M/s Hexagon Manufacturing Inelligence I P Ltd (formerly known as M/s. MSC Software Corporation India Private Limited,), Pune V. Deputy Commissioner of Income-tax, Circle - 7, Pune

CO 53/PUN/2022

AI Insights

The case involves the Income Tax Department (Revenue) and M/s. Hexagon Manufacturing Intelligence India Pvt. Ltd. (formerly MSC Software Corporation India Pvt. Ltd.), concerning the assessment year 2016-17. The primary dispute revolves around the characterization of the assessee's activities—whether they constitute marketing support services or distribution activities—and the consequent implications for transfer pricing and arm's length price adjustments. The TPO had reclassified the assessee's activities from distribution to marketing support, leading to a significant adjustment in the declared income. The CIT(A) had earlier favored the assessee, which the Revenue contested before the ITAT. The ITAT, after reviewing the agreements and activities of the assessee, concurred with the TPO's assessment and overturned the CIT(A)'s decision.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 134412 (ITAT-PUNE)
• Duration Of Justice: 6 month(s) 15 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 10-04-2023
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: C
• Next Hearing Date: 04-04-2023
• Assessment Year: 2016-2017
• Appeal Filed On: 25-09-2022
• Other Referred Cases: Transperfect Solutions India Pvt. Ltd. vs. ACIT
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction; Set aside
• Section: 6; 2; 143(3); 92CA

Judgement Text

आयकर अपीलीय अिधकरण “सी” Ɋायपीठ पुणेमŐ। IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCHES “C” :: PUNE BEFORE SHRIPARTHA SARATHI CHAUDHURY, JUDICIAL MEMBERAND DR. DIPAK P. RIPOTE, ACCOUNTANT MEMBER आयकर अपील सं. / ITA No.376/PUN/2022 िनधाᭅरण वषᭅ / Assessment Year : 2016-17 The DCIT, Circle- 7, Pune. Vs M/s.Hexagon Manufacturing Intelligence India Private Limited, (Formerly known as MSC Software Corporation India Private Limited), Unit Number: 101-105, 1 st Floor, Sai Radhe, 100+101, Kennedy Road, Adjoining to Hotel Grand Sheraton, Pune – 411001. PAN: AAECM 0862 H Appellant / Revenue Respondent / Assessee Cross Objection No.53/PUN/2022 िनधाᭅरण वषᭅ / Assessment Year : 2016-17 M/s.Hexagon Manufacturing Intelligence India Private Limited, (Formerly known as MSC Software Corporation India Private Limited), Unit Number: 101-105, 1 st Floor, Sai Radhe, 100+101, Kennedy Road, Adjoining to Hotel Grand Sheraton, Pune – 411001. PAN: AAECM 0862 H Vs The DCIT, Circle- 7, Pune. Appellant / Assessee Respondent / Revenue Assessee by Shri Govind Bhangdiya – AR Revenue by Shri Suhas Kulkarni – Addl.CIT Date of hearing 05/04/2023 Date of pronouncement 11/04/2023 ITA No.376/PUN/2022 & C.O.No.53/PUN/2022 M/s.Hexagaon Manufacturing Intelligence India Pvt. Ltd., (Formerly known as MSC Software Corp. India Pvt. Ltd.,) 2 आदेश/ ORDER PER BENCH : This appeal filed by the Revenue and cross appeal by the Assessee is directed against the order of ld.Commissioner of Income Tax(Appeals)-13, Pune dated 23.12.2021 emanating from order under section 143(3) r.w.s 144C(3)of the Income Tax Act, 1961 for the A.Y.2016-17 dated 14.12.2019. The Revenue in ITA No.376/PUN/2022 has raised the following grounds of appeal: “1. Whether on the facts and circumstances of the case the learned CIT(A) is correct to hold that assessee is engaged in distribution activity ignoring the FAR analysis as submitted by the assessee in TPSR? 2. Whether on the facts and circumstances of the case the learned CIT(A) has erred inaccepting the assessee's contention that the comparables engaged in 'the distribution function can be used with FAR analysis of assessee’s in Marketing Support Services, also? 3. When as per the agreement the assessee is entitled to retain only 3.5% of its sales to third party, whether the CIT(A) was correct in holding that the revenue transaction is not a tainted transaction and allowing the assessee to consider PLI at OP/OR level instead of OP/OC? 4. Whether on the facts and circumstances of the case the learned CIT(A) has erred in concluding that Dynacons Technologies, Integra Telecommunications and JMD Telefilms are functionally comparable to MSC India?” 2. The assessee in Cross Objection Appeal No.53/PUN/2022 has raised the following grounds of appeal : “1. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in dismissing the following grounds of appeal (Ground 2.2, 2.3, 2.4, 2.7, 2.8, 2.9 and 2.11) of the respondent raised ITA No.376/PUN/2022 & C.O.No.53/PUN/2022 M/s.Hexagaon Manufacturing Intelligence India Pvt. Ltd., (Formerly known as MSC Software Corp. India Pvt. Ltd.,) 3 before the Ld. CIT(A) considering them academic: 2.2. Disregarding the benchmarking analysis adopted as part of TP Study Report 2.3 Selection/ rejection of filters and failing to provide the accept reject matrix and search process 2.4 Correct profitability if the Respondent is to be compared to marketing support service providers 2.7 Not giving due consideration to the pricing arrangement for the selection of comparables 2.8 Considering pricing policy as per agreement, failing to appreciate PLI as per signed financials 2.9 Selection of functionally non comparable companies for the purpose of determining the ALP 2.11 Allowing economic adjustments for differences between Respondent and comparables 2. On the facts and in circumstances of the case and in law, the learned Deputy Commissioner of Income-Tax Circle-7, Pune (‘Ld. AO’) has erred in making transfer pricing addition to the Appellant’s income and the learned Commissioner of Income-tax (Appeals)-13, Pune [‘Ld. CIT(A)’] has erred in partially upholding/ confirming the actions of the Ld. AO in this regard. 3. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in not adjudicating certain grounds of appeal raised before the CIT(A) by the respondent considering them pre- mature. [i.e., Ground 3 raised before the Ld. CIT(A)]. The Respondent craves leave to add to or alter, by deletion, substitution, modification or otherwise or amend or withdraw the cross objections herein and to submit such statements, documents and papers as may be considered necessary' either before or during the hearing of the appeal.” Brief facts of the case : 3. As per the assessment order the assessee had filed Return of Income for AY 2016-17 declaring total income of Rs.3,24,08,070/- on 10/11/2016. The case of the assessee was selected for scrutiny assessment. The Assessing Officer (AO) referred the case to the Transfer pricing Officer(TPO) for determination of Arm’s Length ITA No.376/PUN/2022 & C.O.No.53/PUN/2022 M/s.Hexagaon Manufacturing Intelligence India Pvt. Ltd., (Formerly known as MSC Software Corp. India Pvt. Ltd.,) 4 Price of the International transactions entered with the AEs. The Transfer Pricing Officer(TPO) vide order dated 25.10.2019 passed under section 92CA arrived at the Arms Length Price of the transaction. During the year, assessee has undertaken following transactions as under : 3.1 The assessee claimed in the Transfer Pricing Study Report that assessee is in the business of distribution of software. The assessee has applied TNMM Method to benchmark the transactions. Accordingly, assessee selected the companies comparable to its functions. However, in the transfer pricing order, TPO held that the main activity of the assessee is marketing activity and assessee is getting remunerated for marketing functions with a fixed mark-up. Accordingly, the TPO carried out the search and arrived at following comparables : ITA No.376/PUN/2022 & C.O.No.53/PUN/2022 M/s.Hexagaon Manufacturing Intelligence India Pvt. Ltd., (Formerly known as MSC Software Corp. India Pvt. Ltd.,) 5 “9.1.8. Considering the above, the final set of comparables engaged in MSS activity are as follows : Sr.No Company Name Combined weighted average OP/OC 1 D D B Mudra Pvt. Ltd. -1.35% 2 Publicis Communications Pvt. Ltd. 2.08% 3 I C R A Management Consulting Services Ltd. 3.73% 4 Pressman Avertising Ltd 10.94% 5 Concept Public Relations India Ltd 11.45% 6 Kestone Integrated Mktg. Services Pvt. Ltd. 11.92% 7 Paradigmplus Marketing Communications Pvt. Ltd. 12.72% 8 Majestic Research Services & Solutions Ltd. 18.83% 9 Fcbulka Advertising Pvt. Ltd. 37.41% 10 Platinum Advertising Pvt. Ltd. 46.51% 11 Cheil India Pvt. Ltd. 61.88% Date place Range Adjusted Weighted OP/OC 4 35 th percentile 10.94% Median 11.92% 8 65 th percentile 18.83% 4. The TPO observed that OP/OC of the assessee was 3.63%. However average OP/OC of the comparable selected by TPO was 11.92%. Accordingly, the TPO calculated Arms Length Price of the international transaction and adjustment as under : Description Reference Amount (Rs) Operating revenue A 38,26,42,814 Operating Cost B 36,92,56,315 ALP Margin C 11.92% ALP D=B*(B+11.925)% 41,32,64,953 Adjustment E=D-A 3,06,22,139 Thus the arm’s length price f international transaction of marketing support activity (distribution segment) of assessee is ITA No.376/PUN/2022 & C.O.No.53/PUN/2022 M/s.Hexagaon Manufacturing Intelligence India Pvt. Ltd., (Formerly known as MSC Software Corp. India Pvt. Ltd.,) 6 altered by Rs.3,06,22,139/- thus enhancing the total income accordingly.” 5. Thus, the TPO enhanced value of the international transaction by Rs.3,06,22,139/-. The AO passed an order under section 143(3) r.w.s 144C(3) of the Act dated 14.12.2019 accepting the adjustments recommended by the TPO. Aggrieved by the order of the AO and TPO, assessee filed appeal before ld.CIT(A)-13, Pune. The ld.CIT(A) held in para 3.4 as under : “3.4 Finding on ground no.2.1 I have decided the similar issue of re-characterisation of the software distribution function as market support services (MSS) in favour of the appellant in AY 2015-16 vide order No. PN/CIT(A)- 13/CIT Circle-14, Pune/10445/2018-169 dated 23.12.2021. My predecessor had also allowed the similar issue in AY 2013-14. Therefore following the same, this ground of appeal is allowed. AS the ground no. 2.1 is allowed, therefore, ground no.2.2, 2.3,2.4,2.7, 2.8, 2.9 and 2.11 become academic and infructuous and hence, dismissed.” 6. Aggrieved by the order of the ld.CIT(A), the Revenue filed appeal before this Tribunal and also assessee filed Cross Objection appeal. Ground No.1 to 3 : 7. In assessee’s own case the ITAT Pune in ITA No.375/PUN/2022 for A.Y.2015-16 vide order dated 16.01.2023 held as under : “4. First, we shall adjudicate the appeal by the Revenue in ITA No.375/PUN/2022. The grounds of appeal are as follows: ITA No.376/PUN/2022 & C.O.No.53/PUN/2022 M/s.Hexagaon Manufacturing Intelligence India Pvt. Ltd., (Formerly known as MSC Software Corp. India Pvt. Ltd.,) 7 1. Whether on the facts and circumstances of the case the learned CIT(A) is correct to hold that assessee is engaged in distribution activity ignoring the FAR analysis as submitted by the assessee in TPSR? 2. Whether on the facts and circumstances of the case the learned CIT(A) has erred in accepting the assessee's contention that the comparables engaged in the distribution function can be used with FAR analysis of assessee's in Marketing Support Services, also? 3. When as per the agreement the assessee is entitled to retain only 3.5% of its sales to third party, whether the CIT(A) was correct in holding that the revenue transaction is not a tainted transaction and allowing the assessee to consider PLI at OP/OR level instead of OP/OC? 4. Whether on the facts and circumstances of the case the learned CIT(A) has erred in concluding that Dynacons Technologies, Integra Telecommunications and JMD Telefilms are functionally comparable to MSC India? 5. It is observed that this appeal is time barred by 68 days and the ld. AR raised no objection regarding condonation of delay. Having heard the submissions of the parties, the delay is condoned and the case is heard on merits. 6. The issue for adjudication in this appeal is broadly whether the assessee is in distribution support services or is doing marketing support services as held by the TPO. The ld. TPO has given his finding at para 6.1 of his order analysing the relevant clauses of the agreement between the assessee and the Associated Enterprise (AE) and has held as follows: “6.1 Purchase Price: Reseller shall pay to Company monthly an aggregate amount such that Reseller earns cumulative year-to-date Operating Income of three and one-half percent (3.5) of Net Revenue ("Purchase Price"). For purposes of this section 6.1 Operating Income is determined according to the following formula; Net Revenues less Costs, general and administrative expenses, and all other costs not explicitly excluded from Costs. For purposes of calculating the Operating Income under this Agreement, "Costs" shall mean all direct and indirect costs incurred by Reseller in connection with marketing and selling the Products, maintenance contracts and support services to third parties in the Territory (excluding the Purchases Price specified in Section 6.1), computed under US GAAP. 6.2. Ownership- Reseller acknowledges Company's (or its licensor's) right, title and interest in, and to, any and all Intellectual Property Rights and that, except as specified in this Agreement, Reseller shall acquire no rights whatsoever in or to any Intellectual Property Rights. Without limiting the foregoing, except as provided herein, this Agreement does not constitute a license, sale or any other transfer of the intellectual Property Right. Reseller shall not take any action that ITA No.376/PUN/2022 & C.O.No.53/PUN/2022 M/s.Hexagaon Manufacturing Intelligence India Pvt. Ltd., (Formerly known as MSC Software Corp. India Pvt. Ltd.,) 8 may adversely affect or impair Company's right, title or interest in or to the Intellectual Property Rights. 6.3. Analysis of functions performed- On going through various clauses of agreement, the following observations are made:  MSC India performs routine marketing activities in India to attract customers of Software products in Indian market.  The marketing material is provided by company to assessee at no cost and even when assessee prepares localized products, its copyrights are with company.  The routine marketing activities primarily include attending conferences, exhibitions and seminars, gatherings to showcase the product to targeted customers.  When an order i. received from customer to MSC India, they are submitted to AE with specific type, quantity of product, name and e-mail address of customer and requested delivery date.  The AE has discretion to accept or reject the order.  If accepted, the delivery of product is the responsibility of AE. Company will deliver product directly to end customer and Company will provide assessee, notification of such delivery.  Customer makes payment to assessee.  Assessee retains 3.5% of revenue from the receipts from customers and remaining amount is passed on to company i.e. AE.  The copy of agreement with customer is done in a format approved by Company. Further Company has right to call for periodic report regarding activities of assessee and verify its books which assessee has to comply, (Clause 3.8 and 3.9 of the agreement) Thus as can be seen from the above discussion, the main activity of the assessee is marketing activity. Otherwise ownership of the product is with AE, the power to determine whether to accept/ reject order and pricing is with AE. So assessee is getting remunerated for marketing function only with a fixed mark up.” 7. Thus, the TPO held that the main activity of the assessee is the marketing activity. Otherwise ownership of the product is with the AE, the power to determine whether to accept / reject the order and pricing is with the AE. Therefore, the assessee is getting remunerated for marketing function only with a fixed mark-up. Once the functions of the assessee were understood, FAR analysis of comparables was undertaken to verify whether the functions performed by the assessee and the comparables selected were similar or not. In this regard, ld. TPO observed and held as follows: “6.4. ..... Integra Telecommunications: As per the Annual report, page 13, for FY 2014 15, main product of the company is computer hardware, for which of total turnover is 100. Further as per page 19 of the annual report, the company deals in various type/ make of computer, laptop, various other hardwares and softwares as per the requirements of its client. Thus as can be seen from the annual report , main business of the company is trading in computer hardware. As per the P& L ITA No.376/PUN/2022 & C.O.No.53/PUN/2022 M/s.Hexagaon Manufacturing Intelligence India Pvt. Ltd., (Formerly known as MSC Software Corp. India Pvt. Ltd.,) 9 account, there is purchase of product , sale of product and mention of inventory. So it is functionally different than the activities of assessee. Dynacos Technologies Limited: As per page 46 of the Annual report, Dynacons Technologies Limited is an Information Technology Company engaged in providing a comprehensive range of products to customers. As per the website of the company Dynacons Enterprise Services offerings include a wide spectrum of Enterprise IT and Office Automation Services including Infrastructure Managed Services, Breakfix Services, Managed print Services, cloud Computing, Systems Integration Services, and Applications Development and Maintenance. Thus the services offered are functionally different than the assessee. JMD Telefilms- As per the annual report, during the year AY 2015-16, the Company was into the business of Music Recording (Entertainment Industry), Software(Mobile Applications) Trading, Recording & Sale of Music CDs in its retail outlets or through Franchisees, Renting of Musical Studio as well as Investment activity in Capital Market in accordance with the Accounting Standard 17 notified by Companies (Accounting Standards) Rules 2006. Further as per segment reporting, company is into trading of hardware and software. 6.5 After analysing annual report of these comparables, it is seen that functional profile of comparable companies selected by assessee is different. Some of them are into trading or computer hardware and software. They are into trading activity who will purchase different products from various companies, will have inventory of those products and will sell in retail market. However functions performed by assessee are different. Assessee is mainly into marketing of products. The ownership and inventory of products is with AE. The orders are placed by assessee to AE and finally delivery is also given by AE. Thus role of assessee is marketing of products and support services. Thus the comparables selected by assessee cannot be considered as comparables due to different functional profile. Thus herewith it is held that activity of assessee is marketing support activity.” 8. The ld. CIT(A) on the other hand, allowed the appeal of the assessee holding the activities of the assessee to be distribution support services while relying on the assessee’s own case for A.Y. 2013-14 where the predecessor CIT(A) has accepted the software distribution functions of the assessee. It was held that since there is no change in the facts for the year under consideration as compared with the facts of A.Y. 2013-14 relief was provided to the assessee by holding that the assessee is into distribution support services. 9. We have perused the case records, heard the rival contentions and analyzed the facts and circumstances in this case. We have also perused the Reseller agreement between the assessee and its AE and in this agreement the very term the assessee is referred to as “Reseller”. In the recital part clause (B), it states “Company wishes to appoint reseller to market and sell the products in the territory (as defined herein) and reseller desires to accept such appointment. Here, the reseller is MSC Software Corporation India Pvt. Ltd. i.e. the assessee and this clearly signifies that the assessee has to do the ITA No.376/PUN/2022 & C.O.No.53/PUN/2022 M/s.Hexagaon Manufacturing Intelligence India Pvt. Ltd., (Formerly known as MSC Software Corp. India Pvt. Ltd.,) 10 marketing activities and sell the products. The other relevant clauses in this agreement are as follows: “Section 2 - Appointment of Reseller 2.1 Appointment. Subject to the terms and conditions set forth in this Agreement, Company hereby appoints Reseller, on a non- exclusive basis, to market and sell the Products in the Territory, and Reseller hereby accepts such appointment. Nothing in this Agreement shall be construed to limit Company's right to directly or indirectly market or sell the Products in the Territory or to appoint one or more additional resellers within the Territory. 2.2 Relationship Between the Parties. Company and Reseller agree that, in the performance of their respective obligations hereunder, they are and shall remain independent contractors. Nothing in this Agreement shall be construed to constitute either Party as the agent of the other Party for any purpose whatsoever, and neither Party shall have the power to bind the other Party to any contract or the performance of any other obligation, or represent to any third party that it has any right to enter into any binding obligation on the other Party's behalf. Section 3 - Obligations of Reseller 3.1 General Conduct. Reseller shall use its best efforts to market and sell the Products within the Territory. Reseller shall conduct its business in a lawful manner that will reflect favorably on Company and the Products and shall not engage in any deceptive, misleading, illegal or unethical business practice. 3.2 Advertising and Promotion. In furtherance of its obligations under Section 3.1 hereof, Reseller shall advertise and promote the Products in a commercially reasonable manner, including but not limited to, participating in trade shows and exhibitions and performing marketing presentations. Reseller shall, at its own expense, have the right to prepare localized Product descriptions and promotional materials as it considers appropriate for the successful marketing of the Products in the Territory. Reseller shall and hereby does assign to Company or its designee any and all copyrights and/or other proprietary rights in such Product descriptions, promotional materials, and other related localized materials effective upon the date of creation thereof by Reseller. 3.3 End-User Agreements. Reseller shall cause each customer to which any of the Products are delivered to agree to an End-User Agreement in a form which has been approved by Company which is attached hereto as Exhibit A. Reseller shall provide Company with copies of each End-User Agreement in accordance with those policies communicated by Company to Reseller from time to time. 3.4 Sub-reseller Agreements. Reseller shall have the right to appoint Sub-reseller(s). Reseller shall cause each Sub-reseller (if any) to execute a Sub-reseller Agreement which contains substantially similar terms as those contained herein. Upon request, Reseller shall provide Company with copies of each Sub-reseller Agreement in accordance with those policies communicated by Company to Reseller from time to time. ITA No.376/PUN/2022 & C.O.No.53/PUN/2022 M/s.Hexagaon Manufacturing Intelligence India Pvt. Ltd., (Formerly known as MSC Software Corp. India Pvt. Ltd.,) 11 3.5 Personnel and Facilities. Reseller shall occupy and maintain facilities adequate to market and sell the Products in the Territory. Reseller shall retain and have at its disposal at all times an adequate staff of trained and qualified personnel to perform its obligations under this Agreement. 3.6 Representations and Warranties. Reseller shall not make representations or warranties with respect to the Products greater in scope or duration than those generally made by Company in the Territory, except where required by local law or as specifically agreed between Reseller and Company. Company shall indemnify and hold Reseller harmless against any damages and losses resulting from (a) the non-conformance of the Products with Company's standard warranty for the Territory, (b) such other warranty as Reseller may be unable to disclaim as a matter of local law, and (c) product liability or other claims howsoever arising out of Reseller's exercise of its rights and performance of its obligations under this Agreement, other than those caused by Reseller's gross negligence. 3.7 Training. Consulting and Maintenance Services. Reseller may offer to provide training, consulting and maintenance services for customers in the Territory. All such services that Reseller provides to customers under this Section 3.7 shall conform to Company's quality standards, which Company shall make known to Reseller from time to time. 3.8 Record Keeping. At all times during the term of this Agreement, Reseller shall maintain full, complete and accurate books of account and records with regard to its activities under this Agreement. Upon reasonable notice, Reseller shall consent to Company reviewing, during normal business hours, Reseller's, books, records and systems in order that Company, at its expense, may verify compliance by Reseller with its obligations under this Agreement. 3.9 Additional Information. From time to time during the term of this Agreement, Company may request Reseller to provide Company with periodic reports regarding its activities hereunder, which shall include such information as requested by Company. Reseller shall provide such information to Company as and when requested. Reseller shall also immediately report to Company all claimed or suspected Product defects. Section 4 - Obligations of Company 4.1 Marketing Materials. Company shall, at no cost, provide Reseller with a reasonable quantity of marketing and promotional materials to assist Reseller in its marketing activities hereunder. 4.2 Technical Support. Company shall provide Reseller with reasonable technical assistance with respect to the Products in the Territory. 4.3 Performance of Maintenance Contracts. The Parties acknowledge and agree that Company shall be responsible for providing Enhancements, as that term is defined in the Company's standard end-user agreement, and unless otherwise agreed, that Reseller shall be responsible for the performance of technical support services under the maintenance contracts sold by Reseller hereunder; provided that Reseller may, from time to time, request Company to ITA No.376/PUN/2022 & C.O.No.53/PUN/2022 M/s.Hexagaon Manufacturing Intelligence India Pvt. Ltd., (Formerly known as MSC Software Corp. India Pvt. Ltd.,) 12 assist with the performance of such services, on such terms as agreed between the Parties. Section 5 - Purchase Orders and Delivery 5.1 Orders. All orders for the Products submitted by Reseller to Company (the "Purchase") shall be placed as instructed by Company. On receipt of orders for the Products by Reseller from a customer. Reseller shall submit to Company a corresponding order for the Products. All orders for the Products submitted by Reseller to Company shall specify the type and quantity of the Products, the name and email address of the customer requesting the Products and the requested delivery date. Each order submitted by Reseller shall be governed by and deemed to incorporate ail the terms and conditions of this Agreement. Company shall, at its discretion, accept or reject the order without undue delay, Company shall use commercially reasonable efforts to ensure that the Products are delivered electronically to the customer by the delivery date requested by Reseller or its customer and shall indemnify and hold Reseller harmless for any damages incurred by Reseller as a result of delays in delivery that are caused by Company. 5.2 Delivery. All deliveries hereunder shall be made in accordance with those terms agreed to between Company and Reseller from time to time. Except as otherwise agreed by the Parties, Company agrees to deliver downloadable Products directly to the end- user's computer or device. Company will provide to Reseller notification of such delivery for Reseller's records. Company's obligation to deliver the Products to end-users shall be complete at such time as, and place where, the end-user first successfully receives the download of the Products. At that time and place, ail risk of loss to the Products shall pass to the end-user. 5.3 Cancellation and Rescheduling. Reseller may cancel or reschedule any of its purchase orders for the Products submitted pursuant to this Section 5, provided that such cancellation or rescheduling is in accordance with the terms and conditions communicated to Reseller by Company from time to time. Section 6 - Prices and Payments 6.1 Purchase Price. Reseller shall pay to Company monthly an aggregate amount such that Reseller earns cumulative year-to-date Operating Income of three and one-half percent (3.5) of Net Revenue ("Purchase Price"). For purposes of this Section 6.1 Operating Income is determined according to the following formula: Net Revenues less Costs, general and administrative expenses, and all other costs not explicitly excluded from Costs. "Net Revenue" shall mean and include total gross revenues recognized by Reseller from selling the Products, related maintenance contracts, training and support services to third parties, computed under U.S. Generally Accepted Accounting Principles ("US GAAP"), less any credits, discounts, allowances, returns, refunds, and deferred revenue items which were previously recognized for transfer pricing purposes, with respect to such Products and excluding any consumption tax or similar taxes applied to such Products. ITA No.376/PUN/2022 & C.O.No.53/PUN/2022 M/s.Hexagaon Manufacturing Intelligence India Pvt. Ltd., (Formerly known as MSC Software Corp. India Pvt. Ltd.,) 13 For purposes of calculating the Operating income under this Agreement, "Costs" shall mean all direct and indirect costs incurred by Reseller in connection with marketing and selling the Products, maintenance contracts and support services to third parties in the Territory (excluding the Purchase Price specified in Section 6.1), computed under US GAAP. For the avoidance of doubt, "Costs" relate only to the marketing and support activities performed by Reseller hereunder, and exclude stock based compensation, foreign exchange gains/losses, interest income/expense, and other extraordinary or non-recurring items (e.g., restructuring costs). 6.2 End of Month Adjustment and Payment. Within thirty (30) calendar days after the end of each month, the Parties shall determine Reseller's Operating Income for the month. Within ninety (90) days after the end of each month, to the extent necessary, Company shall pay to Reseller (or Reseller shall refund to Company) an amount such that Reseller recognizes an Operating income of three and one-half percent (3.5), based on Net Revenue, for the cumulative year-to-date period ending with such month.” 10. From the analysis of these provisions, it is absolutely clear that the assessee being the reseller is doing only marketing support services. That MSC India is actually performing routine marketing activities in India attracting customers of software products in the Indian market. The marketing material is provided by company to the assessee at no cost and even when assessee prepares localized products, the copyrights are always with the company. The routine marketing activity primarily includes attending conferences, exhibitions, seminars to showcase the product to the targeted customers. When an order is received from the customer by MSC India that would be submitted to AE with specific type quantity of the product name and e- mail address of the customer and the requisite delivery date. However, the AE has the discretion either to accept or reject that order. If accepted, the delivery of the product is the responsibility of AE. The company will deliver the product directly to the customer and company will provide the assessee just a notification of such delivery. The customer makes payment to the assessee, the assessee retains 3.5% of revenue from the receipts from customers and the remaining amount is passed on to the company i.e. AE. The copy of agreement with customer is done in a format which also to be approved by the AE. Further, the AE has right to call for periodic report regarding the activities of the assessee and verify the books of account of assessee as evident from clauses 3.8 and 3.9 of the agreement. Therefore, we are of the considered view that the assessee’s main activity is nothing but marketing activity, whereas all the ownership of the product, the power to determine whether to accept / reject the order and the pricing is with the AE. The assessee is only getting 3.5% of the revenue from the receipts of the customers for the marketing function that it is doing. We, therefore, set aside the findings of ld. CIT(A) and restore the order of ld. TPO. The grounds of appeal of Revenue are allowed. The appeal of Revenue in ITA No.375/PUN/2022 is allowed. 11. Now, we shall adjudicate Cross Objection by the assessee and the grounds of objections are as follows: ITA No.376/PUN/2022 & C.O.No.53/PUN/2022 M/s.Hexagaon Manufacturing Intelligence India Pvt. Ltd., (Formerly known as MSC Software Corp. India Pvt. Ltd.,) 14 “1. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in dismissing the following grounds of appeal (Ground 2.2, 2.3, 2.4, 2.7, 2.8 and 2.10) of the respondent raised before the Ld. CIT(A) considering them academic: 2.2. Disregarding the benchmarking analysis adopted as part of TP Study Report 2.3 Selection/ rejection of filters and failing to provide the accept reject matrix and search process 2.4 Correct profitability if the Respondent is to be compared to marketing support service providers 2.7 Not giving due consideration to the pricing arrangement for the selection of comparables 2.8 Selection of functionally non comparable companies for the purpose of determining the ALP 2.10 Allowing economic adjustments for differences between Respondent and comparables 2. On the facts and in circumstances of the case and in law, the learned Deputy Commissioner of Income-Tax Circle-7, Pune ('Ld. AO') has erred in making transfer pricing addition to the Appellant's income and the learned Commissioner of Income- tax (Appeals)-13, Pune ['Ld, CIT(A)'] has erred in partially upholding/ confirming the actions of the Ld. AO in this regard. 3. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in not adjudicating certain grounds of appeal raised before the CIT(A) by the respondent considering them pre-mature [i.e.. Ground 3 raised before the Ld. CIT(A)]. The Respondent craves leave to add to or alter, by deletion, substitution, modification or otherwise or amend or withdraw the cross objections herein and to submit such statements, documents and papers as may be considered necessary either before or during the hearing of the appeal.” 12. With regard to ground of objection No.2, the assessee is aggrieved with the findings of ld. CIT(A) which is at para 3.6 of his order as follows: “3.6 Findings on ground no.2.6 The similar issue was dealt by my predecessor in AY 2013-14 wherein he found no error in the Ld. TPO’s decision to treat foreign exchange gain as non-operating in nature for the purpose of computation of the PLI of the appellant as well as that of the comparable companies. Therefore following the same, this ground of appeal is dismissed.” 13. We find that Pune Bench of Tribunal in several decisions have held that forex gain is operating in nature. The relevant findings of the Tribunal in one such decision in ITA No.331/PUN/2021 in the case of Transperfect Solutions India Pvt. Ltd. vs. ACIT, order dated 29.07.2022, is as follows: ITA No.376/PUN/2022 & C.O.No.53/PUN/2022 M/s.Hexagaon Manufacturing Intelligence India Pvt. Ltd., (Formerly known as MSC Software Corp. India Pvt. Ltd.,) 15 “11. It is undisputed even from the DRP directions that the forex gain pertains to business revenue of the assessee company. It has been held in several decisions rendered by the various courts of the country including the Hon’ble Delhi High Court in Pr.CIT Vs. BC Management Services Pvt. Ltd. (2018) 403 ITR 45 (Delhi) that foreign exchange gain or loss should be considered as operating in determining the operating margin. In view of the above precedent, we hold that the forex gain should be treated as an item of operating revenue. This ground, is therefore, allowed.” 14. Respectfully following the decision cited hereinabove, we hold thatforex gain is operating in nature and accordingly, ground of objection No.2 is allowed. 8. Thus, ITAT Pune in ITA No.375/PUN/2022 held that the assessee’s main activity is marketing activity and accordingly upheld the order of the TPO qua the nature of the activity of the assessee. 9. Respectfully following the decision of ITAT Pune in ITA No.375/PUN/2022 (supra), we uphold the order of the TPO qua nature of the activity. We hereby hold that assessee’s main activity is marketing activity. Therefore, comparable engaged in Distribution Activity, as selected by the assessee in TPSR, are not comparable to the functions performed by the assessee. Accordingly, Ground No's.1 to 3 raised by the Revenue are Allowed. Rebuttal of AR’s submission: 10. In this case Ld.AR vehemently argued that the ITAT’s order in assessee’s own case for A.Y. 2015-16 have failed to appreciate the functions of the assessee properly and hence the said ITAT order shall not be followed. We specifically asked the Ld.AR whether the ITA No.376/PUN/2022 & C.O.No.53/PUN/2022 M/s.Hexagaon Manufacturing Intelligence India Pvt. Ltd., (Formerly known as MSC Software Corp. India Pvt. Ltd.,) 16 activities under taken by the assessee for AY 2015-16 and current year are same or not? The Ld.AR admitted that activities under taken by the assessee in AY 2015-16 and current year are same. The Agreement between the assessee and the AEs for AY 2015-16 and current year is same. The Ld.AR could not brought on record any document to demonstrate that the functions of the assessee in AY 2015-16 and current year are not same. In these facts and circumstances of the case, we are of the opinion that it is our duty to follow the ITAT order in AY 2015-16 (supra) specially when the Hon’ble JM was party to that order. Ground No.4 : 11. The Ground No.4 is regarding ld.CIT(A)’s decision that Dynacons Technologies, Integra Telecommunications and JMD Telefilms are comparables to assessee. It is observed that the ld.CIT(A) has not adjudicated the issue of comparability of these comparable on merits. Therefore, the said issue is set-aside to the file of ld.CIT(A) for denovo adjudication. The ld.CIT(A) shall give opportunity to the Assessee and Revenue. Accordingly, Ground No.4 is allowed for statistical purpose. 12. In the result, appeal of the Revenue is Partly Allowed. ITA No.376/PUN/2022 & C.O.No.53/PUN/2022 M/s.Hexagaon Manufacturing Intelligence India Pvt. Ltd., (Formerly known as MSC Software Corp. India Pvt. Ltd.,) 17 Cross Objection No.53/PUN/2022 (Assessee) : 13. We have already held in Revenue’s appeal in ITA No.376/PUN/2022 that assessee’s is in the marketing activity. It is observed that the ld.CIT(A) has not adjudicated the grounds raised by the assessee. However, it is observed that assessee had benchmarked its international transactions in TPSR as distribution activity. The assessee treated itself as distributor in TPSR and identified the comparables. Since we have already decided that assessee’s main activity is marketing, the issue of comparability of comparables selected by the TPO is set-aside to the ld.CIT(A) for denovo adjudication on merits. The ld.CIT(A) shall provide opportunity to the Revenue and Assessee. Accordingly, the Cross Objection, Ground No.1 is allowed for statistical purposes. Ground No.2 : 14. Since we have set-aside the issue of selection of comparables, the Ground No.2 becomes academic in nature and hence dismissed. Ground No.3 : 15. The assessee has not pressed for this Ground No.3 as it is pre- mature, hence, dismissed. ITA No.376/PUN/2022 & C.O.No.53/PUN/2022 M/s.Hexagaon Manufacturing Intelligence India Pvt. Ltd., (Formerly known as MSC Software Corp. India Pvt. Ltd.,) 18 16. In the result, Cross Objection appeal of the assessee is Partly Allowed for Statistical Purpose. Order pronounced in the open Court on 11 th April, 2023. Sd/- Sd/- (PARTHA SARATHI CHAUDHURY) (DR. DIPAK P. RIPOTE) JUDICIAL MEMBER ACCOUNTANT MEMBER पुणे / Pune; ᳰदनांक / Dated : 11 th April, 2023/ SGR* आदेशकᳱᮧितिलिपअᮕेिषत / Copy of the Order forwarded to : 1. अपीलाथᱮ / The Appellant. 2. ᮧ᭜यथᱮ / The Respondent. 3. The CIT(A), concerned. 4. The Pr. CIT, concerned. 5. िवभागीयᮧितिनिध, आयकर अपीलीय अिधकरण, “सी” बᱶच, पुणे / DR, ITAT, “C” Bench, Pune. 6. गाडᭅफ़ाइल / Guard File. आदेशानुसार / BY ORDER, // TRUE COPY // Senior Private Secretary आयकर अपीलीय अिधकरण, पुणे/ITAT, Pune.