Full Text
HIGH COURT OF DELHI
Date of Decision: 09.07.2025
TPG SOFTWARE PVT LTD .....Appellant
Through: Mr. Himanshu S. Sinha, Mr. Prashant Maharchandani, Ms. Kanika Jain &
Mr. J.S. Kataria, Advs.
Through: Mr. Ruchir Bhatia, Mr. Anant Mann, Mr. P. Gupta & Mr. Abhishek Anand, Advs.
HON'BLE MR. JUSTICE TEJAS KARIA VIBHU BAKHRU, J (ORAL).
JUDGMENT
1. The Assessee has filed the present appeal impugning an order dated 11.09.2023 passed by the learned Income Tax Appellate Tribunal [ITAT] in ITA No.6468/Del/2018 in respect of assessment year [AY] 2014-15. The Assessee had preferred the said appeal impugning the assessment order dated 29.08.2018 passed by the Assessing Officer [AO] under Section 143(3) read with Section 144C(13) of the Income Tax Act, 1961 [Act].
2. The Assessee had filed its return of income for AY 2014-15 declaring an income of ₹4,24,39,400/-. The said return was picked up for scrutiny. Since the return included income from international transactions, a reference was made to the Transfer Pricing Officer [TPO].
3. The learned TPO passed an order under Section 92CA(3) of the Act proposing a transfer pricing adjustment of ₹6,84,70,678/- in respect of international transactions, which related to provision of software development services provided by the Assessee to its overseas associated enterprises as well as interest on the outstanding receivables.
4. The Assessee furnished its transfer pricing study report and selected eight comparable entities which, according to the Assessee, were comparable on the basis of Function, Assets and Risk [FAR] profile. The Assessee had used Transactional Net Margin Method [TNMM] as the most appropriate method and adopted Operating Profit / Total Operating Costs as the Profit Level Indicator [PLI]. The TPO accepted selection of TNMM as the most appropriate method.
5. The learned TPO accepted some of the entities selected by the Assessee as comparables but rejected the others for various reasons. The learned TPO rejected the five entities selected by the Assessee as comparables and included nine others as comparable entities. The final list of entities, as set out in the order passed by the learned TPO, are reproduced below:
6. The Arm’s Length Price [ALP] was determined by the learned TPO, on the average PLI of 26.09. The transfer pricing adjustment as computed by the learned TPO’s on the aforesaid basis, as set out in its order, is reproduced below: Operating Revenues Received (A) 43,53,50,928 Total Operating Cost (B) 39,99,79,711 Arm’s Length Profit (C=26.09% OF B) 10,43,54,707 Arm’s Length Price (D= B+C) 50,43,34,418 Adjustment/Difference (E= D-A) 6,89,83,490 Price Received by Assessee in international transaction (F) 42,66,58,271 Proportion of AEs revenue to Total Revenue (G=F/A) 98.00% Adjustment (H+ E*G) 6,76,06,095
7. Additionally, the learned TPO also proposed an upward adjustment of ₹8,64,583/- on account of interest on outstanding receivables and accordingly directed enhancement of the Assessee’s income for the relevant AY by an amount of ₹6,84,70,678/-.
8. The Assessee filed its objections before the Dispute Resolution Panel [DRP], including objections relating to the selection of comparables – exclusion of comparables selected by the Assessee and inclusion of other comparables by the TPO.
9. The tabular statement, as set out by the learned DRP, regarding its view of the Assessee’s objections to comparables selected by the learned TPO and exclusion of comparables selected by the Assessee is reproduced below:
1. Cigniti Technologies Limited It passes all filters applied by this office. Hence, it is a good comparable • Engaged in independent testing services and has built dedicated Testing Centres of Excellence (TcoE) for Security Mobile, BFSI and Retail • During the year under review, Cigniti built accelerators and pre built test suites for SAP and Oracle • The acquisition of Gallop Solutions Inc had a significant impact on the revenue of the company. Revenue during the year increased to INR 5,552.12 lacs as against INR[2],356.75 lacs million, during FY 2013-14. • Cigniti has INR 54.86 crores worth of intangible fixed assets in the nature of brands, trademarks goodwill, patents and copyrights. As per annual accounts, • It is the third largest independent testing software services company. • The intangible are
54.86 Cr out of total fixed assets of 91.77 Cr and computers are only 15.84 Cr The FAR is different. The is functionality not similar. It should be excluded.
2. 2 Cybercom Datamatics Information Solutions Ltd The Company provides business aligned next generation solutions to a wide range of industry verticals that help enterprises across the world overcome their business challenges and achieve operational efficiencies. These solutions leverage innovations in • Act as consultants and advisors on information /internet systems and surveryors of information services. • Carry on the busienss of development, testing, implementation migration of home grown and other applications, marketing The company is a joint venture company of Cybercom Group AB and Datamatics Global Services Limited w.e.f. 01.06.2006 and subsequently became a subsidiary of DGSL w.e.f. 28.03.2007. Hence, the technology, of business process, and domain expertise to provide clients a competitive edge. It is considered as a comparable to the assessee. and manufacturing of information technology prodcuts and services software and hardware systems to enterprise and embedded technologies in telecome and other industries. • No segment information is available. • Cybercome Datamatics is a JV company – may derive implicit benefits from JV partners. • Super normal profits during FY 2013- 14 i.e 87.03% objection of the assessee regarding JV is not material. The company reports revenues from only ‘sale of services’. The company is primarily engaged in providing software development services and all other activities are incidental to providing such services. retained.
3. 3 Mindtree Limited Mindtree Limited (Mindtree’ or the Company) is an international information Technology consulting and Company that delivers business solutions through global software development. It operates in two units. Product engineering services and IT services. The Company is structured into five verticals – Manufacturing, BFSI, Hitech, Travel & Transportation and Others. The Company offers services in the arears of agile, analytics and information management, application development and business of software selling of products and have business in five verticals manufacturing, BFSI, Hitech, travel & transportation and others • Has incurred subcontracted expenses i.e. INR 140.[6] crores (difference in business model) • Runs nearly half of its operations outside India or outsources extensively outside India • Invested in IP whereas Assessee does not own any IP R&D • Segmental info not available • Much larger During this financial year the revenue recognition has changed. As per the annual accounts the revenue recognition is primarily from software services - Revenue from software development on time-andmaterial basis is recognized as the related services are rendered. Revenue from fixed price contracts is recognized using the proportionate completion method, which is determined by relating the actual project cost of work maintenance, business process business technology consulting, cloud, digital business’s, independent testing, infrastructure management services, mobility, product engineering and SAP services. This Company is engaged in software services and is comparable to the assessee. scale of operations (Sales – INR 3031.[6] crores vs Assessee – INR 43.[5] crores) performed to date to the estimated total project cost for each contract. Functionally the similar. The change in segment reporting does not change the primary function. The intangibles are Rs.17.10 Cr. (which includes softwares of Rs.15.50 Cr. and intectual property is only Rs.1.50 Cr.) as against the operating revenue of Rs.3081.00 Cr. FAR is similar. In TNMM broad functional similarity is to be seen. retained.
4. 4 Persistent Systems Ltd Persistent Systems Ltd. is an OPD speciality company, offering the customers the benefits of offshore delivery. The company designs, develops and maintains software systems and solutions, creates new applications and enhances the functionality of the customers’ existing software products. This company is functionally comparable. software product development of end-toend solutions • Undertakes R&D • Owns intangibles • Invest significantly in IP • Has acquired Cloud Squad Inc • Has established branch offices in Germany and South Africa The Company is into software development. The assessee too is into this field. The P&L account shows it has only one stream of revenue i.e. sale of software services. It means it is not into product There is no stock in trade in the P&L account. As per the Balance sheet it has total intangible assets of Rs.70 Crores (Sales – INR 1184.[1] (which includes contractual rights b/f of 54 Cr.) against total assets of Rs.280 Cr. which is not very significant. Thus the FAR is similar to that of the assessee. retained.
5. 5 Tata Elxsi Ltd Tata Elxsi provides system integration and software development. The company provides hard core technology and strength in design. The company offers end-to end solution across the product lifecycle. Company’s operations are classified into two business segments, i.e. Software Development & Services and Systems Integration & Support. This company is engaged in software services and is functionally • Activities undertaken as part of software development & services segment are not comparable with the Assessee’s function • Holds inventory incurred AMP expenses & consultant fee expenses (Difference in business model) R&D (Sales – INR 682.[7] crores vs. Assessee – The company’s business is divided in 2 segments – software development & services; and Systems integration & Support. The functions of the company are similar to that of the assessee. The assessee has also aggregated 3 different functions. In TNMM broad functional similarity is to be seen. This is a comparable entity. retained.
6. 6 Tata Technologies Limited Tata Technologies Limited is company in the Tata Group that provides services in engineering and design, product lifestyle manufacturing, product development, and IT service management to automotive and • Significant related party transaction i.e. 87.68% (Refer page no. 395 of paperbook) providing diversified business operations which include IT Consultancy, SAP implementation and maintenance, providing networking solutions, CAD/CAM engineering As per annual accounts the providing difference services including IT Consultancy, SAP and maintenance, aerospace original equipment, manufacturers and their suppliers. This & design consultancy. information is not available. • Earns revenue from sale in software functionally comparable of third party software products and software (Sales INR 886.18 INR 43.[5] Crores). solutions and CAD/CAM engineering and design consultancy. The company provides Engineering and Design Services and Product Lifecycle Management product and services to manufacturers and their suppliers in international automotive, aerospace and engineering markets. recognizes revenue from sale of services (Rs.762.89 Cr) sale of products (Rs.122.12 Cr) and commission income (Rs.1.17Cr) The company’s accounts are maintained business segment wise. In the segment reporting note 25(v) it is mentioned that the company’s operations entail providing ‘Information Product and Services’ which constitute a single segment for primary reporting. owns intangible assets in the form of software licenses of Rs.106.09 Cr (net block as on 31.03.2014 of Rs.39.39Cr) The SDS segment should be taken as comparable
7. 7 Thirdware Solutions Limited Thirdware Solutions Ltd is engaged in implementation and consulting services of software based on ERP and Business Intelligence. Thirdware offers comprehensive Application Implementation Services (AIS) Development Services (ADS) and Management- Support Services (AMS) in Enterprises Application Space. This company is Carries out diverse set of activities, which are not similar services provided by the Assessee. information not available • Entire operating income derived from trading of products • Owns intangibles • Super normal profits during FY 2013-14, i.e. 50.58% Company is engaged in two business segments, namely, Technology and enabled services providing other professional technical and business services, purchase of IT hardware and software including software as a services (SAAS). Functional similarity (FAR) should alone decide the comparability. The Company is similar, hence should be retained, if segment data is available
8. 8 Wipro Limited Wipro Limited is a leading global information technology, consulting and • Renders IT services including BPO services. It is engaged in providing IT Services and IT products but no segmental data is business process services company. It harnesses the power of cognitive computing, hyperautomation, robotics, cloud, analytics and emerging technologies to help our clients adapt to the digital world and make them successful. This selling /trading of IT products • Incurred huge expenses on account of sub-contracting /technical fees/third party application (Difference in business model) info not available (Turnover- 38,797 Cr vs Assessee INR 43.5Cr) • Owns significant intangibles (INR 35.35Cr) • Has registered patents • Presence of brand and significant AMP expenses. available. The company is also significant R&D activities Further, two subsidiaries, Wipro Service Limited and WiproEnergyIT Services Limited amalgamated with Wipro Limited, and one unit of the company demerged from the company. The company has significant intangible assets, and exceptionally high turnover, earning supernormal profits (31.26%) FAR of the different. Besides extraordinary events and brand ownership make the company not excluded.”
10. Insofar as the comparables selected by the learned TPO are concerned, the DRP accepted that two of the comparables, namely Cigniti Technologies Limited and Wipro Limited, were required to be excluded; however, the remaining entities, were found to be comparable on the FAR analysis. Insofar as the comparables entities proposed by the Assessee, which were rejected by the learned TPO are concerned, the learned DRP accepted that two of the entities [Sagarsoft (India) Limited and Maveric Systems Limited] are required to be included.
11. In addition, the learned DRP also issued further directions. Based on the same the learned AO passed the final assessment order dated 29.08.2018.
12. The Assessee preferred an appeal before the learned ITAT objecting to the inclusion of following five entities as comparables:
(i) Cybercom Datamatcis Information Solutions Ltd.
(ii) Mindtree Ltd.
(iii) Persistent Systems Ltd.
(iv) Tata Elxsi Ltd.
(v) Comviva Technologies Ltd.
13. The Assessee’s contention, as to why each of the said entities was required to be excluded as a comparable entity was duly noted by the learned ITAT in the impugned order. It is the Assessee’s case, that the FAR profile of the said entities was not comparable to that of the Assessee’s.
14. Insofar as Comviva Technologies Ltd. is concerned, the Assessee pointed out that no analysis was conducted either by the learned TPO or by the learned DRP for including the said entity. The learned ITAT, although articulated the Assessee’s contentions but did not provide any reasons for rejecting the objection. The learned ITAT did not reject the Assessee’s contention that no analysis was conducted for including the said entity; however, rejected the Assesee’s contention on an erroneous premise that the said entity was featured in the list of comparables selected by the Assessee as well as by the TPO and the DRP.
15. Similarly, the learned ITAT did not provide any reasons for its conclusions in respect of other entities as well. Illustratively, in the case of Cybercom Datamatics Information Solutions Ltd., it is the Assessee’s case that the said entity is not comparable as it is functionally dissimilar to the Assessee. The Assessee had referred to the annual report and contended that Cybercom Datamatics Information Solutions Ltd. acts as consultants and advisors on information / internet systems and surveyors of information services. It also carries on the business of development, testing, implementation, migration of homegrown and other applications, marketing and manufacturing of information technology products and services, software and hardware systems to enterprise and embedded technologies in telecom and other industries. The Assessee emphasized that it, on the other hand, is a captive software development company and therefore cannot be considered as comparable to Cybercom Datamatcis Information Solutions Ltd. The learned ITAT recorded the said submission as well as the counter submissions advanced on behalf of the Revenue. However, there is no discussion as to why Cybercom Datamatcis Information Solutions Ltd. Was accepted to be functionally comparable to Assessee.
16. Similarly, there is no discussion as to why the Assessee’s contentions regarding other entities have been rejected.
17. In view of the above, we consider it apposite to set aside the impugned order and remand the matter to the learned ITAT to consider the Assesee’s appeal afresh and pass a reasoned order.
18. The petition is disposed of. Pending application is also disposed of.
VIBHU BAKHRU, J TEJAS KARIA, J JULY 9, 2025 ‘gsr’