Xchanging Solutions Limited (formerly Cambridge Solutions Limited) is an Indian company engaged in software development services and was part of the Xchanging group. For assessment year 2011-12, the company filed a return of taxable income at nil.
Following an audit, the assessing officer passed a final assessment order determining assessed income at INR 190,805,854, which included transfer pricing adjustments relating to the software development services segment and corporate guarantee commission.
In an earlier round of proceedings, the Income Tax Appellate Tribunal (ITAT) had remanded the issue of exclusion of five comparables — E Infochips Limited, Acropetal Technologies Limited, E-Zest Solutions Ltd, ICRA Techno Analytics Ltd, and Persistent Systems and Solutions Ltd — to the Dispute Resolution Panel for fresh consideration. Separately, the ITAT had remanded the issue of inclusion of two comparables — R Systems International Limited and Helios and Matheson Information Technology Ltd — to the Transfer Pricing Officer. The ITAT also upheld the arm’s length price of the guarantee fee at 0.5%.
The Transfer Pricing Officer passed a give-effect order including the two remanded comparables but did not address the five comparables that had been remanded to the Dispute Resolution Panel, retaining them in the comparables set. Based on the Transfer Pricing Officer’s order, the assessing officer issued a draft assessment order. Xchanging Solutions objected before the Dispute Resolution Panel, arguing that the Transfer Pricing Officer’s order was invalid because the five comparables should have been reconsidered by the DRP as directed by the ITAT. The Dispute Resolution Panel rejected this objection, reasoning that it could only act upon receiving objections from the assessee against a draft assessment order and that no copy of the ITAT’s order had been forwarded to it. The Dispute Resolution Panel confirmed inclusion of all five comparables. A final assessment order was then passed on 27 December 2024.
Xchanging Solutions appealed, contending that the entire order was invalid because the ITAT’s direction to the Dispute Resolution Panel had not been properly complied with. The tax authority argued that directing the Dispute Resolution Panel was impermissible under the law, that the Dispute Resolution Panel could only be activated by the assessee, and that the assessee had in substance received a full opportunity to contest these comparables before both the Transfer Pricing Officer and the Dispute Resolution Panel.
Judgment
The Income Tax Appellate Tribunal partly allowed the appeal in favour of Xchanging Solutions. The Tribunal held that the Dispute Resolution Panel and Transfer Pricing Officer are not parties before the tribunal — only the assessing officer is the respondent — and therefore any direction should properly have been given to the assessing officer alone. The Tribunal acknowledged that the earlier order had directed the Dispute Resolution Panel to reconsider the five comparables, but the Dispute Resolution Panel had not done so in time. While the Dispute Resolution Panel eventually considered the comparables in a later direction and rejected the assessee’s objections, the Tribunal found that the procedural irregularity remained. The Tribunal directed the assessing officer to remove all five comparables from the computation of the arm’s length price for the software development services segment and to recompute the transfer pricing adjustment of INR 43,166,829 accordingly. No other infirmity was found in the assessment order. The corporate guarantee adjustment at 0.5% was not disturbed.
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