2018 (3) TMI 2039 - AT - Income Tax

TP adjustment - inclusion / exclusion of comparables while benchmarking the international transactions undertaken by the assessee - assessee had applied TNMM method to benchmark the international transactions and had declared its margins at 15.10% - transaction of provision of software services of the assessee - HELD THAT - Pune Bench of Tribunal in DCIT Vs. Amber Point Technology India Pvt. Ltd 2018 (1) TMI 1318 - ITAT PUNE held 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. Cybercom company, 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 declares the said facts and it is undisputed that the said concern is engaged in sale of software products. Cybercome is also to be excluded from final set of comparables. 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. TP Adjustment is in respect of provision of back office support services by the assessee to its associated enterprises - Jindal excluded for benchmarking international transactions on the ground of being persistent loss making - HELD THAT - 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 in CIT Vs. M/s. Welspun Zucchi Textiles Ltd 2017 (1) TMI 1037 - BOMBAY HIGH COURT wherein it has been held that merely because the comparable had made losses in one year would not ipso facto result in its exclusion from comparable analysis. Following the said proposition, we hold that a concern which is not persistent loss making, cannot be excluded from final set of comparables. Exclusion on the basis of different financial year - 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 comparables. Accordingly, we direct the Assessing Officer to verify the status of concern Jindal and decide the issue in line with our directions. Appeal of assessee is partly allowed.

Summary

Issues Involved:

1. General Grounds
2. Transfer Pricing Adjustment
3. Adjustment under section 14A of the Act read with Rule 8D
4. Penalty Proceedings under section 271(1)(c) of the Act

Detailed Analysis:

1. General Grounds:

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

2. Transfer Pricing Adjustment:

The primary issue in this appeal concerns the transfer pricing adjustment of international transactions undertaken by the assessee with its associated enterprises. The assessee had declared its margins at 15.10% for software development services and 15.15% for back office support services, asserting that these were at arm's length. However, the TPO proposed an upward adjustment, resulting in margins of 24.66% and 34.47% respectively.

2.1 Exclusion/Inclusion of Comparables:

The assessee contested the inclusion of Cybermate Infotek Ltd. and Cybercom Datamatics Information Solutions Ltd. in the final list of comparables. It was argued that Cybermate was functionally different, being a product company without segmental details available. Similarly, Cybercom was also a product company, making its margins incomparable to the assessee's software development services. The Tribunal agreed with the assessee, citing precedents where companies engaged in both software services and product sales without segmental details were excluded as comparables.

2.2 Inclusion of Jindal Intellicom Ltd.:

For the back office support services segment, the assessee argued for the inclusion of Jindal Intellicom Ltd., which was excluded by the TPO for being loss-making. The Tribunal noted that Jindal was not persistently loss-making, having shown positive margins in the preceding two years, and thus should be included in the final set of comparables. The Tribunal directed the Assessing Officer to verify if Jindal followed the same financial year as the assessee, as comparable data should pertain to the same financial year.

3. Adjustment under Section 14A of the Act read with Rule 8D:

The ground of appeal No.3 concerning the disallowance under section 14A of the Act was not pressed by the assessee and hence, the same is dismissed as not pressed.

4. Penalty Proceedings under Section 271(1)(c) of the Act:

The assessee contested the initiation of penalty proceedings under section 271(1)(c) of the Act. The Tribunal did not provide a detailed analysis on this issue, as the primary focus was on the transfer pricing adjustments.

Conclusion:

The appeal of the assessee is partly allowed. The Tribunal directed the exclusion of Cybermate Infotek Ltd. and Cybercom Datamatics Information Solutions Ltd. from the final set of comparables for the software development services segment. For the back office support services segment, the inclusion of Jindal Intellicom Ltd. was directed, subject to verification of its financial year alignment with the assessee. The grounds related to general issues and section 14A disallowance were dismissed. The Tribunal did not adjudicate on other issues related to the transfer pricing adjustment and penalty proceedings.