ITAT Mumbai Bench Rules in Favor of HERE Solutions, Orders Exclusion of Certain Comparables in Transfer Pricing Adjustment under Section 92CA

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ITAT Mumbai Bench Upholds HERE Solutions' Appeal, Significantly Reducing Transfer Pricing Adjustment

Mumbai, March 17, 2025 - In a significant ruling for the technology sector, the Income Tax Appellate Tribunal (ITAT), Mumbai Bench, has allowed the appeal filed by HERE Solutions India Pvt. Ltd., a subsidiary of HERE Pte Ltd, Singapore, against an order by the Commissioner of Income Tax (Appeals) [CIT(A)]. The Tribunal's decision effectively overturns a substantial portion of a transfer pricing adjustment initially proposed by the Transfer Pricing Officer (TPO) and sustained by the CIT(A) for the assessment year 2013-14.

Case Overview: Contesting Comparability in Transfer Pricing

The case arose from a transfer pricing adjustment of INR 9,90,90,367 proposed by the TPO under Section 92CA(3) of the Income Tax Act, 1961, which was later incorporated into the final assessment order. HERE Solutions, engaged in developing and distributing map and location-based data services, contested this adjustment, arguing that the TPO and CIT(A) had erred in their selection of comparable companies for benchmarking its international transactions related to "Production Services" and "Software Development Services."

The core dispute revolved around whether the international transactions between HERE Solutions and its associated enterprises (AEs) were conducted at arm’s length price. The company had initially benchmarked its transactions using the Transactional Net Margin Method (TNMM), but the tax authorities rejected several of its comparables and introduced new ones, leading to the significant upward adjustment in income.

Assessee's Arguments: Flaws in Comparability Analysis

Appearing before the ITAT, Shri Ketan Ved , representing HERE Solutions, argued vehemently against the inclusion of specific companies chosen by the TPO and CIT(A) for comparison. The grounds for objection were multifaceted, including:

• Functional Incomparability: Several companies added by the tax authorities were functionally different, engaging in diverse activities beyond the scope of services provided by HERE Solutions (e.g., companies with R&D activities, product development, or mixed IT and BPO services without segmental data).
• Lack of Segmental Data: For some comparables, crucial segmental financial information, particularly for BPO or IT services segments, was not available, making accurate comparison impossible.
• Related Party Transactions (RPT) Filter: One comparable, Omega Healthcare Management Services Pvt. Ltd., failed the RPT filter as its entire revenue was derived from related party transactions.
• Data Reliability: In the case of Aspire Systems (India) Pvt. Ltd. , the complete profit and loss account was unavailable, rendering the financial data insufficient for benchmarking.

Revenue's Stand: Upholding the Lower Authorities

Shri Pravin Salunkhe, Sr. DR, representing the Revenue, strongly supported the orders of the lower authorities, asserting that the selected companies were functionally comparable and that the TPO had followed due process in arriving at the transfer pricing adjustment.

ITAT's Decision: Exclusion of Key Comparables

The ITAT bench, comprising Shri Amarjit Singh (Accountant Member) and Shri Sandeep Singh Karhail (Judicial Member), after considering the submissions and evidence, ruled in favor of the assessee. The Tribunal directed the exclusion of the following companies from the comparability analysis for "Production Services":

• Excel Infoways Ltd.: Noted for fluctuating margins, lack of separate BPO segmental data, and declining revenue in IT/BPO services. The Tribunal referenced a coordinate bench decision in Lanxess India Private Limited v/s ACIT which also excluded this company due to fluctuating margins. > "From the perusal of relevant extracts of the annual report of Excel Infoways Ltd... 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."
• MPS Ltd.: Found to be engaged in extensive R&D and development of cloud-based publishing platforms, activities beyond mere data digitalization, and lacked segmental information. > "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... Hence, we are of the considered view that this company cannot be said to be functionally comparable to the assessee..."
• IRIS Business Services Ltd.: Engaged in diverse software and services revenue streams without sub-classification of revenue segments, hindering functional comparability. > "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."
• Omega Healthcare Management Services Pvt. Ltd.: Excluded due to failing the RPT filter, with 100% of revenue from related party transactions. The Tribunal cited the Special Bench decision in DCIT v/s Quark Systems Private Limited , affirmed by the Punjab and Haryana High Court, and the Bombay High Court in CIT v/s Tata Power Solar Systems Ltd , which established that taxpayers are not estopped from challenging the comparability of companies, even those initially proposed by them. > "From the perusal of the annual report of Omega Healthcare Management Services Pvt. Ltd... 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."

Similarly, for "Software Development Services", the ITAT ordered the exclusion of:

• Aspire Systems (India) Pvt. Ltd. : Due to the unavailability of the profit and loss account, rendering financial statements incomplete for benchmarking. The Tribunal followed the precedent set in Lionbridge Technologies Private Ltd v/s ACIT , where this company was also excluded due to incomplete financials. > "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 authorized representative is that profit and loss account of the company is not available. Therefore 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. In such circumstances, this comparable company should be excluded from comparability analysis."
• Cyber Infrastructure Pvt. Ltd.: Lacked segmental information for BPO services despite generating revenue from both software exports and 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."

Implications and Conclusion

By directing the exclusion of these key comparable companies, the ITAT has significantly reduced the basis for the transfer pricing adjustment. The Tribunal concluded by allowing the assessee's appeal and dismissing the penalty proceedings initiated under Section 271(1)(c) as premature. This order underscores the importance of rigorous comparability analysis in transfer pricing assessments and emphasizes the necessity for functional comparability and the availability of relevant financial data for selected comparables. The decision will likely offer significant relief to HERE Solutions and provide valuable guidance for similar transfer pricing disputes involving technology and IT-enabled services companies. ```