Facts of the Case

The appeal was filed by the Revenue challenging the order of the Income Tax Appellate Tribunal (ITAT) dated 30.10.2018. The dispute arose in relation to transfer pricing adjustments concerning the respondent, Global Logic India Limited, engaged in software development services.

Two primary issues were raised:

  1. Treatment of foreign exchange gain/loss as operating income/loss.
  2. Exclusion of comparables, namely Infosys Ltd. and Wipro Technologies Services Ltd., in determining arm’s length price.

Issues Involved

  1. Whether foreign exchange gain/loss should be treated as operating income/loss for transfer pricing purposes.
  2. Whether the ITAT erred in excluding Infosys Ltd. and Wipro Technologies Services Ltd. as comparables.

Petitioner’s (Revenue) Arguments

  • The Tribunal erred in categorizing foreign exchange gain/loss as operating in nature.
  • The exclusion of major companies like Infosys Ltd. and Wipro Technologies Services Ltd. was unjustified despite their relevance as comparables.
  • The Tribunal incorrectly applied judicial precedents in excluding these companies.

Respondent’s (Assessee) Arguments

  • The issue of foreign exchange gain/loss is already settled in favour of the assessee by the decision in
    Pr. Commissioner of Income Tax-3 v. Fiserv India Pvt. Ltd..
  • Infosys Ltd. and Wipro Technologies Services Ltd. are functionally dissimilar, as they are engaged in both:
    • Software development services, and
    • Sale of software products
  • Absence of segmental financial data makes them unsuitable as comparables.

Court’s Findings / Order

1. Foreign Exchange Gain/Loss

  • The issue is already settled against the Revenue by prior precedent (Fiserv India case).
  • Hence, no interference was required.

2. Exclusion of Comparables

  • The Court upheld ITAT’s decision to exclude:
    • Infosys Ltd.
    • Wipro Technologies Services Ltd.
  • Reason:
    • These companies derive income from both software services and software products.
    • Lack of segmental data makes comparison unreliable.
  • The Court relied on earlier rulings including:
    • Microsoft India (R&D) (P.) Ltd. vs DCIT
    • Principal Commissioner of Income Tax-7 v. Open Solutions Software Services Pvt. Ltd.
  • It was held that the Tribunal’s approach was correct and consistent with settled law.

3. Safe Harbour Rules

  • Notification dated 18.09.2013 and CBDT guidelines dated 20.12.2013:
    • Not applicable retrospectively
    • Applicable only if opted by the assessee

Final Order

  • The appeal was dismissed.
  • No substantial question of law arose.

 Important Clarifications

  • Segmental data is critical for selecting comparables in transfer pricing cases.
  • Companies engaged in mixed activities (products + services) cannot be compared with pure service providers without clear financial segmentation.
  • Safe Harbour Rules are prospective, not retrospective.
  • Forex fluctuation is generally treated as operating in nature when linked to business operations.

 

Sections Involved

  • Section 260A of the Income Tax Act, 1961 (Appeal to High Court)
  • Section 92C – Transfer Pricing (Arm’s Length Price)
  • Rule 10B(1)(e) of Income Tax Rules – Comparability Analysis

Link to download the order -https://delhihighcourt.nic.in/app/showFileJudgment/RAS11092023ITA4612019_195436.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.