Facts of the Case

The appellant, Cadence Design Systems (India) Private Limited, challenged the order dated 05.01.2018 passed by the Income Tax Appellate Tribunal for Assessment Year 2010-11, which had upheld the inclusion of TCS E-Serve International Ltd., TCS E-Serve Ltd., and Infosys BPO Ltd. as comparables for determining the Arm’s Length Price (ALP) of its international transactions.

The appellant was engaged in providing IT software development services, IT back-office support services, and related support services to its associated enterprises on a cost-plus mark-up basis. Out of ten comparables selected by the Transfer Pricing Officer, objections were raised against the inclusion of the above three entities.

Issues Involved

Whether the Income Tax Appellate Tribunal erred in upholding the inclusion of TCS E-Serve International Ltd., TCS E-Serve Ltd., and Infosys BPO Ltd. as comparables for ALP determination in respect of the appellant’s international transactions for AY 2010-11.

Petitioner’s Arguments

The appellant contended that it was a captive contract service provider, insulated from market risks and compensated on a cost-plus basis. It was argued that the impugned comparables:

  • Enjoyed significant brand value due to association with large corporate groups;
  • Operated on a much larger economic scale;
  • Incurred substantial expenditure on brand building and marketing, which materially influenced profitability.

Reliance was placed on prior judicial precedents, including the appellant’s own case for AY 2011-12, where similar comparables had been excluded.

Respondent’s Arguments

The Revenue supported the Tribunal’s order, contending that the comparables were functionally similar and that differences in turnover, brand value, or scale alone could not justify exclusion. It was argued that the Tribunal had correctly followed the Transfer Pricing Officer’s reasoning in retaining the comparables.

Court Order / Findings

The Delhi High Court examined the record and noted that:

  • In the appellant’s own case for AY 2011-12, TCS E-Serve Ltd. and Infosys BPO Ltd. had already been excluded, following the judgment in Pr. Commissioner of Income Tax v. BC Management Services Pvt. Ltd.;
  • In PCIT v. Evalueserve SEZ (Gurgaon) Pvt. Ltd., this Court had approved exclusion of the very same comparables on the ground of high brand value and economic upscale operations;
  • Entities with strong brand association and scale advantages enjoy higher profitability, making them unsuitable comparables for captive, low-risk service providers.

In light of settled judicial precedent and undisputed facts on record, the Court found the Tribunal’s order unsustainable.

Important Clarification

The Court clarified that functional similarity alone is insufficient in transfer pricing analysis. Brand value, scale of operations, and market positioning materially affect profitability and must be considered while selecting comparables, particularly where the tested party operates on a cost-plus, captive model.

Final Outcome

The appeal was allowed. The Delhi High Court set aside the Tribunal’s order and directed the exclusion of TCS E-Serve International Ltd., TCS E-Serve Ltd., and Infosys BPO Ltd. from the list of comparables for determining the Arm’s Length Price for Assessment Year 2010-11. The substantial question of law was answered in favour of the assessee and against the Revenue.

link to download the order- https://www.mytaxexpert.co.in/uploads/1770112967_CADENCEDESIGNSYSTEMSINDIAPRIVATELIMITEDVsDEPUTYCOMMISSIONEROFINCOMETAX.pdf  

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