IBM INDIA PVT LTD,BANGALORE vs. DCIT, CIRCLE-(1)(1), BANGALORE

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ITTPA 1219/BANG/2025Status: DisposedITAT Bangalore17 April 2026AY 2004-058 pages
AI SummaryPartly Allowed

What did the Tribunal hold?

The Tribunal held that the inclusion of Adam Comsof Ltd. as a comparable was defective on two grounds. Firstly, the TPO adopted financial data for the period 01.07.2002 to 30.06.2003, which did not fall within the relevant financial year 01.04.2003 to 31.03.2004. This approach contravened Rule 10B(4) of the Income Tax Rules, which mandates the use of data relating to the financial year in which the international transaction was entered into, unless exceptional circumstances justify using earlier year data as per the proviso. The Tribunal relied on the Delhi High Court's decision in Chryscapital Investment Advisors (India) (P.) Ltd. v. Deputy Commissioner of Income-tax, which held that using data not pertaining to the relevant financial year is impermissible. Secondly, the Tribunal found substance in the assessee's alternative contention that Adam Comsof Ltd. was involved in fraudulent activities and had been penalized by SEBI, as evidenced by a SEBI adjudication order imposing a penalty of Rs. 30,00,000/- for violations of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003. The Tribunal relied on the Bombay High Court's decision in Commissioner of Income-tax, Pune v. Cummins Turbo Technologies Ltd., which upheld the exclusion of companies with unreliable financials due to extraordinary circumstances. Therefore, the Tribunal directed the AO/TPO to exclude Adam Comsof Ltd. from the final set of comparables. The ground of appeal was allowed.

What were the facts?

The assessee, IBM India Pvt. Ltd., filed an appeal against the order of the Assessing Officer (AO) passed under Section 143(3) read with Section 144C of the Income Tax Act, 1961, for Assessment Year 2004-05. The dispute pertains to the trading segment of the assessee's business. The assessee had benchmarked its international transactions using the Resale Price Method (RPM) and reported a Gross Profit Margin of 16.64%. The Transfer Pricing Officer (TPO) bifurcated the trading segment and, without fresh benchmarking, selected comparables including Adam Comsof Ltd., leading to an upward adjustment of Rs. 21,08,51,801/- under the hardware trading segment. The assessee appealed to the CIT(A), seeking exclusion of Adam Comsof Ltd. due to a discrepancy in sales figures and the use of financial data from a different financial year. The CIT(A) upheld the TPO's action, citing flexibility in using earlier year data under Rule 10B(4) of the Income Tax Rules.

What were the issues?

1. Whether the Tribunal had to decide if the inclusion of Adam Comsof Ltd. as a comparable was permissible, considering it used financial data from a period not within the relevant financial year (FY 2003-04), thereby violating Rule 10B(4) of the Income Tax Rules. 2. Whether the Tribunal had to decide if Adam Comsof Ltd. should be excluded as a comparable due to allegations of fraudulent activities and SEBI penalties, rendering its financials unreliable. Assessee's contentions: - The TPO erred in using financial data of Adam Comsof Ltd. for the period 01.07.2002 to 30.06.2003 instead of the relevant financial year 01.04.2003 to 31.03.2004, citing the Delhi High Court decision in Chryscapital Investment Advisors (India) (P.) Ltd. v. Deputy Commissioner of Income-tax. - Adam Comsof Ltd. was involved in fraudulent activities and penalized by SEBI, making its financials unreliable, citing the Bombay High Court decision in Commissioner of Income-tax, Pune v. Cummins Turbo Technologies Ltd. Revenue's contentions: - The TPO rightly included Adam Comsof Ltd. as a comparable, and minor variations in sales figures do not materially impact comparability. - Rule 10B(4) permits reliance on earlier year data when current year data is unavailable. - The assessee failed to provide conclusive evidence of the unreliability of Adam Comsof Ltd.'s financial results.

Which sections of the Income-tax Act were involved?

Section 143(3),Section 144C,Section 15HA

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, ‘C’ BENCH, BANGALORE

Before: SHRI WASEEM AHMED & SHRI SOUNDARARAJAN K

For Appellant: Shri Sharath Rao and Shri Dhreej, Advocates
For Respondent: Dr. Divya K.J, CIT (DR)
Hearing: 17.03.2026Pronounced: 17.04.2026

PER WASEEM AHMED, ACCOUNTANT MEMBER:

The present appeal has been instituted by the assessee against the order of the AO passed u/s 143(3) r.w.s 144C of the Act.

2.

The assessee in the memo of appeal has filed 03 grounds and sub-grounds of appeal, challenging both Transfer pricing and corporate issues, which we for the sake of brevity are not inclined to reproduce it here.

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3.

At the outset, we note that the ground No. 1.1 raised by assessee is general in nature and does not call for any fresh adjudication. Accordingly, the same is dismissed as not pressed.

4.

Ground No. 2 along with sub-grounds 2.1 to 2.6 are interconnected and pertain to fresh economic analysis conducted by the TPO and inclusion and exclusion of certain comparables by the TPO and by the Ld. DRP for computing the ALP of the international transactions carried out with the AE.

5.

At the outset, we note that at the time of hearing, the assessee has pressed only Ground No. 2.4, and the remaining grounds are either not pressed or have become academic in nature. Accordingly, the remaining grounds are dismissed as not pressed, and we proceed to adjudicate Ground No. 2.4 on merits.

6.

The brief facts of the case are that the assessee, a private limited company, is engaged in providing software research and development services to its group companies and is also involved in trading of both hardware and software. It is pertinent to note that the dispute in the present case is confined only to the trading segment of the assessee.

7.

The assessee benchmarked its international transactions in the trading segment by adopting the Resale Price Method (RPM) as the most appropriate method and reported a Gross Profit Margin of 16.64%. For the purpose of comparability analysis, the assessee selected eight comparable companies, one of which was Adam Comsof Ltd.

.

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7.1 However, during the assessment proceedings, the TPO bifurcated the trading segment into trading of computer hardware and computer software. While doing so, the TPO retained the same set of comparables selected by the assessee under the trading segment without carrying out any fresh benchmarking analysis and selected five out of the eight comparables chosen by the assessee, including Adam Comsof Ltd. Accordingly, an upward TP adjustment was made by the TPO for Rs. 21,08,51,801/- only under hardware trading segment.

8.

Aggrieved assessee filed appeal before the Ld. CIT(A). Before the Ld. CIT(A), the assessee sought exclusion of the comparable company Adam Comsof Ltd. on the ground that the TPO had erred in considering the sales figure at Rs. 15.22 crores instead of Rs. 15.19 crores, which resulted in an increase in the gross profit margin from 18.89% to 19.05%.

9.

The assessee further submitted that the said comparable follows a different financial year ending on 30th June 2003, which does not fall within the relevant financial year 2003–04, and accordingly requested for its exclusion.

9.1 However, the Ld. CIT(A) upheld the action of TPO by contending that whenever there is no current year data available, there is flexibility for TPO to go back in years for obtaining data as per proviso to Rule 10B(4) of the Income Tax Rules.

10.

Aggrieved assessee preferred an appeal before us.

.

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11.

The Ld. AR before us filed a paper book running from page Nos. 1 to 719, along with 7-page synopsis and relevant case laws and contended that the TPO has otherwise strictly applied data of FY 2003– 04 in accordance with Rule 10B of Income Tax Rules in the cases of other comparables. However, in the case of Adam Comsof Ltd., the TPO adopted data pertaining to the period 01.07.2002 to 30.06.2003 instead of the relevant financial year 01.04.2003 to 31.03.2004.

11.2 The assessee placed reliance on the decision of the Hon’ble Delhi High Court in the case of Chryscapital Investment Advisors (India) (P.) Ltd. v. Deputy Commissioner of Income-tax reported in [2015] 56 taxmann.com 417 (Delhi)/[2015] 232 Taxman 20 (Delhi)/[2015] 376 ITR 183 (Delhi)/[2015] 277 CTR 137 (Delhi) dated [27-04-2015] to contend that use of data not pertaining to the relevant financial year is not permissible.

11.3 The assessee also took an alternative plea for exclusion of Adam Comsof Ltd. by contending that the said company was involved in fraudulent activities and had been penalised by SEBI, thereby rendering its financials unreliable. In support of this contention, reliance was placed on the decision of the Hon’ble Bombay High Court in the case of Commissioner of Income-tax, Pune v. Cummins Turbo Technologies Ltd. reported in [2018] 91 taxmann.com 307 (Bombay) dated [28-02-2018]

12.

The Ld. DR, on the contrary, submitted that the TPO has rightly included Adam Comsof Ltd. as a comparable and there is no infirmity in the approach adopted. It was contended that minor variation in sales

.

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figures does not materially impact the comparability analysis and therefore cannot be a ground for exclusion of the comparable.

12.1 The Ld. DR further submitted that in terms of Rule 10B(4) of Income Tax Rules, where current year data is not available, the TPO is permitted to rely on data of earlier years and hence the use of financials of Adam Comsof Ltd. for the period 01.07.2002 to 30.06.2003 is justified.

12.2 With regard to the allegation of fraudulent activities, the Ld. DR contended that the assessee has not brought on record any conclusive evidence to demonstrate that the financial results of the said company are unreliable for the purpose of comparability. Accordingly, it was submitted that Adam Comsof Ltd. has been rightly retained as a comparable by the TPO.

13.

We have heard the rival submissions of both the parties and perused the materials available on record. The issue under consideration before us is with respect to inclusion of Adam Comsof Ltd. as a comparable in the trading segment.

13.1 At the outset, we note that the TPO has otherwise applied data pertaining to the relevant financial year 2003–04 in accordance with Rule 10B(4) of the Rules. However, in the case of Adam Comsof Ltd., the TPO has adopted financial data for the period 01.07.2002 to 30.06.2003, which admittedly does not fall within the relevant financial year 01.04.2003 to 31.03.2004.

.

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13.2 In our considered view, such an approach is not in accordance with the mandate of Rule 10B(4) of the Rules, which clearly provides that the data to be used in analysing comparability shall be the data relating to the financial year in which the international transaction has been entered into. The proviso to Rule 10B(4) permits use of earlier year data only in limited circumstances where such data reveals facts which could influence the determination of transfer pricing in the relevant year. In the present case, no such exceptional circumstance has been brought on record by the Revenue.

13.3 In this regard, we find merit in the reliance placed by the assessee on the decision of the Hon’ble Delhi High Court in the case of Chryscapital Investment Advisors (India) (P.)Ltd. vs. Deputy Commissioner of Income-tax reported in [2015] 56 taxmann.com 417 (Delhi)/[2015] 232 Taxman 20 (Delhi)/[2015] 376 ITR 183 (Delhi)/[2015] 277 CTR 137 (Delhi) dated [27-04-2015], wherein it has been held that use of data not pertaining to the relevant financial year is not permissible unless justified under the proviso to Rule 10B(4) of the Rules. Respectfully following the same, we hold that the adoption of financials of Adam Comsof Ltd. for a non-contemporaneous period renders the comparability defective. The relevant para is reproduced below: “While determining the comparability of transactions, multiple year data can only be included in the manner provided in Rule 10B(4). As a general rule, it is not open to the assessee to rely upon previous year's data.”

13.4 Further, we also find substance in the alternative contention of the assessee that the said company was involved in fraudulent activities and had been subjected to regulatory action by SEBI. This fact can be

.

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verified from the SEBI adjudication order No. IVD- ID3/ACL/AO/DRK/AS/EAD-3/145/09-48/2010 submitted by assessee as Annexure 1 (Para 42 of the order). The relevant para of the SEBI order is reproduced below: “In exercise of the powers conferred under Section15 I of the Securities and Exchange Board of India Act, 1992, and Rule 5 of Securities and Exchange Board of India (Procedure for Holding Inquiry and Imposing Penalties by Adjudicating Officer Rules, 1995, I hereby, impose a penalty of Rs. 30,00,000/- (Rupees Thirty Lakhs only) on Adam Comsof Ltd. having registered office at Narayan Building, 2nd Floor, 23, L.N. Road, Dadar (E), Mumbai - 400014 in terms of the provisions of Section 15HA of the Securities and Exchange Board of India Act, 1992 for violation of Regulations 3 (b), 3(c), 4(1), 4(2)(r) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003. In the facts and circumstances of the case, I am of the view that the said penalty is commensurate with the violations committed by the noticee.”

13.5 The presence of such serious allegations affecting the integrity of financial statements cannot be ignored in a comparability analysis under transfer pricing provisions. In this context, the Hon’ble Bombay High Court in the case of Commissioner of Income-tax, Pune vs. Cummins Turbo Technologies Ltd. reported in [2018] 91 taxmann.com 307 (Bombay) dated [28-02-2018] has upheld exclusion of companies whose financials are unreliable due to extraordinary or abnormal circumstances. The relevant para is reproduced below: “This for the reason that M/s. Maple E-Solutions Ltd. was found involved in frauds resulting in the financial results declared by it, being unreliable. The impugned order of the Tribunal placed reliance upon the aforesaid decisions and concluded because of the unreliability of the data of M/s. Maple E- Solutions Ltd., it could not be used as a comparable to determine the ALP of the respondent assessee's services.”

13.6 Considering the above facts and respectfully following the judicial precedents, we are of the considered view that Adam Comsof Ltd. cannot be regarded as a reliable comparable. Accordingly, we direct the

.

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AO/TPO to exclude the said company from the final set of comparables. Hence, the ground of appeal of the assessee is allowed.

14.

In the result, the appeal of assessee is hereby partly allowed.

Order pronounced in court on 17th day of April, 2026 Sd/- Sd/- (SOUNDARARAJAN K) (WASEEM AHMED) Judicial Member Accountant Member Bangalore Dated, 17th April, 2026 / vms / Copy to: 1. The Applicant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore. 6. Guard file By order Asst. Registrar, ITAT, Bangalore

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