2025 (7) TMI 1237 - HC - Income Tax

TP Adjustment - Comparable selection - HELD THAT - Insofar as Comviva Technologies Ltd. is concerned the Assessee pointed out that no analysis was conducted either by TPO or by the learned DRP for including the said entity. 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. 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. Similarly there is no discussion as to why the Assessee s contentions regarding other entities have been rejected. 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.

Summary

ISSUES:

Whether the selection and rejection of comparable entities by the Transfer Pricing Officer (TPO) and Dispute Resolution Panel (DRP) for determining Arm's Length Price (ALP) under the Transactional Net Margin Method (TNMM) was appropriate.Whether the inclusion of specific entities as comparables without adequate analysis or reasoned justification violates principles of transfer pricing comparability and fairness.Whether the Income Tax Appellate Tribunal (ITAT) adequately addressed and reasoned on the objections raised regarding the functional comparability (Function, Assets and Risk - FAR profile) of the selected comparables.Whether the final transfer pricing adjustment based on the selected comparables and profit level indicator (Operating Profit/Total Operating Costs) was correctly computed and justified under the Income Tax Act, 1961.

RULINGS / HOLDINGS:

The Court held that the ITAT's order lacked adequate reasoning on the acceptance or rejection of specific comparable entities, particularly for those entities objected to on the basis of functional dissimilarity, thus rendering the order non-sustainable.The Court emphasized that inclusion of comparables requires a "reasoned order" and that mere recording of contentions without analysis does not meet the standard of judicial or quasi-judicial decision-making.The Court found that the ITAT erred in rejecting objections on an "erroneous premise" regarding the inclusion of certain comparables without proper analysis, especially in respect of entities like Comviva Technologies Ltd. and Cybercom Datamatics Information Solutions Ltd.The Court set aside the impugned order and remanded the matter to the ITAT for a fresh consideration of the appeal with directions to pass a reasoned order addressing all objections raised on comparability and transfer pricing adjustments.

RATIONALE:

The Court applied the statutory framework under the Income Tax Act, 1961, particularly Sections 92CA(3), 143(3), and 144C(13), governing transfer pricing assessments and dispute resolution.The Court relied on the principle that determination of Arm's Length Price under TNMM requires careful selection of comparable entities based on FAR analysis and appropriate application of Profit Level Indicator (Operating Profit/Total Operating Costs).The Court underscored the necessity for the adjudicatory authority (ITAT) to provide "reasoned conclusions" on the comparability of entities, especially when challenged on functional grounds, to ensure transparency and fairness in transfer pricing adjustments.No doctrinal shift or dissent was indicated; the decision reinforced existing jurisprudence on the requirement of reasoned orders in transfer pricing disputes.