Transfer pricing benchmarking excludes mixed business comparables without segmental data under TNMM method

ITAT Pune held that in transfer pricing benchmarking using TNMM method, comparables engaged in both software services and product sales must be excluded when segmental details are unavailable. Two companies (Cybermate and Cybercom) were excluded as they provided services and sold products without separate segment data. The Tribunal ruled that companies cannot be excluded merely for losses in one year unless persistently loss-making, following Bombay HC precedent. Comparables must have same financial year as assessee. After excluding inappropriate comparables, assessee's margins fell within +/-5% range of remaining comparables. Appeal partly allowed.

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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.

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