M/s. Principal Global Services Private Limited, Pune V. Assistant Commissioner of Income tax, Pune

ITA 482/PUN/2017

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 9274 (ITAT-PUNE)
• Duration Of Justice: 1 year(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-03-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 12-10-2017
• Assessment Year: 2012-2013
• Appeal Filed On: 27-02-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction; Rule of consistency; Earning of tax free income
• Section: 143(3); 14A; 10B; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, PUNE , , , , BEFORE MS. SUSHMA CHOWLA, JM AND SHRI ANIL CHATURVEDI , AM . / ITA NO. 482/PUN/2017 / ASSESSMENT YEAR : 2012 - 13 M/S. PRINCIPAL GLOBAL SERVICES PRIVATE LIMITED. TOWER 6, CYBERCITY, MAGARPATTA CITY, HADAPSAR, PUNE - 411 028. / APPELLANT PAN : AADCP7369P / V/S. THE ASS T. COMMISSIONER OF INCOME TAX, CIRCLE - 4, PUNE. / RESPONDENT APPELLANT BY : SHRI KAMAL SAWHNEY RESPONDENT BY : SHRI RAJEEV KUMAR, CIT / DATE OF HEARING : 08.01.2018 / DATE OF PRONOUNCEMENT : 09 .0 3 .2018 / ORDER PER SUSHMA CHOWLA , JM T HE APPEAL FILED BY THE ASSESSEE IS AGAINST THE ORDER OF A CIT , CIRCLE - 4 , PUNE DATED 23.12.2016 RELATING TO ASSESSMENT YEAR 2012 - 1 3 PASSED UNDER SECTION 143(3) R.W.S 144C(13) OF THE INCOME - TAX ACT, 1961 (IN SHORT THE ACT). 2. 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 : 2 ITA NO.482/PUN/2017 M/S. PRINCIPAL GLOBAL SERVICES PVT. LTD. 1 . GENERAL GROUNDS 1.1 ASSESSING THE TOTAL INCOME AT RS.163,768,093/ - AS AGAINST INCOME OF RS.116,671,150 (AS PER THE RETURN OF INCOME FILED BY THE APPELLANT); 2 . TRANSFER PRICING ADJUSTMENT 2.1 DETERMINING THE ARMS LENGTH PRICE OF INTERNATIONAL TRANSACTION PERTAINING TO SOFTWARE DEVELOPMENT SERVICES PROVIDED BY THE APPELLANT TO ITS AES AS RS .608,977,505/ - AGAINST RS. 576,781,184/ - AS DE TERMINED BY THE APPELLANT AND ACCORDINGLY MADE AN UPWARD ADJUSTMENT OF RS.32,196,321/ - AND DETERMINING THE ARMS LENGTH PRICE OF INTERNATIONAL TRANSACTION PERTAINING TO BACK OFFICE SUPPORT SERVICES PROVIDE D BY T HE APPELLANT TO ITS AES AS RS. 200,216,996/ - AGAINST RS.185,497,012/ - AS DETERMINED BY THE APPELLANT AND ACCORDINGLY MADE AN UPWARD ADJUSTMENT OF RS.14,719,984/ - . 2.2 REJECTING COMPARABLE COMPANIES WHICH ARE IN FACT COMPARABLE TO THE A PPELLANT; 2.3 S ELECTING COMPANIES AS COMPARABLE WHICH ARE IN FACT NOT COMPARABLE TO THE APPELLANT. 2.4 CHERRY PICKING THE HIGH MARGIN COMPANIES AND REJECTING THE LOW MARGIN COMPANIES AND INCONSISTENTLY APPLYING THE BENCHMARKING CRITERIA; 2.5 DISREGARDING THE BENCH MARKING ANALYSIS AND COMPARABLE COMPANIES SELECTED BY THE APPELLANT BASED ON THE CONTEMPORANEOUS DATA IN THE TRANSFER PRICING STUDY REPORT MAINTAINED AS PER SECTION 92 D OF THE ACT READ WITH RULE 10 D OF THE INCOME - TAX RULES, 1962 ('THE RULES') 2.6 NOT SH ARING THE SEARCH STRATEGY ADOPTED FOR SELECTION OF ALLEGED COMPARABLE COMPANIES DURING THE COURSE OF ASSESSMENT PROCEEDINGS; 2.7 APPLYING INAPPROPRIATE FILTERS TO REJECT CERTAIN COMPARABLE COMPANIES SELECTED BY THE APPELLANT 2.8 DISREGARDING THE HON' BL E D RP DIRECTIONS, BY NOT ACCEPTING CALTEC SERVICEZ PVT. LTD. AND JINDAL INTELLICOM LTD. AS COMPARABLE COMPANIES FOR THE BACK OFFICE SUPPORT SEGMENT WHICH ARE REJECTED BY THE TPO JUST ON THE BASIS OF LOSS MAKING 2.9 ERRONEOUSLY COMPUTING THE OPERATING MAR GINS OF THE ALLEGED COMPARABLE COMPANIES WHILE MAKING AN ADJUSTMENT TO THE INTERNATIONAL TRANSACTION OF THE APPELLANT; 2.10 DISREGARDING THE D RP DIRECTIONS AND INCORRECTLY COMPUTING THE WORKING CAPITAL ADJUSTED MARGINS OF THE COMPARABLE COMPANIES; 2.11 NOT ALLOWING RISK ADJUSTMENT IN ACCORDANCE WITH THE PROVISIONS OF RULE 10 B OF THE RULES TO ACCOUNT FOR DIFFERENCE BETWEEN INTERNATIONAL TRANSACTION OF THE APPELLANT AND THE ALLEGED COMPARABLE UNCONTROLLED TRANSACTIONS SELECTED BY THE LD. TPO IN ACCORDANCE WITH RULE 10B (3) OF THE RULES; 3 ITA NO.482/PUN/2017 M/S. PRINCIPAL GLOBAL SERVICES PVT. LTD. 2.12 REJECTING THE USE OF MULTIPLE YEAR DATA I.E. CONTEMPORANEOUS DATA IN THE TRANSFER PRICING STUDY REPORT MAINTAINED AS PER SECTION 92 D OF THE ACT READ WITH RULE 10 D OF THE RULES USED FOR DETERMINING THE ARM'S LENGTH PRIC E OF THE INTERNATIONAL TRANSACTIONS OF THE APPELLANT PERTAINING TO THE SOFTWARE DEVELOPMENT SERVICES SEGMENT; 2.13 VIOLATING THE 'RULE OF CONSISTENCY' WHILE MAKING ADJUSTMENT TO THE INTERNATIONAL TRANSACTION OF THE APPELLANT PERTAINING TO PROVISION OF SOFTWARE DEVELOPMENT SERVICES TO ITS ASSOCIATED ENTERPRISE AS THE LD. AO HAD ACCEPTED THE ARM'S LENGTH NATURE OF THIS TRANSACTION IN A . Y 2011 - 12; 3. ADJUSTMENT UNDER SECTION 14A OF THE ACT READ WITH RULE 8D 3.1 INVOKING RULE 8D AND THEREBY PROPOSING ADDITIONAL DISALLOWANCE OF RS. 180,638 / - UNDER SECTION 14A OF THE ACT. 3.2 WITHOUT PREJUDICE TO GROUND NUMBER 3.1, HAS ERRED IN NOT APPRECIATING THE FACT THAT THE ENTIRE INCOME RECEIVED FROM MUTUAL FUNDS IS TAXED IN THE HANDS OF MU TUAL FUND INVESTMENT COMPANY UNDER SECTION 115 - R OF THE ACT AND HENCE CANNOT BE CONSIDERED AS TAX EXEMPT INCOME. 4. OTHERS ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. 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 . 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 LD. AO TO DECIDE THIS APPEAL ACCORDING TO LAW. 3. THE ISSUE ARISING IN THE PRESENT APPEAL IS AGAINST TRANSFER PRICING ADJUSTMENT OF INTERNATIONAL TRANSACTIONS UNDERTAKEN BY THE ASSESSEE WITH ITS ASSOCIATED ENTERPRISES. 4. THE GROUND OF APPEAL NO.1 RAISED BY THE ASSESSEE IS GENERAL IN NATURE AND HENCE, THE SAME IS DISMISSE D. 5. 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. 4 ITA NO.482/PUN/2017 M/S. PRINCIPAL GLOBAL SERVICES PVT. LTD. 6. 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 PERTAINI NG TO BACK OFFICE SUPPORT SERVICES PROVIDED BY THE ASSESSEE TO ITS ASSOCIATED ENTERPRISES AT 1,47,19,984/ - . 7. 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 UN DERTAKEN 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 INFORMAT ION 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 REP ORT 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 AGAINS T 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 5 ITA NO.482/PUN/2017 M/S. PRINCIPAL GLOBAL SERVICES PVT. LTD. AGAINST THE MARGINS OF ASSESSEE AT 15.10% IN THE INTERNATIONAL TRANSACTIONS OF PROVISION OF SOFTWARE SERVICES BY THE ASSESSEE TO ITS ASSOCIATED ENTERPRISES. THE T PO THUS, PROPOSED AN UPWARD ADJUSTMENT OF 4.79 CRORES. IN THE SECOND FIELD OF PROVISION OF BACK OFFICE SUPPORT SERVICES ALSO, THE TPO HAS PICKED DIFFERENT SET OF COMPARABLES AND THE MEAN MARGIN OF COMPARABLES WORKED OUT TO 34.47% AS AGAINST THE MEAN MAR GIN OF ASSESSEE IN THAT SEGMENT AT 15.15%. THE TPO PROPOSED AN UPWARD ADJUSTMENT OF 3.11 CRORES. 8. 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 AGAIN ST 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 COMP ARABLES 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. 9. THE ASSESSEE IS IN APPEAL BEFORE US IN RESPECT OF BOTH SEGMENTS. 10. THE LEARNED AUTHORIZED REPRESE NTATIVE 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 6 ITA NO.482/PUN/2017 M/S. PRINCIPAL GLOBAL SERVICES PVT. LTD. CYBERMATE INFOTEK LTD. (IN SHORT CYBERMATE) AND CYBERCOM DATAMATICS INFORMATION SOLUTIONS LTD. ( IN SHORT CYBERCOM) ARE TO BE EXCLUDED FROM FINAL LIST OF COMPARABLES. IN RESPECT OF CYBERMATE, IT WAS POINTED OUT THAT IT WAS FUNCTIONALLY DIFFERENT AND WAS A PRODUCT COMPANY AND WAS ALSO ENGAGED IN SOFTWARE DEVELOPMENT BUT NO SEGMENTAL DETAILS WERE AVA ILABLE. OUR ATTENTION WAS DRAWN TO THE FINANCIALS OF SAID CONCERN WHICH ARE PLACED AT PAGES 872 TO 902 OF THE PAPER BOOK. IN THIS REGARD, THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE ALSO PLACED RELIANCE ON DIFFERENT DECISIONS OF TRIBUNAL FOR T HE EXCLUSION OF CYBERMAE. IN RESPECT OF CYBERCOM, IT WAS POINTED OUT THAT IT WAS A PRODUCT COMPANY AND THE MARGIN OF THE SAME COULD NOT BE COMPARED WITH THE ASSESSEE, WHO WAS ENGAGED IN PROVIDING SOFTWARE DEVELOPMENT SERVICES TO ITS ASSOCIATED ENTERPRISES . FURTHER, IN RESPECT OF PROVISION OF BACK OFFICE SUPPORT SERVICES, THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT IN CASE THE CONCERN JINDAL INTELLICOM LTD. (IN SHORT JINDAL) WAS EXCLUDED BY THE TPO ON THE GROUND THAT IT WAS LO SS MAKING AND EVEN THE DRP SAID THAT IT IS LOSS MAKING ; BUT THE CONCERN WAS NOT PERSISTENT LOSS MAKING AND HENCE, THE MARGINS OF SAID CONCERN SHOULD BE INCLUDED FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS OF ASSESSEE. IN THIS REGARD, RELIANCE WAS PLAC ED ON THE RATIO LAID DOWN BY THE HONBLE BOMBAY HIGH COURT IN CIT VS. M/S. WELSPUN ZUCCHI TEXTILES LTD. IN INCOME TAX APPEAL NO.1286 OF 2014, JUDGMENT DATED 06.01.2017. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT IN CASE THE SA ID CONCERN IS INCLUDED, THEN THE MARGINS OF ASSESSEE WERE WITHIN +/ - 5% OF MEAN MARGINS OF COMPARABLES. 11. 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 D RPS 7 ITA NO.482/PUN/2017 M/S. PRINCIPAL GLOBAL SERVICES PVT. LTD. ORDER, WHEREIN DIRECTIONS WERE GIVEN FOR INCLUSION OF JINDAL SUBJECT TO SATISFACTION OF OTHER FILTERS. 12. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE LIMITED ISSUE ARISES IN THE PRESENT APPEAL IS WITH REGARD TO INCLUSION / EXCLU SION 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 ORIENT ED 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 WE RE AVAILABLE I.E. PROVISION OF SOFTWARE SERVICES AND PROVISION OF BACK OFFICE SUPPORT SERVICES . 13. 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 TH E 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 LTD. 46.50% 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% 8 ITA NO.482/PUN/2017 M/S. PRINCIPAL GLOBAL SERVICES PVT. LTD. 14. 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 WA S ENGAGED IN SALE OF SOFTWARE PRODUCTS AND ALSO PROVIDING SOFTWARE DEVELOPMENT SERVICES TO ITS ASSOCIA TED ENTERPRISES. BOTH THESE BUSINESS ACTIVITIES WE RE 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 REPOR T 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 3 8 OTHER PRODUCTS. THE FINANCIALS OF THE SAID CONCERN REFLECT NO SEGMENTAL REPORTING AND THE SERVICES WE RE DECLARED UNDER ONE HEAD. IN SUCH CIRCUMSTANCES, WHERE THE SEGMENTAL DETAILS WE RE NOT AVAILABLE OF THE CONCERN WHICH WERE ENGAGED IN MULTIPLE ACTIVIT IES 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 PRO VIDING 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 TW O 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, WA S ALSO PRODUCT COMPANY, THEN THE MARGIN S OF SAID CONCERN CANNOT BE COMPARED WITH THE MARGINS OF ASSESSEE. 9 ITA NO.482/PUN/2017 M/S. PRINCIPAL GLOBAL SERVICES PVT. LTD. 15. THE HONBLE 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 HONBLE HIGH COURT OF DELHI (SUPRA) WH ILE 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. 16. 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 UNDE R 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. 17. 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 SOLUTION S 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 S OLUTIONS LTD. IS FUNCTIONALLY NOT COMPARABLE. ACCORDINGLY, WE HOLD THAT THE SAID CONCERN IS TO BE EXCLUDED FROM THE FINAL SET OF COMPARABLES. 10 ITA NO.482/PUN/2017 M/S. PRINCIPAL GLOBAL SERVICES PVT. LTD. 1 8 . 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 CONCE RN 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. 1 9 . 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 ASSESSEES MARGIN S. ACCORDINGLY, WE HOLD SO. WE ARE NOT ADJUDICATING ANY 11 ITA NO.482/PUN/2017 M/S. PRINCIPAL GLOBAL SERVICES PVT. LTD. OTHER ISSUE IN RELATION TO SAID SEGMENT AND THE GROUNDS RAISED IN THIS REGARD BECOME ACADEMIC. 20 . 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 S HOULD 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 HONBLE BOMBAY HIGH COURT IN CIT VS. M/S. WELSPUN ZUCCHI TEXTILES LTD. (SUPRA). 2 1 . ON PERUSAL OF RECORD, WE FIND THAT THE TPO HAD EX CLUDED 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 OR DER, 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 HA D SHOWN POSITIVE MARGI NS AND ONLY IN THE YEAR UNDER CONSIDERATION, IT HA D SHOWN NEGATIVE MARGIN, SUCH CONCERN COULD NOT BE TERMED AS PERSISTENT LOSS MAKING CONCERN. WE FIND SUPPORT FROM THE RATIO LAID DOWN BY 12 ITA NO.482/PUN/2017 M/S. PRINCIPAL GLOBAL SERVICES PVT. LTD. THE HONBLE BOMBAY HIGH COURT IN CIT VS. M/S. WELSPUN ZUCCHI TEXTILE S LTD. (SUPRA), 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 L OSS MAKING , CANNOT BE EXCLUDED FROM FINAL SET OF COMPARABLES. SUCH PROPOSITION HAS ALSO BEEN LAID DOWN IN VARIOUS OTHER CASES. HOWEVER, IN VIEW OF THE RATIO LAID DOWN BY THE HONBLE BOMBAY HIGH COURT IN CIT VS. M/S. WELSPUN ZUCCHI TEXTILES LTD. (SUPRA), WE ARE NOT REFERRING TO OTHER DECISIONS RELIED UPON BY THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE IN THIS REGARD. 2 2 . 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 O NE 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 VERI FICATION AT THE END OF ASSESSING OFFICER / TPO. THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. PTC SOFTWARE (I) PVT. LTD. I N 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 BENCHM ARKING INTERNATIONAL TRANSACTIONS AND THE SAME IS TO BE EXCLUDED FROM THE FINAL SET OF 13 ITA NO.482/PUN/2017 M/S. PRINCIPAL GLOBAL SERVICES PVT. LTD. COMPARABLES. ACCORDINGLY, WE DIRECT THE ASSESSING OFFICER TO VERIFY THE STATUS OF CONCERN JINDAL AND DECIDE THE ISSUE IN LINE WITH OUR DIRECTIONS . THE LEARNED AUTHORIZ ED REPRESENTATIVE FOR THE ASSESSEE HAS NOT ARGUED ANY OTHER ISSUE IN RELATION TO THE SEGMENT OF PROVISION OF BACK OFFICE SUPPORT SERVICES. ACCORDINGLY, WE DO NOT ADJUDICATE ANY OTHER ASPECT OF THE SAID TRANSFER PRICING ADJUSTMENT. THE GROUNDS OF APPEAL R AISED BY THE ASSESSEE ARE THUS, PARTLY ALLOWED. 2 3 . IN THE RESULT, APPEAL OF ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED ON THIS 9 TH DAY OF MARCH , 201 8 . SD/ - SD/ - ( ANIL CHATURVEDI ) ( SUSHMA CHOWLA) / ACCOUNTANT MEMBER / JUDICIAL MEMBER / PUNE; / DATED : 9 TH MARCH , 2018 GCVSR / COPY OF THE ORDER IS FORWARDED TO : 1. THE APPELLANT ; 2. THE RESPONDENT; 3. THE DRP, PUNE ; 4. THE DIT (TP/IT), PUNE ; 5. THE DR A , ITAT, PUNE; 6. GUARD FILE. / BY ORDER , // TRUE COPY // COPY // / SR. PRIVATE SECRETARY , / ITAT, PUNE