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TMI Blog2018 (4) TMI 437X X X X Extracts X X X X X X X X Extracts X X X X ..... e Hon'ble Dispute Resolution Panel ('DRP') have erred in making a transfer pricing addition of ₹ 3,35,78,522/- to the total income of the Assessee and assessing the total income at ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 3. 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. 4. 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 7. 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 provide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ary 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. Subseq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vailable, 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." 14. 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. 15. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing 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. 19. 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 O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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." 22. 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 ma ..... X X X X Extracts X X X X X X X X Extracts X X X X
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