WITH ITS AE IS INCORRECT AND THEREF ORE, THE ADOPTION OF CPM HAS TO BE REJECTED. 14.1 5 LD. AR FURTHER SUBMITTED THAT CONSIDERING THE VARIOUS DIFFERENCES IN THE TWO SEGMENTS, THE CPM ADOPTED BY THE TPO IS NOT CORRECT. IN THIS CONTEXT, LD. AR PLACED RELIANCE ON THE DECISION OF ITAT, PUNE IN THE CASE OF DRILBITS INTERNATIONAL PVT. LTD. IN THAT CASE, THE TPO HAD REJECTED TNMM METHOD AND HAD COMPUTED THE ALP BY ADOPTING THE CPM. THE ASSESSEE EXPLAINED THAT THERE ARE VARIOUS DIFFERENCES IN THE TWO SEGMENTS IN THE FORM OF MARKETING FUNCTIONS, CR EDIT RISK, TYPES OF CUSTOMERS, ETC. ETC. AND HENCE, THE CPM COULD NOT BE APPLIED. ITAT IN PARA 50 OF THE ORDER HAS HELD THAT CONSIDERING THE DIFFERENCES IN THE FUNCTIONS PERFORMED AND THE ASSETS UTILIZED, SUITABLE ADJUSTMENTS ARE NOT POSSIBLE TO BE MADE A ND HENCE, THE CPM WAS NOT THE MOST APPROPRIATE METHOD FOR DETERMINING THE ALP. ACCORDINGLY, CONSIDERING THE PRINCIPLE LAID DOWN BY HON'BLE ITAT, THE ASSESSEE SUBMITS THAT CPM IS NOT THE MOST APPROPRIATE METHOD FOR DETERMINING THE ALP. 29 ITA NO S. 1476 /PN/2010 & 1686/PN/2011, JOHN DEERE INDIA PVT. LTD., PUNE 14.1 6 LD. AR ALSO R ELIED UPON ITAT, PUNE DECISION IN THE CASE OF ALFA LAVAL INDIA LTD. ( 149 ITD 285 ) WHEREIN SIMILAR ISSUE WAS INVOLVED. IN THAT CASE, THE ASSESSEE HAD ADOPTED TNMM AS APPROPRIATE METHOD FOR DETERMINING THE ALP. HOWEVER, THE TPO REJECTED TNMM AND ADOPTED CPM. IN THAT CASE ALSO GROSS MARGIN OF THE DOMESTIC AND EXPORT SEGMENT WERE COMPARED. ITAT PUNE HELD THAT CPM WAS NOT THE MOST APPROPRIATE METHOD FOR DETERMINING THE ALP IN VIEW OF THE FACT THAT THERE WERE VARIOUS DIFFERENCES BETWEEN THE EXPORT AND DOMESTIC SE GMENT. 14.1 7 WITHOUT PREJUDICE, LD. AR SUBMITTED THAT IF AT ALL, CPM IS TO BE ADOPTED, SUITABLE ADJUSTMENTS ON ACCOUNT OF THE ABOVE DIFFERENCES MAY ALSO BE MADE . 15. THE LD. CIT (DR) SUPPORTED THE ORDERS OF THE LOWER AUTHORITIES. IT IS ARGUED BY HER TH AT THERE IS NO RES JUDICATA IN INCOME TAX PROCEEDINGS AND THEREFORE, SIMPLY BECAUSE THE TNMM WAS ACCEPTED AS THE MOST APPROPRIATE METHOD IN THE EARLIER YEARS THAT DID NOT MEAN THAT THE SAME SHOULD BE FOLLOWED IN THE CURRENT YEAR. IT IS SUBMITTED THAT EACH YEAR IS AN INDEPENDENT YEAR AND SINCE IN THIS YEAR, THE TPO HAS GIVEN ELABORATE REASONS FOR REJECTION OF TNMM , THERE IS NO REASON TO ACCEPT TNMM ON THE GROUND THAT IT IS ACCEPTED IN THE EARLIER YEARS. THE LD. CIT (DR) SUBMITTED THAT THE TPO HA S POINTED OUT THAT CPM WAS THE MOST APPROPRIATE METHOD ON THE FACTS OF THE CASE AND THEREFORE, THE SAME SHOULD BE ADOPTED FOR DETERMINING THE ALP . 15.1 LD. CIT (DR) ALSO ARGUED THAT THE COMPARABLES SELECTED BY THE ASSESSEE WERE NOT PROPER AND HENCE, THE TPO WAS JUSTIF IED IN REJECTING THE SAME. SHE PLACED RELIANCE ON THE ORDER OF THE TPO WHEREIN HE HA S GIVEN VARIOUS REASONS FOR REJECTING THE COMPARABLE COMPANIES. IT IS ARGUED BY HER THAT THE TURNOVER FILTER APPLIED BY THE TPO IS REASONABLE AND HENCE, ONLY THE COMPANIES HAVING TURNOVER IN THE RANGE OF RS. 500 30 ITA NO S. 1476 /PN/2010 & 1686/PN/2011, JOHN DEERE INDIA PVT. LTD., PUNE CRS TO RS.1000 CRS SHOULD BE SELECTED. SHE ALSO ARGUED THAT THE TPO HA S HIGHLIGHTED THAT SOME OF THE COMPANIES WERE NOT FUNCTIONALLY COMPARABLE WITH THE ASSESSEE COMPANY AND HENCE, THE SAME ARE TO BE OMITTED AS COMPAR ABLE ENTITIES. 15.2 AS REGARDS THE ADOPTION OF CPM, THE L D. CIT ( DR ) ARGUED THAT ON THE FACTS OF THE CASE, CPM IS THE MOST APPROPRIATE METHOD AND THE SAME IS ALSO CLARIFIED BY THE TPO. IT IS SUBMITTED BY LD. CIT (DR) THAT COMPARABILITY OF THE GROSS MARGIN S OF THE TWO SEGMENTS WOULD PROVIDE BETTER PICTURE AND HENCE, CPM IS RIGHTLY ADOPTED BY THE TPO AS THE MOST APPROPRIATE METHOD. 15.3 LD. CIT (DR) FURTHER ARGUED THAT NO ADJUSTMENT ON ACCOUNT OF THE VARIOUS DIFFERENCES BETWEEN THE EXPORT AND DOMESTIC SEGME NTS SHOULD BE ALLOWED. IT WAS SUBMITTED THAT TH O SE DIFFERENCES DO NOT AFFECT THE GROSS MARGINS AND THEREFORE, THE TPO WAS JUSTIFIED IN DISALLOWING THE ADJUSTMENTS ON ACCOUNT OF DIFFERENCES POINTED OUT BY THE ASSESSEE. THE LD. CIT (DR) ALSO ARGUED THAT CPM IS THE DIRECT METHOD AND HENCE, PREFERENCE TO THE SAME SHOULD BE GIVEN AS AGAINST TNMM WHICH IS AN INDIRECT METHOD FOR DETERMINING THE ALP. ACCORDINGLY, IT IS SUBMITTED BY LD. CIT (DR) THAT TNMM IS RIGHTLY REJECTED BY THE TPO AND THE ADDITION MADE IS JUSTI FIED ON THE FACTS OF THE CASE. 16. WE HAVE HEARD THE RIVAL SUBMISSIONS OF THE PARTIES AND PERUSED THE RECORD. WE HAVE ALSO CONSIDERED ALL THE DECISIONS AND PRECEDENTS RELIED ON BY BOTH THE PARTIES. ON THIS GROUND THERE ARE TWO SUB ISSUES FIRST IS REJE CTION OF THE TNMM METHOD ADOPTED BY THE ASSESSEE AND SUBSTITUTING THE SAID METHOD WITH CUP BY THE TPO/DRP AND SECOND ISSUE IS IN RESPECT OF THE ALP ADJUSTMENT MADE BY THE ASSESSING OFFICER. IN THIS CASE , THE ALP ADJUSTMENT IS MADE ONLY TO THE EXPORT OF TR ACTORS AND IN RESPECT OF OTHER REPORTED TRANSACTIONS THE ASSESSING OFFICER HAS 31 ITA NO S. 1476 /PN/2010 & 1686/PN/2011, JOHN DEERE INDIA PVT. LTD., PUNE ACCEPTED THE METHOD ADOPTED BY THE ASSESSEE AS WELL AS DETERMINATION OF THE ALP AS PER THE T.P. STUDY FILED BY THE ASSESSEE. THE CONTENTION OF THE ASSESSEE IS THAT IT HAD EXPOR TED TRACTORS TO AES FOR LAST SEVERAL YEARS AND THE ASSESSEE HAS ADOPTED TNMM METHOD AS THE MOST APPROPRIATED METHOD FOR DETERMINING THE ALP IN RESPECT OF THE TRANSACTION OF EXPORT OF TRACTORS TO THE AES FROM A.Y. 2004 - 05. THE SAID CONTENTION OF THE ASSESS EE HAS NOT BEEN DISPUTED BEFORE US BY THE REVENUE . ADMITTEDLY, FOR ALL THOSE ASSESSMENT YEARS STARTING FROM 200 4 - 05 ONWARDS AND ALSO FOR THE A.Y. 2008 - 09 THE ASSESSING OFFICER HAS ACCEPTED THE TNMM METHOD AS A MOST APPROPRIATE METHOD FOR DETERMINING THE A LP IN RESPECT OF THE SALE OF TRACTORS BY THE ASSESSEE TO THE AES. THE ASSESSEE HAS FILED THE COPIES OF THE ASSESSMENT ORDER FOR THE A.YS. 2004 - 05 AND 2005 - 06 WHICH ARE PLACED IN THE COMPILATION (PAGE NOS. 282 - 285 OF THE P/B - 2). THE ASSESSEE HAS ALSO FI LED THE TPOS ORDER FOR THE A.Y. 2008 - 09 WHICH IS PLACED AT PAGE NOS. 353 354 OF THE P/B - 2 . T HOUGH THE TPO/DRP HAS GONE ON DISCUSSING THE PROVISIONS OF LAW BUT HAVE CONVENIENTLY IGNORED TO PUT OF RECORD HOW THE FACTS OF THE CURRENT YEAR ARE DIFFERENT FR OM THE FACT IN A.YS. 2004 - 05 AND 2005 - 06 AS IN THOSE YEARS THE TNMM WAS ADOPTED BY THE ASSESSE FOR DETERMINING THE ALP WHICH HAS BEEN ACCEPTED AS A MOST APPROPRIATE METHOD BY THE TPO WITHOUT ANY OBJECTION OR RESERVATION . THE ASSESSEE HAS ALSO FILED THE CO PY OF THE TPO ORDER FOR THE A.Y. 2008 - 09 WHICH IS ALSO PLACED AT PAGE NOS. 353 354 OF THE P/B - 2. 17. THERE IS NO DISPUTE ON THE PROPOSITION THAT THE DOCTRINE OF THE RES JUDICATA IS NOT APPLICABLE TO TAX PROCEEDINGS BUT AT THE SAME TIME IF THERE IS NO CHANGE OF THE FACTS IN RESPECT OF THE A PARTICULAR ISSUE AND THE REVENUE HAS A PARTICULAR APPROACH OR METHOD TO DETERMINE THE TAXABILITY THEN THERE MUST BE CONSISTENCY AND THIS VIEW IS EXPRESSED BY THE HON'BLE SUPREME COURT IN THE CASE OF RADHASOAMI SATSAN G VS. CIT 193 ITR 321 (SC). IT IS ALSO CERTAINLY STRANGE THAT IN THE A.Y. 2008 - 09 THE TPO HAS 32 ITA NO S. 1476 /PN/2010 & 1686/PN/2011, JOHN DEERE INDIA PVT. LTD., PUNE AGAIN ACCEPTED THE TNMM METHOD AS AN APPROPRIATE METHOD WHICH WAS ADOPTED BY THE ASSESSEE AND HAS NOT DISTURBED THE RESULT. WE MAY REFER HERE TO THE FEW DECISIO NS OF THE OTHER CO - ORDINATE BENCHES IN WHICH IT IS HELD THAT WHEN THE FACTS INVOLVED ARE SIMILAR IN VARIOUS YEARS AND THE REVENUE HAS ACCEPTED THE METHOD ADOPTED BY THE ASSESSEE IN SOME YEARS THEN THERE IS NO REASON TO TAKE A DIFFERENT STAND IN THE SUBSEQU ENT YEARS WITHOUT EXPLAINING THE REASONS HOW THE FACTS IN THE SAID YEAR ARE DIFFERENT THAN THE PRECEDING YEARS : I. ALFA LAVAL (I) LTD. 149 ITD 285 (PUNE). II. H.A. SHAH & CO. VS. CIT 30 ITR 618 (BOM). III. BRINTONS CARPETS ASIA (P) LTD. 139 TTJ 177 (PUNE) IV. DRILBITS INT ERNATIONAL PVT. LTD. 62 DTR 171 (PUNE). V. AGILITY LOGISTICS (P) LTD. 145 ITD 566 (MUM). VI. SKOL BREWERIES LTD. 153 TTJ 257 (MUM). 18. NOW, LET US LOOK INTO THE T.P. STUDY REPORT FILED BY THE ASSESSEE BEFORE THE TPO. THE TPO HAS REJECTED THE COMPA RABLE ENTITIES SELECTED BY THE ASSESSEE COMPANY. IT IS SEEN THAT IN THE A.Y. 2005 - 06 OUT OF THE 8 COMPARABLE SELECTED BY THE ASSESSEE, 7 COMPARABLE WERE COMMON AND THE TPO HAS NOT DISPUTED THOSE IN THAT YEAR. IN THIS YEAR, THE TPO EXPRESSED THE RESERVATI ON ON THE COMPARABLE SELECTED BY THE ASSESSEE TO SUPPORT HIS WORKING OF THE ALP. THERE CAN NOT B E TWO STANDARDS FOR THE ASSESSING OFFICER ONE STANDARD IN ONE ASSESSMENT YEAR AND DIFFERENT STANDARD IN THE SUBSEQUENT YEAR WITHOUT EXPLAINING HOW FACTS DIFFER . IT IS SEEN THAT THE TPO HAS GONE ON THE TURNOVER FOR REJECTING THE COMPARABLE OF THE ASSESSEE BUT IN THE PRECEDING YEAR A.Y. 2005 - 06 THE TPO HAD ACCEPTED THE VERY SAME COMPANIES AS COMPARABLE. IF TPO DESIRES TO REJECT THE COMPARABLE AS THERE IS A CHANGE IN THE PARAMETERS OR FAR ANALYSIS THEN HE SHOULD HAVE BROUGHT ON RECORD HOW THE PARAMETERS OF THE FAR ARE DIFFERENT IN THIS YEAR AS COMPARED TO A.Y. 2005 - 06. THERE IS A MERIT IN THE CONTENTION OF THE ASSESSEE THAT THE 33 ITA NO S. 1476 /PN/2010 & 1686/PN/2011, JOHN DEERE INDIA PVT. LTD., PUNE TRACTORS SEGMENT IS NICHE SEGMENT AN D THERE IS NO MUCH DIFFERENCE IN THE TURNOVER OF THE COMPARABLE ENTITIES SELECTED BY THE ASSESSEE. 1 9. THE TPO HAS EXPRESSED HIS RESERVATION ON THE ESCORTS LTD. AND HMT LTD. COMPARABLE SELECTED BY THE ASSESSEE ON THE GROUND THAT THOSE TWO COMPANIES HAVE INCURRED LOSSES. IT IS SEEN THAT IN THE A.Y. 2005 - 06 THOSE TWO COMPANIES HAS INCURRED THE LOSSES BUT IN SPITE OF THE LOSSES IN THAT YEAR , THE TPO HAS NOT REJECTED THOSE TWO COMPANIES AS A COMPARABLE. WE FAIL TO UNDERSTAND WHY THERE IS INCONSISTENCY APPR OACH OF THE TPO IN THE NEXT ASSESSMENT YEAR I.E. A.Y. 2006 - 07 WHICH IS BEFORE US , E VEN THOUGH THERE IS NO CHANGE IN THE PARAMETERS OF THE FAR. THE LD. COUNSEL ARGUES THAT THOSE TWO COMPANIES HAD INCURRED LOSSES IN THEIR NORMAL DAY TO FUNCTIONING AND THE L OSSES WERE NOT ON ACCOUNT OF ANY EXCEPTIONAL FACTORS. IN OUR OPINION THE APPROACH OF THE TPO IN RESPECT OF THOSE TWO COMPARABLE COMPANIES SELECTED BY THE ASSESSEE IS ERRONEOUS AND THERE IS NO JUSTIFICATION FOR THE TPO TO REJECT THOSE TWO COMPARABLE. THE TPO HAS ALSO OBJECTED TO THE INCLUSION OF ANOTHER ENTITY I.E. KERALA AGRO MACHINERY CORPORATION LTD. (KAMCL) ON THE GROUND THAT THE SAID COMPANY IS MANUFACTURING POWER TILLERS AND POWER REAPERS AND NOT ENGAGED IN THE BUSINESS OF MANUFACTURING TRACTORS. AC CORDING TO THE TPO THE SAID COMPANY CANNOT BE CONSIDERED AS A COMPARABLE FOR DETERMINING THE ALP IN THE CASE OF THE ASSESSEE. THE TPO HAS ALSO STATED THAT KAMCL IS A PSU AND HENCE, ON THE POINT OF MANAGEMENT , THE TPO EXPRESSED HIS RESERVATION TO ACCEPT TH E SAID COMPANY AS A COMPARABLE. IN RESPECT OF HMT LTD. , THE TPO STATES THAT THE SAID COMPANY IS NOT ONLY MANUFACTURING OF TRACTORS BUT ALSO ENGAGED IN OTHER ACTIVITY. THE TPO HAS FURTHER NOTED THAT VST TILLERS IS ALSO ENGAGED IN DIFFERENT BUSINESS AND TH EREFORE AND CANNOT BE ACCEPTED AS A COMPARABLE. ON ONE MORE COMPARABLE ENTITY I.E. A ESCORTS LTD. THE TPO HAS STATED THAT ESCORT IS ALSO SELLING FARM EQUIPMENTS ALONG WITH 34 ITA NO S. 1476 /PN/2010 & 1686/PN/2011, JOHN DEERE INDIA PVT. LTD., PUNE TRACTORS AND THEREFORE THE SAID COMPANY CANNOT BE CONSIDERED AS A COMPARABLE ENTITY . 20. THE MAIN OBJECTION OF THE ASSESSEE IS ON THE APPROACH OF THE TPO IT IS SUBMITTED THAT IN THE PRECEDING YEAR THE TPO ACCEPT THOSE COMPANIES AS A COMPARABLE HAVE DETERMINING THE ALP WHEN IN THAT YEAR ALSO ALL THE FACTS AND FIGURES WERE BEFORE HIM IN T HE A.Y. 2006 - 07 THE TPO ADOPT THE DIFFERENT APPROACH. IN RESPECT OF THE RESERVATION OF THE TPO TO ACCEPT THE ESCORTS AS A COMPARABLE , THE ASSESSEES CONTENTION IS THAT THE MAIN BUSINESS IS OF SELLING TRACTORS AND HENCE, THE ASSESSEE HAS CONSIDERED SAID CO MPANY AS A COMPARABLE ENTITY AND THIS WAS DEMONSTRATED BEFORE THE TPO ALSO. IN RESPECT OF THE HMT ALSO THE TURNOVER OF THE TRACTORS ACCOUNTS FOR 90% OF THE TOTAL TURNOVER HENCE , EVEN IN THE BUSINESS OF THE SEGMENTAL RESULTS HMT SHOULD BE CONSIDERED AS A C OMPARABLE ENTITY. THE ALTERNATE CONTENTION OF THE ASSESSEE IS THAT EVEN IF THE TPO IS CORRECT WITH REGARD TO THE FOUR COMPANIES CITED (SUPRA) BUT STILL BALANCE FOUR COMPANIES ARE COMPARABLE TO THE ASSESSEE COMPANY AND IN THE SAME BUSINESS AS NO SPECIFIC O BJECTION IS NOTED BY THE TPO, THOSE COMPANIES SHOULD BE CONSIDERED AS COMPARABLE. THE ASSESSEE STATES THAT NET OPERATING MARGINS (NOM) OF THE BALANCE FOUR COMPANIES IS WITHIN PLUS OR MINUS 5% OF THE NET OPERATING MARGIN OF THE EXPORT SEGMENT AND HENCE, TH E TRANSACTIONS ARE AT ALP . THE ASSESSEE HAS FILED THE WORKING ON THE ABOVE CONTENTION WHICH IS AS UNDER: SR. NO. NAME OF THE COMPANY NET OPERATING MARGIN 1 TRACTORS & FARM TRACTOR LTD. 11.90% 2 MAHINDRA & MAHINDRA LTD. 8.65% 3 PUNJAB TRACTORS LTD. 11.50% 4 INTERNATIONAL TRACTORS LTD. 15.41% AVERAGE NET OPERATING MARGIN 11.87% NET OPERATING MARGIN OF EXPORT SEGMENT 11.17% 35 ITA NO S. 1476 /PN/2010 & 1686/PN/2011, JOHN DEERE INDIA PVT. LTD., PUNE 21. IT IS SEEN THAT OUT OF THE 8 COMPANIES SELECTED AS A COMPARABLE IN THIS YEAR I.E. A.Y. 2006 - 07, 7 COMPANIES WERE ALSO S ELECTED IN A.Y. 2005 - 06 AND ONLY KAMCL IS ADDED AS A NEW COMPARABLE COMPANIES IN THIS YEAR. ON PERUSAL OF THE DATA IN OUR OPINION KAMCL CANNOT BE CONSIDERED AS A COMPARABLE IN THE A.Y. 2006 - 07 AS SAID COMPANY IS NOT ADMITTEDLY IN THE BUSINESS OF MANUFACTU RING TRACTORS. BUT IN RESPECT OF THE REMAINING 7 COMPANIES AS PER THE DATA PLACED BEFORE US , ALL THOSE COMPANIES ARE IN THE LINE OF SAME BUSINESS I.E. TRACTOR MANUFACTURING . IF W E PUT THE REMAINING 7 COMPANIES SELECTED BY THE ASSESSEE , THE PICTURE IS AS U NDER: SR. NO. NAME OF THE COMPANY OPERATING TURNOVER PROFIT MARGIN 1 ESCORTS LTD. 1320.32 - 12.02% 2 TRACTORS & FARM TRACTOR LTD. 1391.20 11.90% 3 MAHINDRA & MAHINDRA LTD. 3441.82 8.65% 4 VST TILLERS TRACTORS LTD. 131.14 9.40% 5 PUNJAB TRACTORS LTD. 958.55 11.50% 6 INTERNATIONAL TRACTORS LTD. 953.25 15.41% 7 HMT LTD. 281.24 - 4.84% AVERAGE 5.71 THE AVERAGE OPERATING MARGIN OF 7 COMPANIES IS AT 5.71% AS AGAINST 11.17% OF THE EXPORT SEGMENT OF THE ASSESSEE COMPANY. IT IS ALSO SEEN THAT THE ASSES SEE HAS SHARE IN THE SALE OF TRACTORS IN DOMESTIC MARKET ALSO. WE, ACCORDINGLY, HOLD THAT THE TRANSACTION OF EXPORT OF TRACTORS TO ITS AES IS AT ALP WITHIN THE SETTLE PARAMETERS. 22. LET US DEAL WITH ANOTHER OBJECTION OF THE TPO ON THE APPROPRIATE METHO D WHETHER THE TNMM WHICH IS ADOPTED BY THE ASSESSEE IS A CORRECT APPROPRIATE METHOD OR CUP WHICH IS APPLIED BY THE TPO. THIS ISSUE STANDS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE ITAT, PUNE IN THE CASE OF DRILL BITS INTERNATIONAL PVT. LTD. (SUPRA). IN THE SAID 36 ITA NO S. 1476 /PN/2010 & 1686/PN/2011, JOHN DEERE INDIA PVT. LTD., PUNE CASE THE TPO HAD REJECTED TNMM METHOD AND HAD COMPUTED THE ALP BY ADOPTING THE CPM. THE ASSESSEE EXPLAINED THAT THERE ARE VARIOUS DIFFERENCES IN THE TWO SEGMENTS IN THE FORM OF MARKETING FUNCTIONS, CREDIT RISK, TYPES OF CUSTOMERS, E TC. ETC. AND HENCE, THE CPM COULD NOT APPLIED. THE TRIBUNAL HELD THAT CONSIDERING THE DIFFERENCES IN THE FUNCTIONS PERFORMED AND THE ASSETS UTILIZED, SUITABLE ADJUSTMENTS ARE NOT POSSIBLE TO BE MADE AND HENCE, THE SAID CASE CPM WAS NOT THE MOST APPROPRIAT E METHOD FOR DETERMINING THE ALP. T HE OPERATING PART OF THE DISCUSSION IN THE SAID DECISION IS AS UNDER : 50. CONSIDERING THE ABOVE SUBMISSIONS, VIS - - VIS THE METHOD I.E. CPM (COST PLUS METHOD) ADOPTED BY THE LEARNED TPO TO DETERMINE THE ALP, WHICH HAS BE EN RELIED UPON BY THE LEARNED DEPARTMENTAL REPRESENTATIVE, WE FIND THAT THE LEARNED TPO WHILE ADOPTING CPM HAS FAILED TO APPRECIATE SEVERAL MATERIAL ASPECTS OF THE ISSUE AS DISCUSSED ABOVE. IN OUR VIEW, THE LEARNED TPO WAS NOT JUSTIFIED IN COMPARING THE GR OSS MARGIN IN EXPORT SEGMENT VIS - A - VIS GROSS MARGINS IN DOMESTIC SEGMENT. THERE ARE VARIOUS DIFFERENCES IN THE FUNCTIONS PERFORMED AND THE RISK ASSUMED IN THESE TWO SEGMENTS AND THEREFORE, THE SAME CANNOT BE CONSIDERED AS COMPARABLE CASES FOR DETERMINING T HE ALP. THERE IS NO MARKETING RISK IN THE EXPORT SEGMENT, NO RISK OF BAD DEBTS, NO PRODUCT LIABILITY RISK IN EXPORT SEGMENTS WHEREAS THE ASSESSEE HAS TO BEAR ALL THESE RISKS IN THE DOMESTIC SEGMENT. THE CONTRACTUAL STATEMENTS ALSO DEFER IN THE DOMESTIC SEG MENT VIS - A - VIS EXPORT SEGMENTS. THERE ARE DIFFERENT CHARACTERISTICS AND CONTRACTUAL TERMS IN THE TWO SEGMENTS AND FURTHER GEOGRAPHICAL AND MARKED DIFFERENCES ARE ALSO PRESENT. THUS, WE ARE OF THE VIEW THAT IT IS VERY DIFFICULT TO MAKE SUITABLE ADJUSTMENTS FOR THESE DIFFERENCES, HENCE THE CMA METHOD IS NOT APPROPRIATE METHOD FOR DETERMINING THE ALP. THE LEARNED TPO, IN OUR VIEW, HAS THUS ERRED IN ADOPTING THE CMA METHOD AS APPROPRIATE METHOD. 51. WE ALSO FIND SUBSTANCE IN THE ALTERNATIVE PLEA OF THE LEARNED AUTHORISED REPRESENTATIVE IN THE DEFECTIVE WORKING OUT OF THE TOTAL OF PRODUCTION OF THE GOODS SOLD TO THE AE BY THE LEARNED TPO. THE LEARNED TPO HAS COMPUTED GROSS PROFIT MARGINS IN THE DOMESTIC 37 ITA NO S. 1476 /PN/2010 & 1686/PN/2011, JOHN DEERE INDIA PVT. LTD., PUNE SEGMENT AT 23.54 PER CENT WHILE IN THE EXPORT SEGMENT AT 5. 42 PER CENT. THE DIFFERENCE BETWEEN THE TWO HAS BEEN CALCULATED AT 18.12 PER CENT AND THE SAME IS EMPLOYED TO THE TOTAL COST OF PRODUCTION OF THE GOODS SOLD TO THE AE AND ADDITION OF RS. 58,54,128 HAS BEEN MADE. IN THIS WORKING, THE LEARNED TPO HAS FAILED TO APPRECIATE THAT DURING THE YEAR, THE ASSESSEE HAS PAID PROCESSING CHARGES TO THE LOCAL CONTRACTORS OF RS. 16,98,742 I.E. IN RESPECT OF PRODUCTS SOLD IN THE DOMESTIC SEGMENT, HENCE THE SAME SHOULD NOT HAVE BEEN ALLOCATED TO THE EXPORT SEGMENT. BESIDES, T HERE IS NO REASON TO DOUBT THE SUBMISSION OF THE ASSESSEE THAT MAJOR TIME OF THE JUNIOR AND SERIOR STAFF IS UTILIZED FOR THE DOMESTIC SEGMENT SINCE WHILE DEALING WITH VARIOUS PUBLIC SECTOR UNITS BY THE ASSESSEE SEVERAL FOLLOW UPS LIKE COLLECTION OF THE ORD ERS, PHYSICAL DESPATCH OF GOODS, FOLLOW UP FOR THE PAYMENT ETC., ARE REQUIRED TO BE DONE, HENCE MAJOR PART OF THE TOTAL EXPENDITURE IS TO BE ALLOCATED TO THE DOMESTIC UNIT AND BALANCE TO THE EXPORT SEGMENTS. WE ARE THUS OF THE VIEW THAT LEARNED TPO WAS NOT JUSTIFIED IN REJECTING SUCH SUBMISSION OF THE ASSESSEE TREATING THE SAME AS HAVING NO BASIS. IN OUR VIEW, THE APPORTIONMENT OF THESE COSTS IS JUSTIFIED BECAUSE MAJOR TIME OF THE EMPLOYEES IS DEVOTED TOWARDS THE DOMESTIC SEGMENT. WE ALSO FIND SUBSTANCE IN THE SUBMISSION OF THE LEARNED AUTHORISED REPRESENTATIVE THAT ASSESSEE HAS ALSO TO INCUR SELLING AND ADMINISTRATIVE EXPENSES, FREIGHT EXPENSES, BANK INTERESTS ETC., WHICH CANNOT BE IGNORED AS ULTIMATELY THE INCOME - TAX IS LEVIED ON NET PROFIT AND THEREFORE, COMPARISON OF THE NET PROFIT OF THE DOMESTIC EXPORT SEGMENT IS MORE PROPER. THE ASSESSEE AT PAGE NO. 141 OF THE PAPER BOOK HAS GIVEN WORKING OF THE NET PROFIT OF THE TWO DIVISIONS AS PER WHICH, THE NET PROFIT OF THE DOMESTIC SEGMENT IS 13.04 PER CENT AND T HAT OF THE EXPORT SEGMENT IS 12.55 PER CENT. WE FIND THAT THERE IS HARDLY ANY DIFFERENCE BETWEEN TWO SEGMENTS. WE ALSO FIND SUBSTANCE IN THE SUBMISSION OF THE LEARNED AUTHORISED REPRESENTATIVE THAT IN RESPECT OF TRANSACTION WITH AE, THE ASSESSEE ALSO DOES NOT HAVE TO BEAR BAD DEBT RISKS, PRODUCT/WARRANTY RISKS ETC., HENCE SOME PERCENTAGE OF REDUCTION SHOULD HE GIVEN IN THE MARGIN COMPUTED FOR THE DOMESTIC SEGMENT FOR THE ABOVE RISK. 52. CONSIDERING THE ABOVE MATERIAL FACTS IN TOTALITY, WE ARE OF THE VIEW T HAT THE LEARNED TPO WAS NOT JUSTIFIED IN ADOPTING THE CPM AS THE MOST APPROPRIATE METHOD. ON THE BASIS THAT THE ASSESSEE HAD A JOINT FACILITY ARRANGEMENT OR A LONG - TERM BUY AND SUPPLY 38 ITA NO S. 1476 /PN/2010 & 1686/PN/2011, JOHN DEERE INDIA PVT. LTD., PUNE ARRANGEMENT WITH ITS AE, AS WE HAVE DISCUSSED HEREINABOVE, WE FIND THAT THERE WAS NO SUFFICIENT REASONS WITH THE LEARNED TPO TO REJECT CUP METHOD OR TNMM ADOPTED BY THE ASSESSEE TO DETERMINE THE ARMS LENGTH PRICE (ALP). WE THUS HOLD THAT THE ADDITION MADE BY THE LEARNED TPO AS A RESULT OF INCORRECT APPLICATION OF CPM IS NOT J USTIFIED. IT IS PERTINENT TO NOTE THAT IN THE SUCCEEDING ASST. YR. 2007 - 08, THE ASSESSEE HAS ADOPTED TNMM FOR DETERMINING THE ALP, WHICH HAS BEEN ACCEPTED BY THE LEARNED TPO. IN THE CASE OF BRINTONS CARPETS ASIA (P) LTD. VS. DY. CIT (SUPRA), PUNE BENCH OF THE TRIBUNAL HAS FOLLOWED THE DECISION OF MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF ASSTT. CIT VS. NGC NETWORK (INDIA) (P) LTD. ITA NO. 5307/MUM/2006, DT. 23RD FEB., 2011 (PARA 15) [REPORTED AT (2011) 56 DTR (MUMBAI)(TRIB) 1 ED.] ON THE RULE OF CONSISTEN CY AND NEED FOR NOT TAKING THE DOMESTIC COMPARABLES AND NEED FOR TAKING UP THE EXTERNAL COMPARABLE IN MATTERS OF THE TRANSFER PRICING ADJUSTMENTS. IT WAS HELD FURTHER THAT THE UNCONTROLLED TRANSACTIONS AND THE EXTERNAL COMPARABLES WHICH WAS ADOPTED BY TH E OFFICER IN SUBSEQUENT YEAR HOLDS RELEVANT FOR CURRENT ASSESSMENT YEAR AS WELL. WE THUS WHILE SETTING ASIDE ORDER IN QUESTION OF THE LEARNED TPO, DIRECT THE LEARNED TPO TO ACCEPT CLAIM OF THE ASSESSEE REGARDING THE ALP BASED ON TNMM. THE ISSUE RAISED IN T HE RELATED GROUNDS IS DECIDED IN FAVOUR OF THE ASSESSEE. 23. THE LD. COUNSEL HAS ALSO PLACED HIS RELIANCE ON THE DECISION OF THE ITAT, PUNE IN THE CASE OF ALFA LAVAL (I) LTD. (SUPRA). IN THE SAID CASE ALSO THE ASSESSEE HAD EXPORTED INDUSTRIAL PRODUCTS T O ITS AES AS WELL AS SOLD IN THE DOMESTIC MARKET. THE ASSESSEE HAD ADOPTED TNMM BUT THE SAID METHOD WAS REJECTED BY THE TPO, AND TPO SUBSTITUTED CPM IN THE PLACE OF TNMM. WHEN THE MATTER REACHED BEFORE THE TRIBUNAL IT IS HELD THAT CPM CANNOT BE APPLIED S INCE THERE WERE VARIOUS DIFFERENCES IN THE EXPORT SEGMENT AND DOMESTIC SEGMENT SUCH AS MARKET FUNCTIONS, GEOGRAPHIC DIFFERENCE, VOLUME DIFFERENCE, CREDIT RISK, RELATED PARTY TRANSACTIONS ETC. IN OUR OPINION THE SAID PRINCIPLES ARE CLEARLY APPLICABLE IN TH E PRESENT CASE. AS WE HAVE ALREADY OBSERVED THAT THE ASSESSEE HAS ALSO SHARE IN THE DOMESTIC MARKET AND WE AGAIN COMPARED THE PARAMETERS OF THE 39 ITA NO S. 1476 /PN/2010 & 1686/PN/2011, JOHN DEERE INDIA PVT. LTD., PUNE DOMESTIC MARKET WITH THE EXPORT MARKET AS THERE IS A DIFFERENCE IN THE EXPORT SEGMENT AND DOMESTIC SEGMENT ON A CCOUNT OF CREDIT RISKS, MARKETING, WARRANTY, ETC. ETC. WE, THEREFORE, HOLD THAT ON PRINCIPLES AS WELL AS ON THE RULE OF CONSISTENCY , THE TPO /DRP ARE NOT JUSTIFIED IN HOLDING THAT THE CPM IS AN APPROPRIATE METHOD FOR DETERMINING THE ALP IN RESPECT OF EXPOR T OF THE TRACTORS TO THE AES AND WE APPROVE TNMM AS A MOST APPROPRIATE METHOD ADOPTED BY THE ASSESSEE FOR DETERMINING THE ALP. WE ALSO HOLD THAT EVEN AFTER EXCLUDING KAMCL THE AVERAGE OPERATING PROFIT MARGIN OF THE 7 COMPANIES ARE AT 5.71% AS AGAINST THE 11.70% OF THE EXPORT SEGMENT OF THE ASSESSEE COMPANY. THE ALP DECLARED BY THE ASSESSEE IS WELL WITHIN THE LIMIT. WE, ACCORDINGLY, HOLD SO. IN THE RESULT, THE GROUND NO. 4 IS ALLOWED. 24. NOW, WE TAKE UP THE ASSESSEES APPEAL FOR THE A.Y. 2007 - 08 BEIN G ITA NO. 1686/PN/2011. THE ASSESSEE HAS FILED THE CONCISE GROUNDS. GROUND NO. 1 READS AS UNDER: 1. THE LEARNED A.O. / DRP ERRED IN HOLDING THE SALE TAX / P URCHASE TAX SUBSIDY OF RS. 9,51,40,606/ - RECEIVED BY THE ASSESSEE FROM SICOM AS A REVENUE RECEIPT ON T HE GROUND THAT THE SUBSIDY GIVEN WAS FOR INCREASING THE PROFITABILITY OF THE ASSESSEE. 25. THE FACTS WHICH REVEALED FROM THE RECORD AS UNDER. THE ASSESSEE HAD ESTABLISHED AN UNIT AT SANASWADI NEAR PUNE IN 1998. THE GOVERNMENT OF MAHARASHTRA HAD INTRODU CED A MAHARASHTRA'S '1993 PACKAGE SCHEME OF INCENTIVES' . THIS SCHEME WAS INTRODUCED FOR GIVING INCENTIVE TO THE UNITS FOR SETTING UP UNITS IN BACKWARD AREAS. AS PER THIS SCHEME, THE ASSESSEE WAS ELIGIBLE FOR EITHER SALES TAX AND PURCHASE TAX EXEMPTION OR DEFERMENT OF THE SALES TAX AND PURCHASE TAX PAYMENT COLLECTED BY THE UNITS FOR A PERIOD OF 15 YEARS. INITIALLY, THE ASSESSEE OPTED FOR DEFERRAL SCHEME. AS PER THE SCHEME, THE ASSESSEE WAS AUTHORIZED TO COLLECT SALES TAX BUT PAYMENT WAS TO BE MADE AFTER 15 40 ITA NO S. 1476 /PN/2010 & 1686/PN/2011, JOHN DEERE INDIA PVT. LTD., PUNE YEARS. LATER ON, IN SEPTEMBER, 2001, THE ASSESSEE SHIFTED FROM DEFERRAL SCHEME TO EXEMPTION SCHEME. ACCORDINGLY, THE ASSESSEE WAS ENTITLED TO EXEMPTION FROM PAYMENT OF SALES TAX AND PURCHASE TAX. THUS, THE ASSESSEE BY OPTING FOR EXEMPTION OPTION WAS EXEMPT ED FROM ITS SALES TAX AND PURCHASE TAX LIABILITY. THE ASSESSEE TREATED THE SALES TAX AND PURCHASE TAX SUBSIDY OF RS.9,51,40,606 / - AS A CAPITAL RECEIPT IN ITS RETURN OF INCOME FOR A . Y . 2007 - 08, BUT THE ASSESSING OFFICER HELD THAT THE SALE TAX/PURCHASE TAX S UBSIDY WAS A REVENUE RECEIPT/REASON FOR SUCH CHANGE IN CHARACTER OF INCOME WAS BECAUSE THE SUBSIDY GIVEN WAS FOR INCREASING THE PROFITABILITY OF THE ASSESSEE. THE DRP CONFIRMED THE ACTION OF THE ASSESSING OFFICER. 26. WE HAVE HEARD THE PARTIES. ON THE I DENTICAL SET OF FACTS , WE HAVE DECIDED THE SAME ISSUE IN THE A.Y. 2006 - 07. WE, THEREFORE, TO AVOID THE REPETITION ADOPT THE REASONS GIVEN BY US IN THE A.Y. 2006 - 07 FOR DECIDING THIS ISSUE IN FAVOUR OF THE ASSESSEE. WE HOLD THAT THE SALES TAX / PURCHASE TAX SUBSIDY RECEIVED BY THE ASSESSEE UNDER THE 1993 PACKAGE SCHEME OF INCENTIVE IS IN THE NATURE OF THE CAPITAL RECEIPT AND CANNOT BE TAXED UNDER THE CHARGING PROVISIONS OF THE INCOME - TAX ACT. ACCORDINGLY, GROUND NO. 1 IS ALLOWED. 2 7 . GROUND NO. 2 READS AS UNDER: 2. THE LEARNED A.O. / DRP ERRED IN RECOMPUTING THE TRANSFER PRICE OF THE INTERNATIONAL TRANSACTIONS RELATING TO EXPORTS OF TRACTORS DESPITE THE FACT THAT NONE OF THE CONDITIONS AS PRESCRIBED IN SECTION 92C(3) OF THE INCOME TAX ACT, 1961 ('THE ACT') , HAD BEEN VIOLATED BY THE APPELLANT. THUS, THE A.O. / DRP ERRED IN MAKING AN ADDITION OF RS. 48,39,38,670/ - U/S 92C ON THE BASIS OF THE ORDER OF THE TPO U/S 92CA(3) DATED 21.10.2009 IN THE CASE OF THE APPELLANT COMPANY. 2 8 . THE ASSESSEE HAD CONSIDERED TNMM AS THE MOST APPROPRIATE METHOD FOR DETERMINING THE ALP FOR INTERNATIONAL TRANSACTIONS RELATING TO 41 ITA NO S. 1476 /PN/2010 & 1686/PN/2011, JOHN DEERE INDIA PVT. LTD., PUNE EXPORTS OF TRACTORS. FOR DETERMINING ALP, THE ASSESSEE COMPANY HAD CONSIDERED THE FOLLOWING COMPANIES AS COMPARABLE ENTITIES: S. NO. NAME OF THE COMPANY 1 ESCORTS LTD. 2 TRACTORS & FAR EQUIPMENT LTD. 3 MAHINDRA & MAHINDRA LTD. 4 VST TILLERS TRACTORS LTD. 5 PUNJAB TRACTORS 2 9. THE PLI TAKEN FOR THE PURPOSE BY THE ASSESSEE WAS NET OPERATING PROFIT MARGIN (0PM) TO TOTAL SALES. IT WAS CONTENDED BY THE A SSESSEE COMPANY THAT ITS PLI WAS MUCH MORE THAN THE AVERAGE 0PM OF THE COMPARABLE ENTITIES. BASED ON THE ABOVE CALCULATIONS, THE ASSESSEE HAD SUBMITTED THAT THE INTERNATIONAL TRANSACTIONS RELATING TO EXPORT OF TRACTORS TO ITS AES WERE AT ALP. IT WAS ALSO S UBMITTED BY THE ASSESSEE THAT TNMM WAS THE MOST APPROPRIATE METHOD FOR DETERMINING THE ALP IN RESPECT OF THE INTERNATIONAL TRANSACTIONS RELATING TO EXPORT OF TRACTORS IN THE EARLIER YEARS ALSO BY THE ASSESSEE. BUT THE AO/TPO ADOPTED COST PLUS METHOD (CPM) AND MADE AN UPWARD ADJUSTMENT OF RS.49,18,60,160 / - TO THE VALUE OF THE INTERNATIONAL TRANSACTIONS RELATING TO EXPORT OF TRACTORS. THE REASON FOR ADOPTION OF CPM AS OPPOSED TO TNMM, ACCORDING TO THE ASSESSEE, WAS THAT (A) THERE WERE FUNCTIONAL AND CORRESPON DING DIFFERENCES IN ASSETS AND RISK BETWEEN THE ASSESSEE COMPANY AND THE COMPARABLE ENTITIES, AND (B) THE COMPARABLE ENTITIES HAD SUBSTANTIAL RELATED PARTY TRANSACTIONS. BUT TO THE ABOVE, THE ASSESSEE SUBMITTED THAT SIMPLY BECAUSE THERE WERE RELATED PARTY TRANSACTIONS CARRIED OUT BY THE COMPARABLE ENTITIES, THERE WAS NO REASON TO HOLD THAT THE SAID COMPANIES COULD NOT BE CONSIDERED AS COMPARABLE WITH THE ASSESSEE COMPANY. TH E ASSESSEE ALSO SUBMITTED THAT COMPARING THE GROSS MARGIN TO TOTAL COSTS OF THE DOME STIC AND EXPORT SEGMENT BY THE TPO/AO WAS ALSO NOT CORRECT . T HE TURNOVER FROM SALE OF TRACTORS IN 42 ITA NO S. 1476 /PN/2010 & 1686/PN/2011, JOHN DEERE INDIA PVT. LTD., PUNE THE DOMESTIC MARKET WAS RS.439.77 CRORES WHILE THAT OF SPARES WAS RS.28 .26 CRORES, WHEREAS THE EXPORTS BY THE ASSESSEE WERE FOR RS.3 , 73,69,21 ,591/ - AND THAT OF SPARES FOR RS.10,23,96,574 / - . THE ASSESSEE ALSO SUBMITTED THAT IT HAD BEEN CLARIFIED BEFORE THE TPO THAT THE CPM COULD NOT BE ADOPTED AS THE MOST APPROPRIATE METHOD SINCE THE GROSS PROFIT MARKUP OF THE COMPARABLE ENTITIES WAS DIFFICULT TO BE DETERMINED BECAUSE OF THE MANNER OF PRESENTATION OF THE FINANCIAL STATEMENT OF THE COMPARABLE COMPANIES. IT WAS STATED BY THE ASSESSEE THAT BECAUSE OF LACK OF PROPER INFORMATION AND ALSO ABSENCE OF ADEQUATE DETAILS FOR MAKING THE ADJUSTMENTS, THE CPM WAS NOT CONSIDE RED AS THE MOST APPROPRIATE METHOD. BUT THE TPO DID NOT AGREE WITH THE ABOVE CONTENTION AND INSTEAD STATED THAT CPM COULD BE ADOPTED FOR DETERMINING THE ALP BY CONSIDERING INTERNAL COMPARABLES, AND ALSO STATED THAT THE GROSS MARGIN OF THE DOMESTIC SEGMENT CAN BE COMPARED WITH THE GROSS MARGIN OF THE EXPORT SEGMENT. THE ASSESSEE FURTHER SUBMITTED THAT THE TPO JUSTIFIED THE ADOPTION OF CPM AS THE MOST APPROPRIATE METHOD ON THE GROUND THAT THE ASSESSEE HAD JOINT FACILITY ARRANGEMENT AND LONG TERM BUY & SUPPLY ARRANGEMENT WITH THE A E IN RESPECT OF EXPORT OF TRACTORS. IN THIS CONTEXT, THE ASSESSEE SUBMITTED THAT A JOINT FACILITY ARRANGEMENT IS WHERE A COMPANY PURCHASES SEMI - FINISHED GOODS FROM THE PRINCIPAL, CARRIES OUT OPERATIONS AND SELLS THE FINISHED GOODS BAC K TO THE PRINCIPAL, INVOLVING IN SOME CASES THE TRANSFER OR LICENSING OF INTANGIBLE PROPERTY FROM THE PRINCIPAL TO THE MANUFACTURER. JOINT FACILITY ARRANGEMENTS/LONG TERM BUY & SUPPLY ARRANGEMENTS, WHERE THE ASSOCIATED ENTERPRISE IS A CONTRACT MANUFACTURER CARRYING LOW RISKS AND CARRYING OUT LOW - LEVEL FUNCTIONS. IN SUCH CASES, TRANSFER PRICING DETERMINATION INVOLVES INTANGIBLE PROPERTY OR PRICING OF MANUFACTURING ARRANGEMENTS. BUT THERE WAS NO SUCH ARRANGEMENT BETWEEN THE ASSESSEE AND THE AES. THE SALE TO THE AES WAS PURELY GOVERNED BY THE DEMAND AND SUPPLY MECHANISM AND THERE WAS NO CONTRACT OF WHATSOEVER NATURE 43 ITA NO S. 1476 /PN/2010 & 1686/PN/2011, JOHN DEERE INDIA PVT. LTD., PUNE WHEREIN THE AES HAD AGREED TO PURCHASE A FIXED QUANTITY OF TRACTORS PRODUCED BY THE ASSESSEE COMPANY. THE ASSESSEE SOUGHT TO DEMONSTRATE THAT THRO UGH ON THE FACT THAT ITS DOMESTIC SALES WERE INCREASING YEAR - TO - YEAR AND ALSO THERE WAS CONSIDERABLE INCREASE IN THE ASSESSEE'S SHARE IN THE DOMESTIC MARKET , T HE ASSESSEE COMPANY HAD ALSO PURCHASED ITS RAW MATERIAL FROM LOCAL VENDORS AND IT WAS NOT A CASE OF JOB WORK BEING CARRIED OUT BY THE ASSESSEE FOR ITS A E S. T HE ASSESSEE ALSO STATED THAT JUST BECAUSE 48% OF THE TOTAL REVENUE OF THE ASSESSEE WAS FROM EXPORTS , IT DID NOT MEAN THAT THE ASSESSEE WAS A CONTRACT MANUFACTURER. 30. THE ASSESSEE SUBMITTED THA T IT HAD REQUESTED FOR ADJUSTMENT ON ACCOUNT OF FOLLOWING DIFFERENCES ADJUSTMENT ON ACCOUNT OF DIFFERENCE IN THE LEVEL OF VALUE CHAIN. ADJUSTMENT ON ACCOUNT OF SALES AND MARKETING FUNCTIONS AND ASSOCIATED RISKS. ADJUSTMENT ON ACCOUNT OF WARRANTY FUNCTION S AND ASSOCIATED RISKS. ADJUSTMENT ON ACCOUNT OF CREDIT TERMS AND ASSOCIATED RISKS. ADJUSTMENT ON ACCOUNT OF BAD DEBT RISKS, 31. WE HAVE HEARD THE PARTIES. IN THE A.Y. 2006 - 07 THE ASSESSING OFFICER HAS CHANGED THE TNMM APPROPRIATE METHOD ADOPTED B Y THE ASSESSEE TO CPM. IN THIS YEAR ALSO THE TP ADJUSTMENT IS MADE TO THE TRANSACTION OF EXPORT OF TRACTORS. WHILE ADJUDICATING THE ASSESSEES APPEAL FOR THE A.Y. 2006 - 07 , WE HAVE HELD THAT THE TPO WAS NOT JUSTIFIED IN CHANGING THE APPROPRIATE METHOD FRO M TNMM TO CPM AS IN THE PRECEDING YEAR S, THE TPO HAS ACCEPTED THE TNMM AS MOST APPROPRIATE METHOD. ON THE RULE OF CONSISTENCY , WE HAVE DECIDED THIS ISSUE IN FAVOUR OF THE ASSESSEE. SO FAR AS THE RESERVATION OF THE TPO ON THE COMPARABLE ENTITY SELECTED BY THE ASSESSEE COMPANY ARE CONCERNED WE HA VE HELD THAT THE OPERATIVE NET MARGIN OF PROFIT OF THE ASSESSEE IS MUCH LESSER THAN THE 44 ITA NO S. 1476 /PN/2010 & 1686/PN/2011, JOHN DEERE INDIA PVT. LTD., PUNE OPERATIVE MARGIN OF THE COMPARABLE. AS THE FACTS AS WELL AS THE REASONS OF THE TPO/DRP ARE IDENTICAL IN THIS YEAR AS IN THE A. Y. 2006 - 07, TO AVOID THE REPETITION WE ADOPT THE REASONS GIVEN IN THE A.Y. 2006 - 07 FOR HOLDING THAT TPO/DRP WERE NOT JUSTIFIED TO SWITCHOVER OF CPM AS AN APPROPRIATE METHOD IN PLACE OF TNMM ADOPTED BY THE ASSESSEE. SAME WAY SO FAR AS THE MARGIN IS CONCERN ED IN THIS YEAR ALSO WE HOLD THAT ALL THE TRANSACTIONS OF EXPORT OF THE TRACTORS TO THE AES ARE WELL WITHIN ALP AND NO ADJUSTMENT IS REQUIRED TO BE MADE. ACCORDINGLY, GROUND NO. 2 IS ALLOWED. 32. IN THE RESULT, BOTH THE APPEALS OF THE ASSESSEE ARE ALLO WED. PRONOUNCED IN THE OPEN COURT ON 20 - 0 2 - 201 5 SD/ - SD/ - ( G . S . PAN NU ) ( R.S. PADVEKAR ) ACCOUNTANT MEMBER JUDICIAL MEMBER PUNE, DATED : 20 TH FEBRUARY, 2015 RK/PS COPY TO 1 ASSESSEE 2 DEPARTMENT 3 THE DRP, PUNE 4 THE CIT/DIT (INTERNATIONAL TAXATION), PUNE 5 6 THE DR, ITAT, A BENCH, PUNE. GUARD FILE. //TRUE COPY// BY ORDER ASSISTANT REGISTRAR , INCOME TAX APPELLATE TRIBUNAL , PUNE