HERE SOLUTIONS INDIA PRIVATE LIMITED,MUMBAI vs. ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE 10 (1)(1), MUMBAI

Ground No. 1, is general in nature, and therefore, the same needs no separate adjudication.

The issue arising in Ground No.2, raised in assessee’s appeal, pertains to transfer pricing adjustment in relation to the international transaction pertaining to “Receipt from Production Services”.

The brief facts of the case pertaining to this issue, as emanating from the record, are: Under this segment, the assessee provides digital map data for vehicle navigation, internet and wireless applications and business solutions to its associated enterprises. In its Transfer Pricing Study Report, the following functions have been stated to have been performed by the assessee in relation to the international transaction pertaining to “Receipt from Production Services”: -

For benchmarking the international transaction pertaining to “Receipt from Production Services”, the assessee adopted the Transactional Net Margin Method (“TNMM”) as the most appropriate method with the Profit Level Indicator (“PLI”) of Operating Profit to operating Cost (“OP/OC”). By considering itself the tested party, the assessee identified seven comparable companies with a weighted average margin of 13.37%. As the assessee computed its own PLI at 15.42%, accordingly, it claimed that the international transaction pertaining to “Receipt from Production Services” is at arm’s length price (“ALP”).

During the transfer pricing assessment proceedings, the TPO by applying additional filters rejected five comparable companies selected by the assessee, finding them to be not satisfying one or the other filter or being functionally not comparable to the assessee. The TPO also introduced five new comparable companies, i.e. Accentia Technologies Ltd., Excel Infoways Ltd., Genesys International Corporation Ltd, IRIS Business Services Ltd., and MPS Ltd. By rejecting the contentions raised by the assessee against the selection of new filters as well as the companies included/excluded, the TPO, vide order dated 28/10/2016 passed under section 92CA(3) of the Act, arrived at a set of following seven comparable companies for benchmarking the international transaction of “Receipt from Production Services”: -

Since the average OP/TC of the aforesaid comparable companies selected by the TPO was 30.20%, therefore the TPO by applying the arm’s length margin, inter-alia, proposed an upward adjustment of INR 7,78,33,860, in respect of international transaction pertaining to “Receipt from Production Services”.

During the hearing, the learned AR, by referring to the written submission, submitted that if the four companies, i.e., Excel Infoways Ltd., IRIS Business Services Ltd., MPS Ltd. and Omega Healthcare Management Services Pvt. Ltd., are directed to be excluded, then the international transaction pertaining to “Receipt from Production Services” will be at arm’s length and the entire transfer pricing adjustment made in respect thereof will be deleted. Accordingly, in view of the submissions made by the learned AR, we have confined our findings in Ground No.2 only in respect of the aforesaid four comparable companies. Further, the other issues raised in Ground No.2 are treated as not pressed and are kept open for adjudication if they arise in the assessee’s case in the future.

The first comparable challenged by the assessee is Excel Infoways Ltd. This company was included as comparable by the TPO, vide order passed under section 92CA(3) of the Act, on the basis that this company is engaged in ITeS BPO services and since, only ITeS BPO services segment was considered as comparable to the assessee, the revenue from that segment alone was subjected to service revenue filter. The TPO further held that the entire revenue of this segment is out of BPO services. Before the learned CIT(A), the assessee objected to the inclusion of this company as comparable on the basis that this company has low employee cost, diminishing revenue over the years and abnormal profits. Further, the assessee submitted that the company is engaged in IT and BPO services and the relevant segmental information of BPO services is not available. The learned CIT(A), vide impugned order, disagreed with the submissions of the assessee and upheld the inclusion of this company for benchmarking the international transaction pertaining to “Receipt from Production Services” on the basis that the TPO considered the relevant segmental information for margin working. The learned CIT(A) further held that employee’s cost is not the filter applied by the TPO and a comparable cannot be rejected due to high profit. Being aggrieved, the assessee has challenged the inclusion of this company as comparable.

During the hearing, the learned AR reiterated the submissions made before the lower authorities and placed reliance upon the decisions of the coordinate bench of the Tribunal, wherein this company was excluded for benchmarking the international transaction pertaining to ITeS, inter alia, on the basis that the company is showing fluctuating margins from year-on-year and has closed down its ITeS segment.

On the other hand, the learned Departmental Representative (“learned DR”) vehemently relied upon the orders passed by the lower authorities and submitted that this company is functionally comparable to the assessee and even if the margins are coming down year-on-year, margin for the year under consideration is considered for the purpose of benchmarking analysis.

We have considered the submissions of both sides and perused the material available on record. From the perusal of relevant extracts of the annual report of Excel Infoways Ltd., as reproduced on page 729 of the paper book, we find that Excel Infoways Ltd. is engaged in Information Technology/BPO related services. Further, we find that as at 31/03/2013, 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 the coordinate bench of the Tribunal in Lanxess India Private Limited v/s ACIT, in ITA No. 7220/Mum./2017, for the assessment year 2013-14, vide order dated 31/10/2023, directed exclusion of Excel Infoways Ltd. on the basis that it has fluctuating margins. Accordingly, we direct the TPO/AO to exclude Excel Infoways Ltd. while benchmarking the international transaction pertaining to “Receipt from Production Services”.

The next comparable challenged by the assessee is MPS Ltd. This company was included as comparable by the TPO, vide order passed under section 92CA(3) of the Act, on the basis that this company is carrying out activities which are functionally similar to the assessee and also qualifies all the filters. Before the learned CIT(A), the assessee objected to the inclusion of this company as comparable on the basis that this company is engaged in various activities without availability of relevant segmental information. The assessee further submitted that this company undertakes extensive R&D activity and is also engaged in developing cloud-based publishing platforms. The learned CIT(A), vide impugned order, disagreed with the submissions of the assessee and upheld the inclusion of this company for benchmarking the international transaction pertaining to “Receipt from Production Services”. Being aggrieved, the assessee has challenged the inclusion of this company as comparable.

During the hearing, the learned AR reiterated the submissions made before the lower authorities. On the other hand, the learned DR vehemently relied upon the orders passed by the lower authorities and submitted that data digitalisation is the primary activity of this company and no R&D expenditure was incurred.

We have considered the submissions of both sides and perused the material available on record. From the perusal of relevant extracts of the annual report of MPS Ltd., as reproduced on page 736 of the paper book, we find that MPS Ltd. provides publishing services relating to typesetting of books and journals, composing of yellow page advertisements and catalogues, data coding, conversion, indexing, editing, editorial services, software development, maintenance and support to global publishers. As regards the segmental information, the company claims that it operates in one business segment of providing publishing solutions, viz. typesetting and data digitalisation services and the same is considered to constitute a single segment in the context of primary segment reporting. Further, this company has claimed to have developed an end-to-end cloud-based publishing platform, MPS DigiCore, which addresses the need for an integrated workflow. Further, this company also has a product named MPS Digitrak, which it claims to be a production tracking system developed by MPS Ltd. This company also claims to have developed other solutions through its R&D activities. Therefore, from the details of this company as available in its annual report, it is evident that this 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”.

During the hearing, the learned AR reiterated the submissions made before the lower authorities. On the other hand, the learned DR vehemently relied upon the orders passed by the lower authorities.

We have considered the submissions of both sides and perused the material available on record. From the perusal of the annual report of IRIS Business Services Ltd. for the year under consideration, forming part of the annual report paper book from pages 1-106, we find that this 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 IRIS Business Services Ltd. while benchmarking the international transaction pertaining to “Receipt from Production Services”.

The next comparable challenged by the assessee is Omega Healthcare Management Services Pvt. Ltd. This company was selected as a comparable by the assessee in its Transfer Pricing Study Report, and the same was retained as a comparable by the TPO, vide order passed under section 92CA(3) of the Act. Before us, the assessee has challenged the inclusion of this company as a comparable for the first time on the basis that this company fails the Related Party Transactions (“RPT”) filter. On the other hand, the learned DR submitted that this company was selected by the assessee as comparable, and the same was not challenged at any stage of the appellate proceedings till now. The learned DR submitted that the objection that this company fails the RPT filter was neither raised before the TPO nor the learned CIT(A).

Insofar as the submission of the learned DR that the assessee is seeking exclusion of its own comparable, it is pertinent to note that the Special Bench of the Tribunal in DCIT v/s Quark Systems Private Limited, reported in [2010] 38 SOT 307 (Chd.) (SB), held that there is no estoppel on the taxpayer from pointing out that a particular company has been wrongly taken as a comparable. We further find that the aforesaid decision rendered by the Special Bench of the Tribunal has been affirmed by the Hon’ble Punjab and Haryana High Court in CIT v/s Quark Systems Private Limited, reported in [2011] 244 CTR 542 (P&H). Similarly, it was held by the Hon’ble Jurisdictional High Court in CIT v/s Tata Power Solar Systems Ltd, reported in [2017] 245 Taxman 93 (Bombay).

As regards the objections raised by the assessee that Omega Healthcare Management Services Pvt. Ltd. fails RPT filter, from the perusal of the annual report of Omega Healthcare Management Services Pvt. Ltd., forming part of the paper book from pages 107-196, we find that the entire revenue from product or services amounting to INR 139,10,73,488 was earned from the transaction with related party. Thus, it is evident that this 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 Omega Healthcare Management Services Pvt. Ltd. while benchmarking the international transaction pertaining to “Receipt from Production Services”.

To sum up, we direct that the four companies, i.e., Excel Infoways Ltd., IRIS Business Services Ltd., MPS Ltd. and Omega Healthcare Management Services Pvt. Ltd., be excluded while benchmarking the international transaction pertaining to “Receipt from Production Services”. Ground No.2 raised in assessee’s appeal is decided accordingly.

The issue arising in Ground No.3, raised in assessee’s appeal, pertains to transfer pricing adjustment in relation to the international transaction pertaining to “Receipt from Software Development Services”.

The brief facts of the case pertaining to this issue, as emanating from the record, are: In its Transfer Pricing Study Report, the following functions have been stated to have been performed by the assessee in relation to the international transaction pertaining to “Receipt from Software Development Services”: -

For benchmarking the international transaction pertaining to “Receipt from Software Development Services”, the assessee adopted the TNMM as the most appropriate method with the PLI of OP/OC. By considering itself the tested party, the assessee identified 14 comparable companies with a weighted average margin of 10.40%. As the assessee computed its own PLI at 15%, accordingly, it claimed that the international transaction pertaining to “Receipt from Software Development Services” is at ALP.

During the transfer pricing assessment proceedings, the TPO by applying additional filters rejected seven comparable companies selected by the assessee, finding them to be not satisfying one or the other filter or being functionally not comparable to the assessee. The TPO also introduced three new comparable companies, i.e. Aspire Systems (India) Pvt. Ltd., Cyber Infrastructure Pvt. Ltd., and Infobeans Technology Ltd. By rejecting the contentions raised by the assessee against the selection of new filters as well as the companies included/excluded, the TPO, vide order passed under section 92CA(3) of the Act, arrived at a set of following ten comparable companies for benchmarking the international transaction of “Receipt from Software Development Services”: -

Since the average OP/TC of the aforesaid comparable companies selected by the TPO was 21.41%, therefore the TPO by applying the arm’s length margin, inter-alia, proposed an upward adjustment of INR 2,12,56,507, in respect of international transaction pertaining to “Receipt from Software Development Services”.

During the hearing, the learned AR, by referring to the written submission, submitted that if the two companies, i.e., Aspire Systems (India) Pvt. Ltd. and Cyber Infrastructure Pvt. Ltd., are directed to be excluded, then the international transaction pertaining to “Receipt from Software Development Services” will be at arm’s length and the entire transfer pricing adjustment made in respect thereof will be deleted. Accordingly, in view of the submissions made by the learned AR, we have confined our findings in Ground No.3 only in respect of the aforesaid two comparable companies. Further, the other issues raised in Ground No.3 are treated as not pressed and are kept open for adjudication if they arise in the assessee’s case in the future.

The first comparable challenged by the assessee under this segment is Aspire Systems (India) Pvt. Ltd. This company was included as comparable by the TPO, vide order passed under section 92CA(3) of the Act, on the basis that this company is functionally comparable to the assessee. Before the learned CIT(A), the assessee challenged the inclusion of this company as a comparable on the basis that financial statements of this company are insufficient and the information relating to the business activities undertaken by this company is not included in its financial statements for the financial year 2012-13. The learned CIT(A), vide impugned order, disagreed with the submissions of the assessee and held that this company is functionally comparable to the assessee and satisfies all the filters of the TPO. Being aggrieved, the assessee is in appeal before us.

During the hearing, the learned AR reiterated the submissions made before the lower authorities. On the other hand, the learned DR relied upon the orders passed by the lower authorities.

We have considered the submissions of both sides and perused the material available on record. As per the assessee, the profit and loss account of this company is not available, and accordingly, the financial statements of this company are insufficient for any benchmarking analysis. We find that the coordinate bench of the Tribunal in Lionbridge Technologies Private Ltd v/s ACIT, in for the assessment year 2013-14, vide order dated 20/02/2023, while excluding this company observed as follows:– “016. With respect to the aspire system India Ltd, this comparable was prayed for rejection by the assessee, this was rejected by the ITAT as per order dated 21 May 2018. In the miscellaneous application dated 27 May 2019 the ITAT recalled order to that extent for adjudication on comparability of this comparable.

The learned departmental representative vehemently supported the orders of the learned transfer pricing officer and learned dispute resolution panel 019. We have carefully considered the rival contention and perused the orders of the lower authorities. Assessee argued before the learned transfer-pricing officer that this company is functionally not comparable because it is providing services including outsourced product development, software testing and infrastructure application support and Oracle services. It also contended that the operation of the software segment and the nature of IT consulting services and outsource software development. The learned transfer-pricing officer rejected the same for the reason that companies engaged in providing software development and outsourced solution is comparable functionally. Before the dispute resolution panel the assessee challenged the above comparable that the segment, which is compared with the margins of the assessee, is in the nature of IT consulting services and outsource software development. The learned dispute resolution panel also held that it is functionally comparable to the functions of the assessee. Before us, the assessee has submitted a detailed chart. It was submitted that the complete annual report and financial data of the company is not available and only the balance sheet and notes to the accounts are available. The profit and loss account of this company is also not available. On these ground itself the learned transfer-pricing officer has rejected the companies selected in the transfer pricing study report. Further, the learned transfer pricing officer himself used information available in the profit and loss account in order to reject the assessee's other comparables. Therefore, on the same reasoning, this comparable company should also be excluded. We find that if the annual accounts in its all completeness are not available, it cannot be included in the comparability analysis. In the present case, the argument of the learned

Therefore, respectfully following the decision of the coordinate bench of the Tribunal cited supra, we direct the TPO/AO to exclude Aspire Systems (India) Pvt. Ltd. while benchmarking the international transaction pertaining to “Receipt from Software Development Services”.

The next comparable challenged by the assessee is Cyber Infrastructure Pvt. Ltd. This company was included as comparable by the TPO, vide order passed under section 92CA(3) of the Act, on the basis that this company is functionally comparable to the assessee. Before the learned CIT(A), the assessee challenged the inclusion of this company as a comparable on the basis that relevant segmental information for benchmarking analysis is not available for this company. The learned CIT(A), vide impugned order, disagreed with the submissions of the assessee and held that this company is functionally comparable to the assessee. Being aggrieved, the assessee is in appeal before us.

During the hearing, the learned AR reiterated the submissions made before the lower authorities. On the other hand, the learned DR relied upon the orders passed by the lower authorities.

We have considered the submissions of both sides and perused the material available on record. From the perusal of relevant extracts of the annual report of Cyber Infrastructure Pvt. Ltd., as reproduced on page 756 of the paper book, we find that this company is engaged in the development of software and providing BPO services to customers based outside India. Further, we find that the company earned revenue amounting to INR 15,02,48,654, during the year under consideration, from software exports and BPO services. However, there is no segmental information pertaining to BPO services. Since this 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 Cyber Infrastructure Pvt. Ltd. while benchmarking the international transaction pertaining to “Receipt from Software Development Services”.

To sum up, we direct that the two companies, i.e., Aspire Systems (India) Pvt. Ltd. and Cyber Infrastructure Pvt. Ltd., be excluded while benchmarking the international transaction pertaining to “Receipt from Software Development Services”. Ground No.3 raised in assessee’s appeal is decided accordingly.

Ground No. 4 raised in assessee’s appeal pertains to levy of penalty under section 271(1)(c) r.w. Section 274 of the Act, which is premature in nature. Therefore, the same is dismissed.

The application dated 10/02/2025 filed by the assessee, seeking admission of additional ground of appeal, was not pressed during the hearing. Therefore, the same is dismissed as not pressed.

In the result, the appeal by the assessee is allowed. Order pronounced in the open Court on 17/03/2025