2025 (3) TMI 1520 - AT - Income Tax

Order directs exclusion of unreliable comparables from benchmarking international production and software development services receipts

HERE Solutions India Pvt. Ltd., Versus Assistant Commissioner of Income Tax, Mumbai

ITAT directed the TPO/AO to exclude several proposed comparables from benchmarking for the international transactions (receipts from production services ... TP adjustment - international transaction pertaining to 'Receipt from Production Services' - Comparable selection - HELD THAT:-Excel Infoways Ltd has declared revenue from Information Technology/BPO related services and Infra Projects. As per the segment reporting of revenue, the company has only two business segments, i.e. Information Technology/BPO related services and Infra Activity. Therefore, it is evident that there is no separate segmental information for BPO related services. Since this company is earning revenue from various streams, in the absence of relevant segmental information, it cannot be said to be functionally comparable to the assessee. It is also evident that the revenue from Information Technology/BPO related services declined over the years and the margin reduced from 228% in the financial year 2009-10 to 71.17% in the financial year 2012-13. We find that in Lanxess India Private Limited[2024 (1) TMI 412 - ITAT MUMBAI] directed exclusion of Excel Infoways Ltd. on the basis that it has fluctuating margins. We direct the TPO/AO to exclude Excel Infoways Ltd. while benchmarking the international transaction pertaining to 'Receipt from Production Services'. MPS Ltd.company is not merely a provider of typesetting and data digitalisation services, but also offers various products through extensive R&D activities carried out by it, as noted on page 737 of the paper book. Hence, we are of the considered view that this company cannot be said to be functionally comparable to the assessee, since despite having revenue earnings from multiple streams, it does not have the relevant segmental information for the benchmarking analysis. Accordingly, we direct the TPO/AO to exclude MPS Ltd. while benchmarking the international transaction pertaining to 'Receipt from Production Services'. IRIS Business Services Ltd. company is engaged in the business of supply of software and providing software related services. As per the profit and loss account, the revenue from sale of products is declared at INR 37,66,834 and the revenue from the sale of services is declared at INR 61,96,19,344. However, there is no further sub-classification of the revenue earned from various segments, which the company has recognised, as noted on page 86 of the paper book, i.e., the revenue from services rendered in connection with the advertisement and data conversion, sale of software/software licenses, subscription income, development or customisation of software, hosting and maintenance contracts. Since this company is earning revenue from various streams, in the absence of relevant segmental information, it cannot be said to be functionally comparable to the assessee. Accordingly, we direct the TPO/AO to exclude it. Omega Healthcare Management Services Pvt. Ltd. company fails the filter of RPT more than 25% of the operating revenue applied by the TPO. Accordingly, we direct the TPO/AO to exclude it. TP adjustment - international transaction pertaining to 'Receipt from Software Development Services' - Comparable selection - HELD THAT:- Aspire Systems (India) Pvt. Ltd. be excluded while benchmarking the international transaction pertaining to 'Receipt from Software Development Services' in absence of the profit and loss account the margin, income stream, nature of functions performed resulting into expenditure incurred are not known to the assessee. Cyber Infrastructure Pvt. Ltd. company is earning revenue from multiple streams, in the absence of relevant segmental information, it cannot be said to be functionally comparable to the assessee. Accordingly, we direct the TPO/AO to exclude it. ISSUES PRESENTED AND CONSIDERED 1. Whether the Transfer Pricing Officer's selection of comparable companies for benchmarking 'Receipt from Production Services' under TNMM (OP/OC) was appropriate, specifically the inclusion of Excel Infoways Ltd., MPS Ltd., IRIS Business Services Ltd., and Omega Healthcare Management Services Pvt. Ltd. 2. Whether the Transfer Pricing Officer's selection of comparable companies for benchmarking 'Receipt from Software Development Services' under TNMM (OP/OC) was appropriate, specifically the inclusion of Aspire Systems (India) Pvt. Ltd. and Cyber Infrastructure Pvt. Ltd. 3. Whether penalty proceedings under section 271(1)(c) read with section 274 are maintainable at the stage considered (prematurity). ISSUE-WISE DETAILED ANALYSIS - I. Transfer Pricing: Receipt from Production Services (TNMM - OP/OC) Legal framework: Transfer pricing provisions require determination of arm's length price under sections 92C/92CA and adherence to Rule 10B/10D for comparable selection and benchmarking. TNMM with OP/OC as PLI is permissible where tested party and comparables are functionally comparable and satisfy quantitative/qualitative filters, including related party transactions (RPT) filter and segmental relevance. Precedent treatment: The Tribunal followed coordinate-bench decisions concerning exclusion of companies showing fluctuating margins or lack of segmental data; it relied on established principle that taxpayers are not estopped from challenging their own comparables (Quark Systems principle affirmed by higher courts). Interpretation and reasoning: The Tribunal examined primary source material (annual reports, segmental disclosures, revenue composition, trend in margins, product/R&D activities and RPT percentages). On comparability it applied filters: availability of relevant segmental information, consistency of margins, singularity of business stream relevant to the tested activity, and RPT threshold (not more than 25% of operating revenue). The Tribunal held that: - Excel Infoways Ltd.: Lacked separate segmental information isolating BPO revenue; showed declining and fluctuating margins; coordinate-bench precedent excluded it. Hence functionally non-comparable. - MPS Ltd.: Although claiming a single primary segment, annual report disclosed multiple revenue streams, proprietary products and substantive R&D/product development; absence of relevant segregated segmental data meant functions/risk-profile differed - non-comparable. - IRIS Business Services Ltd.: Revenue comprised multiple streams (product sales, varied services) without sub-classification by relevant service; absence of relevant segmental breakdown rendered it functionally non-comparable. - Omega Healthcare Management Services Pvt. Ltd.: Entire revenue for the year derived from related-party transactions exceeding the RPT filter threshold; fails RPT filter and is excluded. Ratio vs. Obiter: The determinations excluding each comparable are ratio decidendi for the appeal as they form the direct basis for re-benchmarking and deletion of the transfer-pricing adjustment in respect of the production-services transaction. Citations to coordinate-bench precedents and Quark Systems are applied as binding/confirmatory authority (ratio for estoppel principle; applied precedent for comparability issues). Conclusions: The Tribunal directed exclusion of the four challenged comparables (Excel Infoways Ltd., MPS Ltd., IRIS Business Services Ltd., Omega Healthcare Management Services Pvt. Ltd.) from the comparable set for 'Receipt from Production Services'. Ground No.2 is allowed to that extent and the TPO/AO is directed to re-benchmark excluding these companies. ISSUE-WISE DETAILED ANALYSIS - II. Transfer Pricing: Receipt from Software Development Services (TNMM - OP/OC) Legal framework: Same statutory scheme as Issue I - arm's length determination under sections 92C/92CA and Rules 10B/10D requires comparable selection based on functional comparability, adequate financial data, and relevant segmental information; TNMM with OP/OC permissible if tested party status and comparables meet filters. Precedent treatment: The Tribunal followed coordinate-bench findings (Lionbridge/Lionbridge-related orders) excluding comparables where profit & loss accounts or requisite segmental detail were absent or where entities performed product development (different functional profile). Prior Tribunal/Special Bench/Higher Court rulings on exclusion and admissibility of comparables were treated as persuasive/controlling where factually similar. Interpretation and reasoning: The Tribunal reviewed the material facts for each challenged comparable focusing on completeness of financial statements, availability of profit & loss, presence of multiple revenue streams, product-development activity indicating different functional/risk profile, and absence of segmental disclosures isolating the relevant service stream. Specific findings: - Aspire Systems (India) Pvt. Ltd.: Financial statements lacked profit & loss account and sufficient disclosure; independent coordinate-bench precedent rejected this comparable where completeness of accounts was absent and product-development activities evidenced divergence; Tribunal followed that precedent and excluded the company. - Cyber Infrastructure Pvt. Ltd.: Annual report showed revenue from software development and BPO services without segmental breakdown for BPO; multiple revenue streams and lack of relevant segmental information meant functional non-comparability; Tribunal excluded the company. Ratio vs. Obiter: Exclusion of these two comparables is ratio decidendi for resolving Ground No.3 as it directly affects the ALP computation and the upward adjustment. Reliance on coordinate-bench precedent to exclude Aspire Systems is treated as bindingly applied in this factual matrix (ratio); general observations on methodology and leave of other issues as not pressed are obiter in relation to future disputes. Conclusions: The Tribunal directed exclusion of Aspire Systems (India) Pvt. Ltd. and Cyber Infrastructure Pvt. Ltd. from the comparable set for 'Receipt from Software Development Services'. Ground No.3 is allowed to that extent and the TPO/AO is directed to re-benchmark excluding these two companies. ISSUE-WISE DETAILED ANALYSIS - III. Penalty under section 271(1)(c) read with section 274 (Prematurity) Legal framework: Levy of penalty under section 271(1)(c) is contingent upon final assessment and established culpable conduct; initiation of penalty proceedings may be premature if the underlying assessment adjustments are under challenge and not finally crystallized. Interpretation and reasoning: The Tribunal found the penalty ground premature in light of pending transfer-pricing adjudications and adjustments which were the subject-matter of the appeal; since factual and legal determinations affecting income were not finally settled, penalty proceedings could not be sustained at that stage. Ratio vs. Obiter: The conclusion that the penalty ground is premature is ratio for dismissal of Ground No.4 in the present appeal context. Any broader principles as to initiation timing are ancillary observations (obiter) only to the extent they do not alter statutory penalty tests. Conclusions: Ground No.4 (penalty) is dismissed as premature. OVERALL CONCLUSION The Tribunal permitted exclusion of specific comparables identified by the assessee for both challenged international transactions, directed re-benchmarking excluding those comparables, allowed the appeal to that extent, and dismissed the penalty ground as premature. Other issues raised by the assessee were treated as not pressed and left open for future adjudication if they arise.