Delhi HC Sets Aside ITAT Order for Lack of Reasoned Findings on Functional Comparability in Transfer Pricing Case [Read Order]

The Delhi High Court has set aside an order passed by the Income Tax Appellate Tribunal (ITAT) for failing to provide adequate reasons while deciding on the functional comparability of entities in a transfer pricing dispute of TPG Software Pvt Ltd. The Court has remanded the matter back to the ITAT for a fresh and reasoned adjudication.

The case arose from an assessment for the Assessment Year 2014-15, where the Assessing Officer had assessed under Section 143(3) read with Section 144C(13) of the Income Tax Act, 1961. Since the assessee had entered into international transactions relating to software development services with its overseas associated enterprises, the Assessing Officer made a reference to the Transfer Pricing Officer (TPO).

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The TPO, after applying the Transactional Net Margin Method (TNMM) as the most appropriate method, determined the Arm’s Length Price based on an average Profit Level Indicator (PLI). Consequently, an upward adjustment of ₹6,84,70,678 was proposed, including a minor addition for interest on outstanding receivables.

The assessee objected before the Dispute Resolution Panel (DRP), contesting the rejection and inclusion of certain comparables by the TPO. The DRP accepted some of the objections, directing the exclusion of Cigniti Technologies Ltd. and Wipro Ltd., while retaining others, such as Cybercom Datamatics Information Solutions Ltd., Mindtree Ltd., Persistent Systems Ltd., Tata Elxsi Ltd., and Comviva Technologies Ltd.

Aggrieved, the assessee appealed before the ITAT, contending that the Functional, Asset, and Risk (FAR) profile of these retained entities was not comparable and argued that Cybercom Datamatics was engaged in consultancy and advisory services and not in captive software development, while Comviva Technologies had been included without any analysis by either the TPO or the DRP.

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The High Court observed that though the ITAT had recorded the assessee’s submissions, it failed to provide any reasons for rejecting them. The Tribunal did not discuss why Cybercom Datamatics or other entities were accepted as comparable despite clear differences in their functions and operations.

The Court also noted that the ITAT rejected the objection regarding Comviva Technologies Ltd. on an erroneous assumption that it was already part of the comparables list approved by the TPO and DRP, which was factually incorrect.

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The Division Bench comprising Justice Vibhu Bakhru and Justice Tejas Karia held that a reasoned order is essential for judicial scrutiny. Accordingly, the Court set aside the impugned order and remanded the matter to the ITAT to consider the appeal afresh and pass a reasoned decision in accordance with law.

The assessee was represented by Himanshu S. Sinha along with Prashant Maharchandani, Kanika Jain, and J.S. Kataria, while Ruchir Bhatia, along with Anant Mann, P. Gupta, and Abhishek Anand appeared for the revenue.

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