Facts of the Case

  • The assessee, Microsoft India (R&D) Pvt. Ltd., is engaged in software development and IT-enabled services and is a subsidiary of Microsoft Ireland Research Ltd.
  • For AY 2011-12, the assessee filed income declaring over ₹201 crores.
  • The case was referred to the Transfer Pricing Officer (TPO) for determination of ALP.
  • TPO proposed a transfer pricing adjustment of approx. ₹240 crores.
  • Final assessment order was passed under Sections 143(3)/144C determining higher taxable income.
  • Both assessee and revenue filed cross appeals before ITAT, and subsequently before Delhi High Court. 

Issues Involved

  1. Whether certain companies (Infosys, Persistent Systems, Wipro Technology Services) should be included as comparables.
  2. Whether a company included by the assessee can later be excluded.
  3. Whether transactions under prior agreements fall under deemed international transactions (Section 92B(2)).
  4. Whether absence of segmental data invalidates comparability.
  5. Whether ITAT was justified in remanding corporate tax issues instead of deciding them.
  6. Treatment of income classification and deductions under Section 10A.

 

Petitioner’s (Assessee’s) Arguments

  • Certain comparables were functionally dissimilar, engaged in software products along with services.
  • Lack of segmental financial data makes comparison invalid.
  • A wrongly included comparable can be challenged later; there is no estoppel in tax proceedings.
  • ITAT wrongly remanded issues instead of deciding them despite availability of material and binding precedent.
  • Classification of income and TP characterization was erroneous.

 

Respondent’s (Revenue’s) Arguments

  • Companies like Persistent Systems Ltd. were included by assessee itself and should not be excluded later.
  • Comparables satisfied filters applied by TPO.
  • ITAT erred in excluding valid comparables.
  • Assessee cannot resile from its own transfer pricing study.

 

Court Findings / Order

On Transfer Pricing Comparables

  • Infosys Ltd. & Persistent Systems Ltd.
    • Excluded due to mixed revenue from software products and services and absence of segmental data.
  • Wipro Technology Services Ltd.
    • Excluded because transactions were deemed international transactions under Section 92B(2) and hence not “uncontrolled”.

On Estoppel

  • The Court held:

There is no estoppel against law; even if assessee included a comparable, it can challenge it later if incorrect.

On Revenue Appeal

  • Dismissed – No substantial question of law arose.

On Assessee Appeal

  • Partly allowed:
    • ITAT should not have remanded issues mechanically; must decide when material is available.
    • Matter remanded back to ITAT for limited adjudication on corporate tax issues.
  • Other issues (e.g., Section 10A claim) – no interference required.

 

Important Clarifications

  • Functional similarity is key in transfer pricing—not merely passing filters.
  • Segmental data is crucial for comparability.
  • Deemed international transactions (Section 92B(2)) can convert otherwise uncontrolled transactions into controlled ones.
  • No estoppel in tax law—incorrect positions can be corrected.
  • ITAT should avoid routine remand where facts are already available.

 

Sections Involved

  • Section 92B(2) – Deemed International Transactions
  • Rule 10B(1)(e)(ii) – Comparable Uncontrolled Transactions
  • Section 10A – Deduction
  • Section 143(3) – Assessment
  • Section 144C – DRP Proceedings
  • Section 260A – Appeal before High Court


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

Disclaimer

This content is shared strictly for general information and knowledge purposes only. Readers should independently verify the information from reliable sources. It is not intended to provide legal, professional, or advisory guidance. The author and the organisation disclaim all liability arising from the use of this content. The material has been prepared with the assistance of AI tools.