Facts of the Case

The assessee, TPG Software Pvt. Ltd., filed an appeal under Section 260A of the Income-tax Act, 1961 challenging the order dated 11.09.2023 passed by the Income Tax Appellate Tribunal in ITA No. 6468/Del/2018 for Assessment Year 2014–15. The appeal arose from an assessment order dated 29.08.2018 passed under Section 143(3) read with Section 144C(13).

The assessee had filed its return declaring income of ₹4,24,39,400, which was selected for scrutiny. Since the assessee had entered into international transactions relating to provision of software development services to its overseas associated enterprises and interest on outstanding receivables, the matter was referred to the Transfer Pricing Officer under Section 92CA.

The TPO proposed a transfer pricing adjustment of ₹6,84,70,678 by rejecting certain comparables selected by the assessee and including several new comparables. The Dispute Resolution Panel partly accepted the assessee’s objections and excluded some comparables but retained others. The final assessment order was thereafter passed, which was upheld by the ITAT.

Issues Involved

Whether the Income Tax Appellate Tribunal was justified in affirming the transfer pricing adjustment without providing reasoned findings on the assessee’s objections to inclusion of certain comparables, whether the FAR analysis of the disputed comparables was properly examined, and whether the ITAT’s order suffered from non-application of mind warranting interference and remand.

Petitioner’s Arguments

The assessee contended that the ITAT failed to deal with its detailed objections to inclusion of multiple comparables, including Cybercom Datamatics Information Solutions Ltd., Mindtree Ltd., Persistent Systems Ltd., Tata Elxsi Ltd., and Comviva Technologies Ltd. It was argued that several of these entities were functionally dissimilar, owned significant intangibles, undertook product development, had extraordinary events, or operated at a scale far larger than the assessee, which was a captive software development service provider.

It was further contended that in the case of Comviva Technologies Ltd., no analysis whatsoever had been undertaken by the TPO or DRP, and the ITAT rejected the assessee’s objection on an erroneous factual premise.

Respondent’s Arguments

The Revenue supported the impugned order of the ITAT and submitted that the comparables retained by the TPO and DRP were functionally comparable under the TNMM, and that broad functional similarity was sufficient for comparability analysis. It was argued that the ITAT had considered the rival submissions and no substantial question of law arose.

Court Order / Findings

The Delhi High Court observed that although the ITAT recorded the submissions advanced by the assessee in respect of the disputed comparables, it failed to provide any reasons for rejecting those contentions. The Court noted that in several instances, including Cybercom Datamatics Information Solutions Ltd. and Comviva Technologies Ltd., there was no discussion as to why the entities were held to be functionally comparable to the assessee.

The Court held that an appellate order must reflect application of mind and contain reasons dealing with the material contentions raised by the parties. The absence of reasoned findings rendered the impugned order unsustainable. Accordingly, the Court found it appropriate to set aside the ITAT’s order and remand the matter for fresh consideration.

Important Clarification

The Court clarified that while determining comparability under the TNMM, the ITAT is required to examine the FAR profile of the disputed entities and provide cogent reasons for inclusion or exclusion. Mere recording of submissions without reasoned conclusions does not satisfy the requirement of judicial adjudication.

Final Outcome

The appeal was allowed. The Delhi High Court set aside the impugned order dated 11.09.2023 passed by the Income Tax Appellate Tribunal and remanded the matter to the ITAT to consider the assessee’s appeal afresh and pass a reasoned order in accordance with law. The pending application was also disposed of accordingly.

 

Link to Download Order- https://www.mytaxexpert.co.in/uploads/1769595784_TPGSOFTWAREPVTLTDVsDEPUTYCOMMISSIONEROFINCOMETAXCIRCLE252NEWDELHI.pdf

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