Facts of the Case

The Assessee, Microsoft India (R&D) Pvt. Ltd., a subsidiary of Microsoft Corporation USA, is engaged in software development and IT-enabled services. It filed its return declaring income of ₹2,01,64,26,819. The case was selected for scrutiny and referred to the Transfer Pricing Officer (TPO) for determination of Arm’s Length Price (ALP).

The TPO proposed a transfer pricing adjustment exceeding ₹240 crores. The Assessing Officer passed a final order under Section 143(3) read with Section 144C after directions from the Dispute Resolution Panel (DRP).

Both the Assessee and the Revenue filed cross appeals before the ITAT, which partly allowed the appeals. Aggrieved, both parties approached the Delhi High Court under Section 260A.

 

Issues Involved

  1. Whether exclusion of comparables such as Infosys Ltd., Persistent Systems Ltd., and Wipro Technology Services Ltd. by the ITAT was justified?
  2. Whether an assessee can challenge comparables initially selected by itself?
  3. Whether absence of segmental data renders a company incomparable?
  4. Whether transactions under prior agreements qualify as deemed international transactions under Section 92B(2)?
  5. Whether ITAT can remand issues despite availability of complete facts and binding precedent?

 Petitioner’s Arguments (Revenue)

  • ITAT erred in excluding comparables that satisfied TPO filters.
  • Assessee cannot challenge comparables once included in its TP study.
  • Companies like Infosys, Persistent Systems, and Wipro Technology Services were valid comparables.

Respondent’s Arguments (Assessee)

  • The excluded companies were functionally dissimilar due to involvement in software products and ownership of intangibles.
  • Absence of segmental data made comparison unreliable.
  • Transactions involving Wipro Technology Services were not “uncontrolled” due to prior agreements (Section 92B(2)).
  • ITAT wrongly remanded issues despite binding High Court precedents and available facts.

 

Court Findings / Order

1. Exclusion of Comparables Upheld

  • Companies engaged in both software services and product sales without segmental data cannot be valid comparables.
  • Infosys Ltd. and Persistent Systems Ltd. were rightly excluded due to lack of segmental information and functional dissimilarity.

2. Wipro Technology Services – Not an Uncontrolled Transaction

  • Due to a prior agreement between Wipro Ltd. and Citigroup, the transaction became a deemed international transaction under Section 92B(2).
  • Hence, it failed the test of “comparable uncontrolled transaction” under Rule 10B.

3. No Estoppel Against Law

  • Assessee is not barred from challenging comparables initially selected in TP documentation.
  • Objective is correct determination of ALP; incorrect inclusion can be rectified.

4. Revenue Appeals Dismissed

  • No substantial question of law arose; findings were factual in nature.

5. Assessee’s Appeal – Partial Relief

  • ITAT erred in remanding issues despite availability of facts and binding precedent.
  • Remand should be used sparingly.
  • Matter restored to ITAT for adjudication of corporate tax issues (limited scope).

 

Important Clarifications

  • Segmental Data is Crucial: Absence of separate financials for software services vs products invalidates comparability.
  • Functional Similarity Test Prevails: Mere satisfaction of filters is insufficient.
  • Deemed International Transaction: Even third-party transactions can fall under Section 92B(2) if prior agreements exist.
  • No Estoppel Principle: Taxpayers can correct errors in TP studies.
  • Remand Limitation: ITAT must decide issues where sufficient material exists instead of routinely remanding.

 Sections Involved

  • Section 92B – International Transaction
  • Section 92B(2) – Deemed International Transaction
  • Rule 10B(1)(e) – Comparable Uncontrolled Transaction
  • Section 143(3), 144C – Assessment Proceedings
  • Section 260A – Appeal to High Court
  • Section 10A – Deduction
  • Section 254 – Powers of ITAT

 

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2021:DHC:11-DB/SVN04012021ITA2472019_153320.pdf

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