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Income Tax Appellate Tribunal, “A” BENCH, PUNE
आदेश / ORDER
PER SUSHMA CHOWLA, JM
The appeal filed by the assessee is against the order of ACIT, Circle-4, Pune dated 23.01.2017 relating to assessment year 2012-13 passed under section 144C r.w.s. 143(3) of the Income-tax Act, 1961 (in short ‘the Act’).
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The assessee has raised the following grounds of appeal: 1. General Ground 1.1 On the facts and in the circumstances of the case and in law, the Learned AO and the Learned TPO under the directions of the Hon'ble Dispute Resolution Panel ('DRP') have erred in making a transfer pricing addition of Rs.3,35,78,522/- to the total income of the Assessee and assessing the total income at Rs.5,97,88,492/-.; 2. Transfer Pricing adjustment 2.1 On the facts and in the circumstances of the case and in law, the Learned AO and the Learned TPO under the directions of the Hon'ble DRP erred in rejecting comparable companies which are in fact comparable to the Appellant. 2.2 On the facts and in the circumstances of the case and in law, the Learned AO and the Learned TPO under the directions of the Hon'ble DRP erred in selecting companies as comparable which are in fact not comparable to the Appellant. 2.3 On the facts and in the circumstances of the case and in law, the Learned AO and the Learned TPO under the directions of the Hon'ble DRP erred in cherry picking the high margin companies and rejecting the low margin companies and inconsistently applying the benchmarking criteria. 2.4 On the facts and in the circumstances of the case and in law, the Learned AO and the Learned TPO under the directions of the Hon'ble DRP erred in disregarding the benchmarking analysis and comparable companies selected by the Appellant based on the contemporaneous data in the transfer pricing study report maintained as per Section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 ('the Rules'). 2.5 On the facts and in the circumstances of the case and in law, the Learned AO and the Learned TPO under the directions of the Hon'ble DRP erred in applying inappropriate filters in order to arrive at the final set of comparable companies. 2.6 On the facts and in the circumstances of the case and in law, the Learned AO and the Learned TPO under the directions of the Hon'ble DRP erred in not allowing various economic adjustments such as risk adjustment, research & development and marketing adjustment, in accordance with the provisions of Rule 10B. 2.7 On the facts and in the circumstances of the case and in law, the Learned AO and the Learned TPO under the directions of the Hon'ble DRP erred in rejecting the use of multiple year data i.e. contemporaneous data in the transfer pricing study report maintained as per Section 92D of the Act read with Rule 10D of the Rules used for determining the arm's length price of the international transactions of the Appellant pertaining to the software development support services. 2.8 On the facts and in the circumstances of the case and in law, the Learned AO and the Learned TPO under the directions of the Hon'ble DRP erred in violating the "Rule of Consistency" while making adjustment to the international transaction of the Appellant pertaining to provision of
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software development support services to its associated enterprise as the Learned. AO had accepted the arm's length nature of this transaction in A.Y. 2010-11. 3. Others 3.1 On the facts and in the circumstances of the case and in law, the Learned AO erred by levying of interest under section 234B and 234C of the Act. 3.2 On the facts and in the circumstances of the case, the Learned AO erred in initiating penalty proceedings under Section 271(1)(c) of the Act on the premise that the Appellant has concealed/furnished inaccurate particulars of income, without appreciating the fact that the adjustment is not made in accordance with the law. Prayer: The Appellant prays that the Transfer Pricing addition of Rs.3,35,78,522/- made to the total income of the Assessee be deleted and that the penalty proceedings initiated be deleted. The Appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at, the time of hearing of the appeal, so as to enable the Learned AO to decide this appeal according to law.
The assessee has raised several grounds of appeal but the issue raised in the present appeal is against transfer pricing adjustment and the thrust of arguments of assessee is in respect of exclusion and inclusion of certain concerns.
Briefly, in the facts of the case, the assessee for the year under consideration had furnished the return of income declaring total income of ₹ 2,62,09,970/-. The assessee was 100% subsidiary of Pubmatic Inc and was engaged in the business of providing services of internet based advertising including provision of related technologies, systems consultancy, devices, strategies, solution, medias, channels, etc. The Assessing Officer made reference under section 92CA(1) of the Act to the Transfer Pricing Officer (TPO) to benchmark arm's length price of international transactions of provision of software development and research services to its associated enterprises at ₹ 27,72,49,822/-. The assessee had applied TNMM method to benchmark international transactions in its TP study report and had selected certain concerns
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as comparables. The PLI of OP/OC of assessee was 12.65% and had claimed that the margins of comparables were within +/- 5% range. The TPO however, modified the filters to be applied and selected new set of comparables totaling 11, whose mean margins worked out to 24.97% and an adjustment of ₹ 3.17 crores was proposed. The assessee filed objections before the Dispute Resolution Panel (DRP), which deleted two concerns and the Assessing Officer / TPO prepared final set of comparables whose mean margin was computed at 25.73% and an adjustment of ₹ 3.35 crores was made in the hands of assessee.
The assessee is in appeal against the order of Assessing Officer.
The learned Authorized Representative for the assessee has filed final set of comparables which have been so selected numbering 9. The first objection which has been raised by the assessee is against inclusion of Cybermate Infotek Ltd. (in short ‘Cybermate’) and Cybercom Datamatics Information Solutions Ltd. (in short ‘Cybercom’). The assessee has pointed out that the said two concerns were products companies and were also providing software services to its associated enterprises and hence, were not comparable to the assessee. Another concern which the assessee wants to be excluded from final set of comparables was Infobeans Systems Pvt. Ltd. on the ground that it is engaged in export of goods. Our attention was drawn to the financials of said concern placed at page 626 onwards of Paper Book, wherein at page 634, the revenue recognition was on account of sale of goods and rendering of services. However, no segmental details were available and hence, the said margins could not be applied to the assessee. He also pointed out that the accounts of said concern were revised after demerger and the impact of merger was not known. The learned Authorized
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Representative for the assessee pointed out that in 2011 the concern had demerged its product and power division. He stressed that because of said extraordinary event, the said concern was also not comparable. He placed reliance on series of decision for exclusion of Infobeans Systems Pvt. Ltd. The last concern which he wants to be excluded from final set of comparables is Thirdware Solutions Ltd. being functionally not comparable. For the same, he placed reliance on the ratio laid down by the Pune Bench of Tribunal in M/s. Aptara Technologies Pvt. Ltd. Vs. ACIT in ITA No.259/PN/2015 and cross appeal in ITA No.579/PN/2015, relating to assessment year 2010-11, order dated 31.05.2016 and in TIBCO Software India Pvt. Ltd. Vs. DCIT in ITA No.276/PUN/2015 & cross appeal in ITA No.334/PUN/2015, relating to assessment year 2010-11 along with CO No.04/PUN/2016, order dated 31.01.2017. The learned Authorized Representative for the assessee pointed out that the issue raised on adjustment of PLI would become academic and the assessee was not raising arguments on four concerns not satisfying the filters which were applied by the TPO in case the above four concerns are excluded from final list of comparables, since the margins of assessee would be within +/- 5% range.
The learned Departmental Representative for the Revenue strongly objected to the proposition made by the learned Authorized Representative for the assessee and it was pointed out that the assessee was providing software development support services based on guidance provided by its associated enterprises i.e. to improve advertisement hits. No risk was borne by the assessee and where the assessee was asking for risk adjustment, then the said grounds were irrelevant. In respect of TP adjustment, he stated that the assessee has not raised any objection against the companies which were rejected but were initially
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selected by the assessee. In respect of filters being applied, the learned Departmental Representative for the Revenue referred to page 3 of DRP’s order, which refers to the modified filters applied and the assessee has not objected to the same.
We have heard the rival contentions and perused the record. The assessee is 100% subsidiary of PubMatic Inc and was incorporated on 22.12.2006. PubMatic Inc is a global Advertisement Revenue Optimization company that provides online publishers with a service solution to manage ad inventory. It also provides solutions for advertisers and publishers to improve their online marketing results. PubMatic is an ad network aggregator that helps website publishers to maximize the revenue they can earn from their website. The software developed by PubMatic Inc identifies the number of hits the site takes in a particular period. The data as captured is used by PubMatic Inc to match the requirement of the advertiser and publisher. The software used for providing the above services is developed by PunMatic Inc. PubMatic Inc utilizes the software development support services from the assessee to provide services to its clients based in the USA and Europe. The assessee is engaged in providing software development support services based on the instructions and guidance provided by PubMatic Inc. In most cases, assessee was involved in upgradation and creation of additional features / modules of existing as well as new PubMatic products. Based on the architecture design and specifications finalized by the architects in consultation with PMT, assessee’s engineering team undertakes functional designing, software development, testing, etc. based on specifications provided by the associated enterprises. The software development and testing activities of assessee were monitored and controlled by associated enterprises. In the FAR analysis submitted
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by the assessee in its TP study report, the assessee has elaborated on the functions which were performed by PubMatic Inc and the assessee as its subsidiary and had also elaborated on the risk assumed. The assessee further pointed out that the tangible assets and infrastructure for providing software development services includes office space, office infrastructure and computers and software. For rendering software development support services, certain specialized software was required. Since the assessee renders services exclusively to its associated enterprises, the software licenses were owned and provided by associated enterprises. PubMatic owns intangible property rights to the software, including software copyrights and trademarks. In addition, the associated enterprise owns any intangibles created during the software development process. Thus, the associated enterprise owns significant intangible property rights. Further, intangibles in terms of web-enabled tools / software / proprietary platforms / processes were all owned by the associated enterprise. PubMatic Inc is also the owner of brand and marketing intangibles. The assessee does not own any intangible assets. In addition, any design or utility patents created by assessee’s employees were registered in the inventors name as required by the USA patent authority. Subsequently, ownership of the patent was transferred to PubMatic Inc. All the costs were borne by the associated enterprise. The assessee thus, stressed that it owned ordinary assets. The assessee had applied TNMM method to benchmark its international transactions on net cost plus module by taking PLI of OP/OC. The assessee selected list of comparables which are enlisted at page 72 and the mean margin of said concerns worked out to 5.41% (weighted average) as against the margins shown by the assessee at 12.65%. Further, the TPO modified the filters applied by the assessee and one of them was to use margins of concerns selected, for the instant assessment year
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and not applied weighted average. In the final list drawn up by the TPO, the concerns which have been so selected were at variance with the concerns originally selected by the assessee in its TP study report. Though, before the DRP the assessee had filed various objections to the same but as pointed out by the learned Departmental Representative for the Revenue before us, no such objections have been raised during the hearing. The DRP thereafter, gave certain directions for exclusion and re-working and in the final analysis, the following set of comparables have been selected:-
Sr. No. Name of the Company WC adjusted margins 1 Cybermate Infotek Limited 39.72% 2 Infobeans Systems Pvt. Ltd. 25.80% 3 Cybercom datamatics Information Solutions Ltd. 42.30% 4 Evoke Technologies Private Limited 12.17% 5 Thirdware Solutions Limited 18.62% 6 R S Software (India) Limited 15.78% Average 25.73% Tested Party Margin 12.65%
The objections raised by the assessee were in respect of selection of certain concerns and exclusion of certain concerns. However, in the final analysis, the learned Authorized Representative for the assessee has restricted his arguments to the exclusion of following concerns:- i) Cybermate Infotek Ltd. ii) Infobeans Systems Pvt. Ltd. iii) Cybercom Datamatics Information Solutions Ltd. iv) Thirdware Solutions Ltd.
We proceed to decide the present appeal in line with the arguments put forward by the learned Authorized Representative for the assessee. The learned Departmental Representative for the Revenue has objected to the submissions made by the assessee. The first concern which is sought to be excluded by the
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assessee is Cybermate on the ground that it was engaged in providing both software development services and was a product company and in the absence of segmental details, the same cannot be compared. 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 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 are declared under one head. In such circumstances, where the segmental details were not available of the concern which was 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
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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
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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 Cybermate, we hold that Cybercome is also to be excluded from final set of comparables.
The third concern which the assessee wants to be excluded is Infobeans Systems Pvt. Ltd. on the ground that the said concern was earning foreign exchange from export of goods on FOB basis. Hence, the same was not comparable with a concern engaged in software development services. Our
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attention was drawn to the financials of the said concern placed at page 624 onwards, wherein in the Profit and Loss Account, the revenue from sale of software was also shown. The learned Authorized Representative for the assessee also stressed that no segmental details were available. Further, our attention was drawn to the notes to accounts, wherein the export of goods on FOB and services rendered is reported.
Another aspect which has been stressed by the assessee is the extraordinary event of demerger, wherein the financial statements of said concern included the financial statements of software business of demerged company i.e. Seed Enterprises Pvt. Ltd., are available at pages 614 and 633 of the Paper Book.
We have heard the rival contentions and perused the record. The first aspect is the functional comparability of concern which has been finally selected to be comparable. In respect of Infobeans Systems Pvt. Ltd., the financials of said concern clearly reflect that in addition to providing software development services to its associated enterprises, it had also earned foreign exchange from export of goods on FOB basis. The event of export of goods was also mentioned in notes and also in the Profit and Loss Account, where revenue from sale of software was declared. The segmental details of two activities carried on by the said concern were not available and in the absence of the same, the concern could not be equated as functionally comparable to a concern which was providing software development services to its associated enterprises. Applying the same set of reasoning as in the paras hereinabove, we hold that Infobeans Systems Pvt. Ltd. is not comparable to the assessee.
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Before parting, we may also refer to the observations of DRP on Safe Harbour Rules but the same at present cannot be applied and in any case the same cannot be applied to equate software product with software development company. Another aspect which had taken place during the accounting period is the demerger of business of Seed Enterprises Pvt. Ltd., for which the said concern had filed revised accounts. The extraordinary event which had taken place makes the said concern as not comparable to the assessee. In this regard, we find support from the ratio laid down by the Pune Bench of Tribunal in M/s. Aptara Technologies Pvt. Ltd. Vs. ACIT in ITA No.259/PN/2015 and cross appeal in ACIT Vs. M/s. Aptara Technologies Pvt. Ltd. in ITA No.579/PN/2015, relating to assessment year 2010-11, order dated 31.05.2016 and in Cummins Turbo Technologies Limited Vs. DDIT in ITA No.784/PN/2014, relating to assessment year 2009-10, order dated 30.03.2016. Accordingly, we direct the Assessing Officer to exclude Infobeans Systems Pvt. Ltd. from final set of comparables.
Now, coming to the next concern i.e. Thirdware Solutions Ltd., which is functionally dissimilar as it was deriving revenue from sale of license and software services export from SEZ units and revenue from subscription, etc. Our attention was drawn to the financials of said concern placed at pages 708 onwards of Paper Book and it was pointed out that the company had imported raw materials and was also owning intangibles and hence, made it in-comparable to the assessee. In the absence of any segmental details being available, we find merit in the plea of assessee.
The Pune Bench of Tribunal in Approva Systems Pvt. Ltd. Vs. DCIT in ITA No.1921/PUN/2014, relating to assessment year 2010-11, order dated 25.01.2017
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had excluded Thirdware Solutions Ltd. being not comparable to a concern which was providing software services. The relevant findings are as under:- “11. We find that the Tribunal noted that the TPO had selected KALS Information System Ltd. and Thirdware Solution Ltd. as being comparable, whereas the case of assessee was that both the said concerns were functionally different. With regard to KALS Information System Ltd., it was pointed out that the said company was earning income from sale of application software and segmental information with respect to software services were available. In respect of Thirdware Solution Ltd., it was pointed out that the said concern was engaged in software development, trading of software licences and training implementation activities apart from software development. Another contention was raised that Thirdware Solution Ltd. was super profit earning company and was also engaged in the business of software licences and trading of implementation activities. The Tribunal taking note of the Special Bench decision in the case of Maersk Global Centres (India) Pvt. Ltd. Vs. ACIT vide ITA No.7466/M/2012 in respect of super profits and inclusion of concern Thirdware Solution Ltd., held that the said concern was not comparable and observed as under:- “29. We have considered the rival arguments made by both the sides. We find the Special Bench of the Tribunal in the case of Maersk Global Centres (India) Pvt. Ltd. Vs. ACIT vide ITA No.7466/Mum/2012 has observed as under : “99. The question No. 2 referred to this Special Bench is as to whether, in the facts and circumstances of the case, companies earning abnormally high profit margin should be included in the list of comparable cases for the purpose of determining arm’s length price of an international transaction. As already observed, the issue involved in this question has become infructuous in so far as the case of the assessee before the Special Bench is concerned and the same therefore no more survives for consideration in the present case. In generality, we are of the view that the answer to this question will depend on the facts and circumstances of each case inasmuch as potential comparable earning abnormally high profit margin should trigger further investigation in order to establish whether it can be taken as comparable or not. Such investigation should be to ascertain as to whether earning of high profit reflects a normal business condition or whether it is the result of some abnormal conditions prevailing in the relevant year. The profit margin earned by such entity in the immediately preceding year/s may also be taken into consideration to find out whether the high profit margin represents the normal business trend. The FAR analysis in such case may be reviewed to ensure that the potential comparable earning high profit satisfies the comparability conditions. If it is found on such investigation that the high margin profit making company does not satisfy the comparability analysis and or the high profit margin earned by it does not reflect the normal business condition, we are of the view that the high profit margin making entity should not be included in the list of comparable for the purpose of determining the arm’s length price of an international transaction. Otherwise, the entity satisfying the comparability analysis with its high profit margin reflecting normal business condition should not be rejected solely on the basis of such abnormal high profit margin. Question No. 2 referred to this special bench is answered accordingly”.
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29.1 We find from the details furnished by the assessee that the assessee is a software developer whereas Thirdware Solutions Ltd. is engaged in the business of sale-cum-licence of software which is available from the audited accounts, the details of which are as under : Schedule : Sales As on As on 31-03-2009 31-03-2008 Sale of Licence 22,237,588 3,916,427 Software Services 89,177,023 76,724,371 Export from SEZ unit 478,572,420 263,971,033 Export from STPI unit 162,900,630 168,863,049 Revenue from Subscription 16,433,714 9,293,874 770,321,376 522,768,754 Apart from the above the company is also having dividend income, interest income and profit on sale of investment as well as premium of software contract totalling to Rs.2,30,48,603/- which is as per Schedule-13 “other sources”. From the various decisions relied on by the Ld. Counsel for the assessee we find Thirdware Solutions Ltd. has been rejected on the ground that it is functionally dissimilar. The Hyderabad Bench of the Tribunal in the case of Intoto Software India Pvt. Ltd. Vs. ACIT and Viceversa in consolidated order dated 24-05-2013 for A.Y. 2005-06 and 2007-08 at para 26 of the order has observed as under : “26. As far as Thirdware Software Solution Limited is concerned, we find from the information furnished by the said company that though the said company is also into product development, there are no softrware products that the company invoiced during the relevant financial 52 year and the financial results are in respect of services only. Thus, it is clear that there is no sale of software products during the year but the said company might have incurred expenditure towards the development of the software products.” 29.2 In various other decisions also Thirdware Solutions Ltd. has been rejected as a comparable on the ground that it is functionally dissimilar. We therefore find force in the submission of the Ld. Counsel for the assessee that Thirdware Solutions Ltd. should not be included as a comparable. We accordingly set-aside the order of the CIT(A) and direct the Assessing Officer to exclude the same from the list of comparables.” 12. Both the learned Authorized Representatives have admitted that Thirdware Solutions Ltd. was involved in similar functions as in earlier year and in view thereof, we hold that the said concern is functionally different and is to be excluded from final list of comparables.”
Similar proposition has been laid in TIBCO Software India Pvt. Ltd. Vs. DCIT (supra). The learned Authorized Representative for the assessee pointed out that in case the said four concerns Cybermate Infotek Ltd., Infobeans Systems Pvt. Ltd., Cybercom Datamatics Information Solutions Ltd. and Thirdware Solutions Ltd. are excluded, the mean margins of comparables would be within +/- 5% range
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of margins shown by the assessee. He fairly also stated that in such circumstances, there is no requirement to adjudicate the other grounds on different economic adjustments. Accordingly, we hold that the other grounds of appeal raised by the assessee are academic in nature. The grounds of appeal raised by the assessee are thus, partly allowed.
In the result, appeal of assessee is partly allowed.
Order pronounced on this 9th day of March, 2018.
Sd/- Sd/- (ANIL CHATURVEDI) (SUSHMA CHOWLA) ऱेखा सदस्य/ACCOUNTANT MEMBER न्याययक सदस्य/JUDICIAL MEMBER ऩुणे / Pune; ददनाांक / Dated : 9th March, 2018 GCVSR आदेश की प्रनिलऱपप अग्रेपषि/Copy of the Order is forwarded to : The Appellant; 1. The Respondent; 2. The DRP, Pune; 3. The DIT (TP/IT), Pune; 4. The DR ‘A’, ITAT, Pune; 5. Guard file. 6. आदेशािुसार/ BY ORDER, सत्यापऩत प्रयत //True Copy//
वररष्ठ यनजी सचिव / Sr. Private Secretary आयकर अऩीऱीय अचधकरण ,ऩुणे / ITAT, Pune