M/S. PRINCIPAL GLOBAL SERVICES PRIVATE LIMITED,,PUNE vs. ASSISTANT COMMISSIONER OF INCOME TAX,, PUNE

The assessee has raised the following grounds of appeal:- On the facts and in circumstances of the case and in law, the Ld. TPO/AO has erred and the Hon'ble DRP has further erred in upholding/ confirming the action of the Ld. TPO/AO in :

The issue arising in the present appeal is against transfer pricing adjustment of international transactions undertaken by the assessee with its associated enterprises.

The ground of appeal No.1 raised by the assessee is general in nature and hence, the same is dismissed.

The learned Authorized Representative for the assessee at the outset pointed out that ground of appeal No.3 is against disallowance made under section 14A of the Act, is not pressed and hence, the same is dismissed as not pressed.

Vide ground of appeal No.2, the assessee has raised several issues with regard to transfer pricing adjustment made in the hands of assessee i.e. provision of software development services to the associated enterprises, an upward adjustment of ₹ 3,21,96,321/- and pertaining to back office support services provided by the assessee to its associated enterprises at ₹ 1,47,19,984/-.

Briefly, in the facts of the case, the assessee had furnished the return of income declaring income of ₹ 11,66,71,150/-. The assessee had undertaken international transactions with its associated enterprises at ₹ 76,15,55,466/-. The Assessing Officer thus, made reference under section 92CA(1) of the Act to the Transfer Pricing Officer (TPO) for verifying the correctness of arm's length price of said transactions. The TPO noted that the assessee had undertaken international transactions in three different fields i.e. provision of software services, provision of back office support services and reimbursement of expenses. The segmental information was available. The assessee had applied TNMM method to benchmark the international transactions and had declared its margins at 15.10%. The assessee had selected certain companies as comparables and margins of comparable companies as per TP study report was 12.85% in the transaction of provision of software services. In respect of provision of back office support services, where the value of transaction was ₹ 18.52 crores, the assessee had also applied TNMM method and its margin was 15.15% as against the mean margin of comparables at 10.86%. Consequently, the assessee held that international transactions undertaken by it with its associated enterprises were at arm's length. The TPO however, did not accept list of comparables finally selected by the assessee and prepared another list of comparables whose mean margin worked out to 24.66% as

The assessee filed objections before the Dispute Resolution Panel (DRP) and certain directions were given by the DRP, based on which there was a revised comparables set for both segments of provision of software services and provision of back office support services. The Assessing Officer / TPO giving effect to the directions of DRP worked out the adjusted margins of comparables at 21.52% as against 15.10% declared by the assessee in the segment of provision of software services and made an upward TP adjustment of ₹ 3.21 crores. Similarly, in the segment of provision of back office support services, as per directions of DRP, revised margin of comparables worked out to 24% as against 15.15% shown by the assessee and hence, upward TP adjustment of ₹ 1.47 crores was made in the hands of assessee.

The assessee is in appeal before us in respect of both segments.

The learned Authorized Representative for the assessee pointed out that the limited issue which needs to be addressed in the present appeal is exclusion/inclusion of certain comparables and in case the same are so excluded or included, then the margin shown by the assessee would be +/- 5% range of mean margins of comparables finally selected. In respect of segment of provision of software development services, he pleaded that the concerns

The learned Departmental Representative for the Revenue relying on the order of DRP in respect of inclusion of Jindal, referred to the page 50 of DRP’s

We have heard the rival contentions and perused the record. The limited issue arises in the present appeal is with regard to inclusion / exclusion of comparables while benchmarking the international transactions undertaken by the assessee. The assessee was providing offshore application development, testing and support services to its associated enterprises. The assessee was 100% Export Oriented Unit registered with Software Technology Parks of India (STPI) and provided services only to companies within group. The assessee was engaged in the business of providing software development services and back office support services to the entities in the Principal Financial Group. The assessee had applied TNMM method to benchmark two international transactions undertaken by it, for which segmental details were available i.e. provision of software services and provision of back office support services.

First, we shall take up the transaction of provision of software services of the assessee. In this regard, the assessee had selected certain comparables which were modified by the TPO and thereafter, certain directions were given by the DRP and the final set of comparables were worked out which are as under:- Sr. No. Name of the Company Adjusted Margins as per Ld. TPO 1 Mindtree Ltd. 13.60% 2 Cybermate Infotek Limited 39.32% 3 Infobeans Systems Pvt. Ltd. 25.75% 4 E-Zest Solutions Ltd. 16.79% 5 Cybercom Datamatics Information Solutions 46.50% Ltd. 6 Evoke Technologies Ltd. 11.92% 7 Thirdware Solutions Limited 26.81% 8 R S Software (India) Limited 15.55% 9 Sasken Technologies Ltd. 11.77% 10 Spry Resources Ltd. 7.31% Arithmetic Mean 21.52%

The assessee is aggrieved by inclusion of two concerns i.e. Cybermate and Cybercom. In respect of Cybermate, the assessee has pointed out that it was engaged in sale of software products and also providing software development services to its associated enterprises. Both these business activities were clubbed under the head ‘Software segment’ and in the absence of segmental details being available, the assessee argues that the same cannot form part of list of comparables. The perusal of annual report of the said concern at pages 872 to 874 of Paper Book reflects the said concern to be engaged in providing software development services as well as developing variety of software products i.e. in the field of Hospital Management, Software HEAL SOFT and 38 other products. The financials of the said concern reflect no segmental reporting and the services were declared under one head. In such circumstances, where the segmental details were not available of the concern which were engaged in multiple activities i.e. in the present case, in providing software development services as well as being a product company; then we hold that the margins of said concern cannot be applied to benchmark the international transactions of the concern which was engaged in providing software development services to its associated enterprises. The assessee was also providing back office support services to its associated enterprises but was maintaining segmental details for both the activities undertaken by it and hence, the two transactions have been benchmarked separately even by the TPO and the Assessing Officer. The concern which is functionally different from the assessee i.e. in addition to providing software development services, was also product company, then the margins of said concern cannot be compared with the margins of assessee.

The Hon’ble High Court of Delhi in Prl.CIT Vs. Saxo India Pvt. Ltd. in ITA No.682/2016, for assessment year 2011-12, judgment dated 28.09.2016 had held that the cost for a particular segment had to be available in order to determine the exact profitability and if same was not available, then the said company could not be selected as comparable company. The Hon’ble High Court of Delhi (supra) while deciding the case of a company which was engaged in providing software development services and its margins were compared with a company which were involved in both software development services as well as sale of software products, held that the said concern was to be rejected from final set of comparables.

The Mumbai Bench of Tribunal in Ness Technologies (India) Pvt. Ltd. Vs. ACIT in ITA No.7016/Mum/2012, relating to assessment year 2008-09, order dated 24.09.2014 had excluded Cybermate as not comparable to the company providing software development support services to associated enterprises. The learned Authorized Representative for the assessee has pointed out that profile of concern Cybermate for assessment year 2008-09 and in the year under appeal i.e. assessment year 2012-13 is the same and hence, the said proposition is to be applied. We find merit in the plea of assessee in this regard.

We further find that Pune Bench of Tribunal in MSC Software Corporation India (P.) Ltd. Vs. ACIT (2017) 80 taxmann.com 55 (Pune-Trib) while deciding the case of exclusion of a product company had held as under:- “18. On perusal of record and the order of Tribunal in John Deere India Pvt. Ltd. Vs. ACIT (supra), we find that the concern E-zest Solutions Ltd. is a product company and is engaged in both the provision of software services and sale of software services. On the other hand assessee is engaged in Software development services where the segmental details are not available, accordingly, E-zest Solutions Ltd. is functionally not comparable. Accordingly, we hold that the said concern is to be excluded from the final set of comparables.”

The said proposition was applied by Pune Bench of Tribunal in DCIT Vs. Amber Point Technology India Pvt. Ltd. in ITA Nos.756 & 757/PUN/2014 and cross appeals in ITA Nos.761 & 762/PUN/2014, relating to assessment years 2008-09 and 2009-10, order dated 25.01.2018 for exclusion of concern which was engaged in providing both software services and was also selling its products. Accordingly, we hold that the concern Cybermate which is engaged in both sale of software products and providing software development services and where no segmental details are available for each of the segments, then the margins of said concern could not be applied to benchmark the arm's length price of international transactions of providing software development services to associated enterprises by the assessee.

Similarly, the concern Cybercom is also a product company and was providing software development to its associated enterprises and was also selling developed software products. Both the activities were clubbed under one software segment. As per the annual report of said company, it was engaged in providing consultancy and advisory services and was also carrying out the business of development, testing, marketing and manufacturing of information technology products and services. The annual report of the said concern placed at page 918 of Paper Book declares the said facts and it is undisputed that the said concern is engaged in sale of software products. Following our reasoning in the paras hereinabove in respect of Cybermae, we hold that Cybercome is also to be excluded from final set of comparables. The learned Authorized Representative for the assessee here pointed out that once the two concerns are so excluded, then the margins of comparables would be within +/- 5% of assessee’s margins. Accordingly, we hold so. We are not adjudicating any

The second aspect of transfer pricing adjustment is in respect of provision of back office support services by the assessee to its associated enterprises. The assessee herein has only submitted that Jindal is to be included for benchmarking international transactions. The learned Authorized Representative for the assessee pointed out that merely because the said concern had shown losses in one year would not make the said concern to be persistent loss making and consequently, the margins of said concern should be included in the final set of comparables. In this regard, the learned Authorized Representative for the assessee has filed tabulated details that the margins of said concern for assessment year 2010-11 was 14.94%, for assessment year 2011-12 was 13.50% and for assessment year 2012-13 was (-) 0.38%. In this regard, he placed reliance on the ratio laid down by the Hon’ble Bombay High Court in CIT Vs. M/s. Welspun Zucchi Textiles Ltd. (supra).

On perusal of record, we find that the TPO had excluded the said concern from final set of comparables, against which the assessee filed objections before the DRP, who directed the Assessing Officer to include the same on satisfaction of certain conditions. However, while passing the final assessment order, the Assessing Officer / TPO excluded the said concern as being not comparable on the ground of being persistent loss making. The perusal of margins of said concern from year to year reflect that in the preceding two years, it had shown positive margins and only in the year under consideration, it had shown negative margin, such concern could not be termed as persistent loss making concern. We find support from the ratio laid down by

Before parting, we also point out that inclusion / exclusion of said concern was considered by Pune Bench of Tribunal in M/s. Schlumberger India Technology Centre Pvt. Ltd. Vs. DDIT in ITA No.640/PUN/2014, relating to assessment year 2010-11, order dated 10.01.2018. The proposition raised by the assessee in that year was that Jindal had a different financial year than the one of assessee and hence, the same should be excluded. The assessee in that case had prepared its financial statements for the financial year and Jindal had prepared financial statements for a period of 15 months. The Tribunal had directed its exclusion from final set of comparables in assessment year 2010-11. This aspect whether the said concern was following the same year as the assessee, needs verification at the end of Assessing Officer / TPO. The Hon’ble Bombay High Court in the case of CIT Vs. PTC Software (I) Pvt. Ltd. in Income Tax Appeal No.732 of 2014 had also held that the comparable data should pertain to the same financial year. Accordingly, we hold that the margins of concern having different accounting period cannot be selected for benchmarking international transactions and the same is to be excluded from the final set of

In the result, appeal of assessee is partly allowed.