ITAT Delhi in Coforge Ltd v. ACIT
Introduction
A notable case decided by Income Tax Appellate Tribunal (ITAT), Delhi Bench, in the case of "Coforge Ltd. Vs. ACIT" (ITA Nos. 2889 & 2890/Del/2018) provides an authoritative precursor in establishing how to properly use Section's transfer pricing laws in Chapter X of the Income-tax Act of 1961. This judicial precedent includes much more than an order in an appeal between an assessee and the Department; it also provides a means to correct an increasing erosion of basic principles in establishing the Arm's Length Price (ALP), Most Appropriate Method (MAM), and Comparability.
In short, it is dealing with whether an active issue concerning rules pertaining to transfer pricing rules can be considered applicable, independent of economic substance, reality, and common sense. The Tribunal answered this decisively by holding that transfer pricing is not a tool for tax maximization but an anti-abuse mechanism intended to ensure neutrality between associated and uncontrolled transactions. The ruling reinforces that ALP determination must reflect real-world business conditions and not hypothetical constructs engineered through selective comparables or forced methodological preferences.
The significance of the judgment lies in its firm reaffirmation of TNMM as the appropriate method for captive IT service providers, its insistence on strict functional comparability, and its rejection of intangibles-heavy and scale-driven comparables that distort benchmarking outcomes. By anchoring its analysis in statutory intent and internationally accepted principles, the ITAT restores doctrinal clarity to Indian transfer pricing law. The decision therefore serves as a jurisprudential guidepost for taxpayers, tax authorities, and practitioners navigating complex transfer pricing disputes.
Selection of the Most Appropriate Method: Reasserting TNMM and Rejecting Artificial Method Preferences
One of the central controversies before the Tribunal was the determination of the Most Appropriate Method under Section 92C. Coforge Ltd, operating as a captive service provider rendering software development and IT-enabled services to its Associated Enterprises, had adopted the Transactional Net Margin Method (TNMM). This choice was supported by a detailed Functional-Asset-Risk (FAR) analysis demonstrating that the assessee operated with limited risk, did not own valuable intangibles, and functioned on a cost-plus remuneration model.
The Revenue authorities, however, sought to undermine this approach by implicitly favoring alternative methods—particularly the Comparable Uncontrolled Price (CUP) method—for certain transactions, despite the absence of reliable comparable data. The Tribunal firmly rejected this approach and clarified an important jurisprudential principle: the most appropriate method is not determined by theoretical hierarchy but by practical reliability in the given factual context.
The ITAT observed that while CUP may appear conceptually superior, its application requires a very high degree of comparability across multiple parameters, including contractual terms, risk allocation, geographic markets, and volume of transactions. In the absence of such near-identical comparables, reliance on CUP becomes speculative rather than scientific. The Tribunal cautioned that transfer pricing law does not permit notional precision at the cost of commercial reality.
By upholding TNMM, the Tribunal reaffirmed that for integrated, intangible-light service transactions—particularly in the IT and ITES sectors—TNMM remains the most robust and reliable method. This finding aligns Indian jurisprudence with OECD Transfer Pricing Guidelines and consistent international practice. More importantly, it curtails the administrative tendency to invoke alternative methods selectively to justify higher adjustments, thereby restoring predictability and coherence to method selection under Indian transfer pricing law.
Comparability Analysis: Functional Similarity as the Cornerstone of ALP Determination
The most consequential aspect of the Coforge ruling lies in its treatment of comparability analysis. The Tribunal undertook a principled examination of the comparables introduced by the Transfer Pricing Officer and found that several of them were fundamentally flawed due to functional dissimilarity, ownership of significant intangibles, extraordinary corporate events, and scale mismatches.
The ITAT categorically rejected the notion that companies can be treated as comparable merely because they operate within the same broad industry classification. It reiterated that functional similarity—not statistical convenience or industry labels—is the decisive criterion. Companies engaged in high-end services, product development, or intellectual property exploitation cannot be benchmarked against captive service providers performing routine functions under limited-risk arrangements.
Importantly, the Tribunal went beyond abstract principles and recorded specific functional differences between the assessee’s comparables and those selected by the TPO. The ITAT noted that several TPO-selected entities were engaged in independent procurement audits, consultancy, and market-facing advisory services, whereas the assessee was confined to rendering routine, captive support services to its Associated Enterprises. The Tribunal observed that such companies operated as independent entrepreneurs, assumed open-market risks, and earned income from third-party clients, making them fundamentally different from a captive service provider operating on a cost-plus basis. In one instance, the Tribunal specifically recorded that the comparable incurred advertising and marketing expenditure amounting to approximately 6.08% of its total sales, evidencing brand-building and market development functions absent in the assessee’s business model. The ITAT accepted the assessee’s contention that entities performing significant marketing and promotional activities fail the advertising and marketing filter and cannot be treated as functionally comparable. Further, the Tribunal expressed reservations regarding entities engaged in mixed or diversified activities without reliable segmental data, holding that such lack of functional purity further vitiated comparability. On these facts, the ITAT categorically held that the TPO’s comparables were “miles apart” from the assessee in terms of functions, assets employed, and risk profile.
A particularly important reaffirmation in this judgment is the Tribunal’s treatment of intangibles and scale. The ITAT held that ownership of proprietary software, brand value, or unique intellectual property fundamentally alters the profit-earning capacity of an enterprise. Such differences are not minor variances capable of being neutralised through adjustments; rather, they represent structural divergences that vitiate comparability altogether. Similarly, entities operating at a vastly larger scale enjoy economies, market power, and brand leverage that captive service providers simply do not possess.
By excluding such entities from the comparable set, the Tribunal restored doctrinal discipline to benchmarking exercises. It made it clear that comparability adjustments cannot be used as a fig leaf to justify inherently incomparable selections. This aspect of the ruling is particularly significant in the Indian context, where transfer pricing adjustments have often been driven by the inclusion of industry giants whose margins reflect market dominance rather than arm’s length efficiency.
Through this reasoning, the ITAT reinforced the principle that ALP determination must be grounded in economic equivalence. The decision thus serves as a strong judicial check on arbitrary and outcome-oriented comparability selection.
Purpose and Scope of Transfer Pricing Provisions: Anti-Abuse, Not Revenue Enhancement
Another critical contribution of the Coforge decision is its clear articulation of the purpose underlying Chapter X of the Act. The Tribunal emphasized that transfer pricing provisions are anti-avoidance measures designed to prevent profit shifting, not instruments to artificially inflate taxable income. This distinction, though conceptually well-established, had increasingly been blurred in administrative practice.
The ITAT observed that ALP determination cannot be approached as a mechanical arithmetic exercise aimed at maximising tax collections. Instead, it must reflect what independent enterprises would have agreed to under comparable circumstances. Any approach that disregards functional reality and commercial substance defeats the legislative intent of transfer pricing regulations.
This reasoning assumes particular importance in cases involving tax holiday provisions such as Section 10B. While the Tribunal did not treat Section 10B as an independent focal issue, it implicitly clarified that transfer pricing adjustments cannot be used as an indirect tool to neutralize legislatively granted incentives. Genuine profits of eligible export-oriented units cannot be eroded through artificial benchmarking or inflated margins derived from incomparable entities.
By anchoring transfer pricing to neutrality and fairness, the Tribunal reaffirmed the equilibrium that Chapter X seeks to achieve—ensuring that neither the taxpayer nor the Revenue derives an undue advantage. This articulation strengthens taxpayer confidence and reinforces the credibility of the Indian transfer pricing regime in a global context.
Conclusion
The judgment in Coforge Ltd. vs. ACIT is a moment of restoration in the area of Transfer Pricing jurisprudence in India. What is even more important about ITAT instead of charting new rules is that it performed an even more significant task in reaffirming first principles, principles which were in danger because of formulaic and revenue-led applications. the Tribunal, in reiterating TNMM as the proper method for captive service providers, maintaining high standards of functional comparability, excluding only intangibles and scale-based comparables, and re-articulating the anti-abuse provision contained in Chapter X, has delivered a judgment of lasting doctrinal significance. The judgment will restore balance between administrative action and judicial review to ensure that transfer pricing legislation does not become over-stretched from economic reality.
This also underlines for companies the importance of carrying out profound FAR analyses and appropriate benchmarking practices.. For tax administrators, it serves as a reminder that discretion must operate within jurisprudential limits. For CA students and practitioners, the case offers a clear and structured illustration of how transfer pricing law is meant to function in practice—anchored in substance, fairness, and commercial logic.