ITAT Pune Excludes Cybercom Datamatics as Comparable, Upholds InfoBeans in TP Case

Nethawk Networks India Private Limited Vs ACIT (ITAT Pune)

The Pune ITAT partly allowed the assessee’s appeal against the final assessment order passed under Sections 143(3) read with 144C(13) of the Income-tax Act for AY 2012-13. The sole dispute concerned a transfer pricing adjustment of Rs.1,35,74,804 relating to the international transaction of providing software development services to the assessee’s Associated Enterprise (AE). The assessee had applied the Transactional Net Margin Method (TNMM) with Operating Profit/Operating Cost (OP/OC) as the Profit Level Indicator (PLI). While the assessee accepted the selection of TNMM and computation of the PLI, it challenged the inclusion of certain comparable companies. The Tribunal also admitted an additional ground elaborating the companies challenged in the memorandum of appeal.

Before examining the comparables, the Tribunal analysed the nature of the assessee’s activities by referring to the Computer Programming and Product Support Services Agreement dated 01.04.2007 and the transfer pricing study report. It observed that the assessee rendered only software development services to its AE, with all intellectual property rights in the deliverables vesting exclusively in the AE. The Tribunal therefore proceeded to examine the comparability of the disputed companies in the context of software development services.

The first dispute concerned InfoBeans Systems Pvt. Ltd. The assessee sought its exclusion on the ground that a demerger and transfer of software business, approved by the Madhya Pradesh High Court on 26.09.2012 with an appointed date of 01.04.2011, constituted an extraordinary financial event. The Tribunal examined the annual report and noted that the company had no independent business operations before 01.04.2011 and had commenced its actual business only from the first day of the relevant financial year by taking over the software business of another entity. It observed that the rationale for excluding companies affected by mergers or demergers is the distortion of financial results arising from interruption of an existing business. Since InfoBeans had no pre-existing business and its operations began only upon the transfer of the software business, its financial results represented uninterrupted business operations for the entire relevant year. As the assessee had not challenged its functional comparability apart from the merger issue, the Tribunal upheld its inclusion as a comparable. While the assessee relied on the Tribunal’s decision in eGain Communications Pvt. Ltd., the Tribunal distinguished that decision by observing that the peculiar factual position regarding commencement of business from the first day of the year had not been brought to the Bench’s attention in that case.