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2025 (5) TMI 1398 - AT - Income TaxTP Adjustment - Comparable selection - it is the assessee s consistent submission that many of the companies included by the TPO are functionally not comparable or fail key filters such as RPT absence of segmental data supernormal profits or engagement in diversified activities as supported by decisions of various coordinate benches of ITAT. HELD THAT - We find merit in the contentions of the assessee with respect to the following comparables - MPS Ltd is engaged in activities involving significant R D and has developed proprietary cloud-based platforms. It does not provide segmental data for its various streams of revenue. Respectfully following the order of the coordinate bench in assessee s own case in ITA No. 5919/Mum/2024 dated 17.03.2025 we direct its exclusion. IRIS Business Services Ltd. earns revenue from multiple service lines such as advertisement software development data conversion hosting and subscriptions without furnishing segmental revenue bifurcation. In absence of segmental information and following judicial precedent in assessee s own case it is liable to be excluded. Omega Healthcare Management Services Pvt. Ltd. derives the entirety of its revenue from related parties thereby failing the RPT filter of 25%. The coordinate bench in assessee s own case has already directed its exclusion. ICRA Techno Analytics Ltd. now Nihilent Analytics Ltd. has related party transactions exceeding 25% of total revenue. Moreover it is engaged in multiple service lines with limited segmental information. Therefore following settled judicial precedent we direct its exclusion. eClerx Services Ltd. is engaged in KPO functionally distinct from the assessee s routine ITES profile. The ITAT-Mumbai benches have consistently held this to be not comparable to low-end ITES providers. We accordingly direct its exclusion. Infobeans Technologies Ltd. which derives income from both software product sales and development services without providing segmental bifurcation. The ITAT-Pune Bench in Pubmatic India Pvt. Ltd 2018 (4) TMI 437 - ITAT PUNE and Emerson Electric Company (India) Pvt Ltd. 2019 (6) TMI 1444 - ITAT MUMBAI have directed exclusion of this company. We concur. Thirdware Solutions Ltd. engaged in high-end software development and sale of software products and IPs is functionally distinct. Following the coordinate bench ruling in Lionbridge Technologies Pvt. Ltd. 2019 (8) TMI 1868 - ITAT MUMBAI we direct its exclusion. Upon exclusion of the above comparables the operating profit margins of the remaining comparables align with the margins declared by the assessee thereby demonstrating that the international transactions undertaken by the assessee were at arm s length. The ruling of the ITAT Mumbai in the assessee s own case was not available at the time of preparation of the Transfer Pricing Study or during the proceedings before the Ld. CIT(A). The issues concerning the exclusion of comparables now stand well settled. Accordingly the transfer pricing adjustments under the ITES segment and under the IT segment are unsustainable. We direct the Ld. AO to recompute the ALP after excluding the above-mentioned comparables. Consequently the additions made under Section 92CA(3) and confirmed by the Ld. CIT(A) stand deleted.
The core legal questions considered in this appeal pertain primarily to the determination of the arm's length price (ALP) for international transactions under the transfer pricing provisions of the Income-tax Act, 1961. Specifically, the issues involve:
Detailed analysis of these issues is as follows: Transfer Pricing Adjustments for ITES and IT Services The legal framework governing transfer pricing adjustments is primarily contained in Sections 92C, 92D, and related provisions of the Income-tax Act, 1961, along with Rules 10B, 10C, 10D, and 10E of the Income-tax Rules, 1962. These provisions mandate that international transactions between associated enterprises be benchmarked against comparable uncontrolled transactions to determine the arm's length price. The assessee, a wholly owned subsidiary of HERE Singapore Limited, rendered ITES and IT services to its associated enterprises (AEs) and declared income on a cost-plus basis with a net cost plus (NCP) mark-up of 15.35% for ITES and 15% for IT services. The assessee conducted a detailed and methodical search process using databases PROWESS and CAPITALINE PLUS and prepared a Transfer Pricing Study Report (TP Study Report) in compliance with the statutory requirements. The AO/TPO, however, rejected the assessee's comparables and benchmarking analysis, alleging that the international transactions were not at arm's length. The AO/TPO adopted comparables used in previous assessment years (AY 2011-12 and AY 2012-13) and added new comparables without conducting a scientific or methodical search process, which the assessee contended was a violation of Sections 92C(1) and 92C(2) and amounted to cherry-picking. The assessee challenged the inclusion and exclusion of various comparable companies, asserting that many of the AO/TPO/CIT(A)-selected comparables were functionally dissimilar, failed key filters such as the RPT filter (related party transactions exceeding 25%), lacked segmental data, or were engaged in diversified activities including significant R&D, which rendered them unsuitable for benchmarking. The Tribunal examined the issue of comparables in depth, applying the relevant statutory provisions and judicial precedents. It noted that the assessee had complied with all procedural and substantive requirements for determining ALP, including maintaining contemporaneous documentation, conducting a functional analysis, and applying appropriate filters under the Rules. Comparability and Selection of Comparable Companies The Tribunal considered the detailed submissions and evidence regarding the comparability of specific companies:
The Tribunal observed that the AO/TPO/CIT(A) had failed to apply consistent and appropriate qualitative and quantitative criteria for acceptance/rejection of comparables. The use of single-year data instead of permissible multiple-year data, rigid application of filters such as export earnings and related party transactions, and reliance on comparables without segmental data or functional similarity were found to be erroneous. The Tribunal emphasized that transfer pricing provisions require a scientific and methodical search process to identify comparables, and any deviation from this principle, including cherry-picking or ad-hoc inclusion of comparables, is impermissible. Application of Law to Facts and Treatment of Competing Arguments The assessee's contention that the international transactions were at arm's length, supported by a detailed TP Study Report and consistent with the statutory framework, was upheld. The Tribunal found that the margins earned by the assessee exceeded the weighted average margins of the properly selected comparable companies, thereby negating the need for any upward adjustment. The revenue's arguments for inclusion of certain comparables were rejected where those companies failed key comparability criteria. The Tribunal gave due weight to binding coordinate bench decisions and judicial precedents, applying principles of functional comparability, segmental data availability, and related party transaction filters rigorously. Penalty Proceedings under Section 271(1)(c) Given the deletion of the transfer pricing additions, the Tribunal held that the penalty proceedings initiated under Section 271(1)(c) read with Section 274 of the Act became infructuous and dismissed the penalty ground as academic. Significant Holdings The Tribunal held:
The Tribunal reaffirmed the principle that transfer pricing adjustments must be based on a methodical and scientific comparability analysis and that the inclusion or exclusion of comparables must be grounded in functional comparability, availability of segmental data, and application of appropriate filters. It underscored the binding nature of coordinate bench decisions and judicial discipline in transfer pricing matters.
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