Facts of the Case

  • The Assessee, Microsoft India (R&D) Pvt. Ltd., is engaged in software development and IT-enabled services.
  • It filed its return declaring income of ₹2,01,64,26,819 for AY 2011-12.
  • The case was selected for scrutiny and referred to the Transfer Pricing Officer (TPO).
  • TPO proposed a transfer pricing adjustment of ₹2,40,89,61,667.
  • AO passed final assessment under Section 143(3)/144C determining income at ₹4,37,47,44,593.
  • Both Assessee and Revenue filed cross appeals before ITAT.
  • ITAT excluded certain comparables (Infosys, Persistent Systems, Wipro Technology Services).
  • Both parties challenged ITAT’s order before the Delhi High Court.

Issues Involved

  1. Whether ITAT was correct in excluding comparables like Infosys, Persistent Systems Ltd., and Wipro Technology Services Ltd.
  2. Whether an assessee can challenge comparables initially selected by itself.
  3. Whether absence of segmental data justifies exclusion of comparables.
  4. Whether transactions deemed as international transactions under Section 92B(2) can be treated as uncontrolled.
  5. Whether ITAT was justified in remanding corporate tax issues to the AO instead of deciding them finally.

Petitioner’s Arguments (Assessee)

  • ITAT erred in remanding issues instead of deciding them finally despite availability of material and binding precedent.
  • Comparables selected were functionally dissimilar due to:
    • Presence of software product revenue
    • High-end R&D and intangible assets
  • Segmental data absence makes comparability invalid.
  • Certain corporate tax issues were already settled by jurisdictional High Court and should not be remanded.

Respondent’s Arguments (Revenue)

  • ITAT wrongly excluded comparables that passed filters applied by TPO.
  • Assessee should not be allowed to challenge comparables initially selected by itself.
  • Filters applied by TPO were stricter and valid.
  • Exclusion of comparables was erroneous and contrary to TP principles.

Court Findings / Judgment

1. Exclusion of Comparables Upheld

  • Infosys, Persistent Systems, and Wipro Technology Services were rightly excluded:
    • Mixed revenue from software products and services
    • No segmental data available
  • Such companies cannot be compared with captive service providers.

2. No Estoppel Against Law

  • Assessee can challenge comparables even if initially selected.
  • Objective is correct determination of ALP, not procedural rigidity.

3. Related Party Transactions (RPT) – Section 92B(2)

  • Wipro Technology Services had transactions deemed as international transactions.
  • Hence, it ceased to be an uncontrolled comparable under Rule 10B.

4. No Substantial Question of Law (Revenue Appeals)

  • Findings of ITAT were factual and required no interference.
  • Revenue appeals dismissed.

5. ITAT’s Remand Improper (Assessee Appeal)

  • ITAT should not remand matters routinely.
  • Being final fact-finding authority, it must adjudicate when material is available.
  • Matter restored to ITAT for limited issues.

 Important Clarifications

  • Functional similarity and segmental data are critical for TP comparability.
  • Even a small portion of product revenue can invalidate comparability if segmentation is unavailable.
  • Transactions under prior agreements may become deemed international transactions under Section 92B(2).
  • Passing filters does not guarantee inclusion as comparable.
  • ITAT must avoid mechanical remand when sufficient material exists.

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.