ACIT Vs Mphasis Software And Services (India) Private Limited (ITAT Bangalore)
No Grounds, Wrong Papers & No Surviving Grievance: Bangalore ITAT Dismisses Revenue’s ₹2.34 Crore TP Appeal
SEO Title: ITAT Bangalore Dismisses Revenue Appeal on Nil ALP for Selling Commission
SEO Description: ITAT Bangalore holds selling commission forming part of TNMM operating costs cannot be separately benchmarked at Nil & dismisses Revenue appeal.
Summary:
The assessee, Mphasis Software & Services (India) Private Limited, was engaged in software development, IT consultancy, IT-enabled services & business process outsourcing. It filed its return declaring total income of ₹24,06,00,006.
Since the assessee entered into international transactions with associated enterprises, the matter was referred to the TPO. The disputed transaction concerned selling commission of ₹2,34,35,294 paid to associated enterprises for marketing assistance, business development & securing offshore software contracts.
The assessee benchmarked its software development segment under the Transactional Net Margin Method, treating the selling commission as part of the operating cost of that segment. The TPO accepted TNMM as the most appropriate method & accepted the software development transaction as being at arm’s length. However, he isolated the selling commission, treated it as a separate intra-group service, applied the CUP method & determined its arm’s-length price at Nil.
The adjustment of ₹2.34 crore was incorporated in the final assessment order passed u/s 143(3) r.w.s. 144C. The CIT(A), following Tribunal decisions in the assessee’s group cases, restored the matter to the AO/TPO to verify whether the selling commission formed part of operating expenses benchmarked at the entity or segmental level.
The Revenue challenged the CIT(A)’s order before the Tribunal.
Issue before the Tribunal
The substantive issue was whether selling commission, already included in the operating cost while benchmarking the software development segment under TNMM, could be separately isolated & assigned a Nil arm’s-length price.
However, an equally significant issue was whether the Revenue’s appeal was maintainable when no grounds of appeal were filed, incorrect documents were attached & the order challenged was not enclosed.
Revenue’s contentions
The CIT-DR submitted that the CIT(A) had granted relief without conducting an adequate functional analysis. According to the Revenue, the agreements did not specify the relevant cost base, allocation mechanism or agreed mark-up for the marketing services rendered by the associated enterprises.
The assessee had allegedly failed to demonstrate that expenses incurred by the associated enterprises related to specific revenue streams. Therefore, unrelated parties would not have accepted such an arrangement & the TPO was justified in determining the arm’s-length price at Nil.
The CIT-DR nevertheless acknowledged that the AO had not filed any grounds of appeal. Even after requesting the AO to provide them, the grounds were not received.
Assessee’s submissions
The assessee submitted that the selling commission was closely linked with software development services & formed part of the segmental operating cost. The associated enterprises performed marketing, customer acquisition, business-development & on-site functions, while the assessee executed the offshore software work.
Once TNMM was applied to the integrated software development segment & the overall margin was accepted as being at arm’s length, a single operating cost could not be artificially segregated & benchmarked again.
The assessee also pointed out that the CIT(A) had merely followed the Tribunal’s decision in a group company’s case & directed verification. Pursuant to that direction, the TPO had already passed an order dated 16 June 2025, verified the facts & deleted the entire adjustment. Therefore, no grievance survived for the Revenue.
Tribunal’s criticism of Revenue’s appeal
The Tribunal expressed serious concern regarding the careless manner in which the appeal was filed. The Revenue failed to attach the CIT(A)’s order, wrongly uploaded the assessment order as if it were DRP directions & described the TPO’s order as objections filed before the DRP, though no DRP directions existed.
The appeal was delayed by 63 days. The PCIT’s limitation certificate contained outdated instructions directing filing in triplicate despite compulsory e-filing. The Tribunal had issued a defect notice on 15 October 2025 regarding absence of grounds, but neither the AO nor other Revenue authorities responded.
Even the Departmental Representative sought adjournment because the grounds were unavailable. The Tribunal observed that the appeal was approved by the higher authority in an equally routine & careless manner.
The AO attributed the delay to time-bound reassessment work, rectification matters, CPGRAMS grievances & technical glitches in the ITBA portal. The Tribunal noted the irony that even the AO complained of portal difficulties routinely faced by taxpayers. Nevertheless, since there was no serious opposition, the 63-day delay was condoned.
Findings on transfer pricing adjustment
The Tribunal held that where selling commission forms part of operating cost & TNMM is applied to the integrated segment, the commission cannot ordinarily be isolated & separately assigned a Nil value.
The TPO had accepted TNMM & the arm’s-length nature of the software development services. The same methodology had been followed in earlier years. In the group company’s case for AY 2009-10, the Tribunal had held that no separate adjustment was warranted where selling commission was included in operating costs. The Revenue had not challenged that decision before a higher forum.
Moreover, after verification directed by the CIT(A), the TPO had already deleted the ₹2.34 crore adjustment. Thus, no effective grievance survived.
The Tribunal dismissed the Revenue’s appeal as devoid of merit & also liable for dismissal due to procedural deficiencies.
Practical implications
The ruling confirms that closely linked transactions benchmarked together under TNMM should not be selectively separated merely to assign a Nil arm’s-length price. The Revenue must conduct a proper functional analysis before adopting separate benchmarking.
The order also sends a strong institutional message: Revenue appeals require the same procedural discipline expected from taxpayers. Grounds, correct orders, limitation records & supporting documents must be properly filed.
Most importantly, once the TPO has implemented the CIT(A)’s direction & deleted the adjustment after verification, an appeal without a surviving grievance becomes academic. The ruling combines a substantive TP principle with a warning that careless litigation cannot be sustained merely because it is filed by the Revenue.
Cases Discussed
- Mphasis Ltd. v. ACIT, ITA No. 242/Bangalore/2014 — Tribunal decision concerning selling commission forming part of operating costs where TNMM was applied.
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT BANGALORE BENCH
1. This appeal has been filed by the Assistant Commissioner of Income Tax, Circle-4(1)(1), Bangalore (“learned AO”), in the case of M/s. Mphasis Software and Services (India) Private Limited (“the assessee”) for assessment year 2009-10. It is directed against the appellate order dated 20 March 2025 passed by the Commissioner of Income Tax (Appeals), Bangalore-12 (“learned CIT(A)”), whereby the assessee’s appeal against the assessment order dated 20 May 2013, passed under section 143(3) read with section 144C by the Deputy Commissioner of Income Tax, Circle-12(1), Bangalore, was allowed for statistical purposes.
2. As there are no grounds of appeal filed by the learned assessing officer, the learned it CIT DR stated that she has asked the learned assessing officer to submit the grounds of appeal on 15 December 2025 but still it has not been received however she referred to the order of the learned that CIT – AN stated that the revenue is aggrieved with the order of the learned CIT – A wherein at paragraph No. 5.1 despite assessing officer determining the arm’s-length price of the selling commission paid to its associated enterprises at rupees Nil, has directed to verify the selling commission in the same manner and thus he has deleted the addition. He submitted that this would be the grievance of the assessing officer has other than that nothing else is decided.
3. The only dispute in this appeal concerns the selling commission expenditure of ₹2,34,35,294 incurred by the assessee. The assessee treated this amount as part of the cost base while benchmarking its software development services under the Transactional Net Margin Method, which it adopted as the most appropriate method. Accordingly, the selling commission paid to its associated enterprises was included in computing the assessee’s margin. However, while accepting that the arm’s-length price of the software development services was properly determined, the learned Assessing Officer disputed the inclusion of the selling commission on the ground that, as it was paid to associated enterprises, it should be benchmarked separately. He therefore determined its arm’s-length price at nil.
4. Briefly stated, the facts of the case are that the assessee is engaged in software development, related services, and business process outsourcing services. It filed its return of income on 29 September 2009 declaring a total income of ₹240,600,006. Since the assessee had entered into certain international transactions, a reference was made to the Joint Commissioner of Income Tax, Transfer Pricing Officer-I, Bangalore (“learned TPO”), for determining the arm’s-length price of such transactions. The learned TPO made an adjustment of ₹23,435,294 by passing an order under section 92CA(3) of the Act on 29 January 2013, which was incorporated in the draft assessment order passed under section 143(3) read with section 144C of the Act on 22 March 2013. The assessee did not file objections before the Dispute Resolution Panel; therefore, the final assessment order was passed on 20 May 2013, determining the assessee’s total income at ₹261,496,464, including only the transfer pricing adjustment of ₹23,435,294.
5. Aggrieved by the assessment order, the assessee preferred an appeal before the learned CIT(A). The learned CIT(A) observed that, in the case of the assessee’s group company, Mphasis Limited, for assessment year 2012-13, the Tribunal, by order dated 14 August 2024, had restored the issue relating to selling commission adjustment to the file of the learned Assessing Officer for verification. Following that decision, the learned CIT(A) granted similar relief and directed the learned Assessing Officer to verify whether the selling commission formed part of the operating expenses benchmarked at the entity level. If so, the learned Assessing Officer was directed to follow the same approach in the present case.
6. The issue in the present case concerns the assessee’s payment of selling commission of ₹2, 34,35,294 to its associated enterprises, which was reported as an international transaction. The assessee had applied the Transactional Net Margin Method as the most appropriate method to benchmark this transaction along with its software development, IT consultancy, IT-enabled services of ₹94,485,406, and reimbursement of expenses of ₹18,702,933 at the entity level. The learned TPO, however, treated the selling commission as an intra-group service and proposed to benchmark it separately by applying the CUP method. The assessee explained that the commission was paid to its associated enterprises for marketing assistance in securing contracts for offshore services subcontracted to the assessee. Under the master service agreement, the associated enterprises subcontracted the offshore portion of statements of work or work orders issued by customers to the assessee, and the assessee assumed the corresponding rights and obligations. The assessee was responsible for delivering the software development services, while the associated enterprises undertook marketing and business-development activities and performed on-site services for third-party contracts. The assessee submitted that the commission was paid to Mphasis Corporation, Mphasis UK Limited, and Mphasis Consulting Limited, aggregating to ₹34,35,294, and was debited to the profit and loss account as selling commission. On examining the invoices and agreements, the learned TPO noted that the service fee was to be computed on the basis of costs allocated to the assessee, together with a mutually agreed profit mark-up. However, the agreements did not specify the cost base, the manner of allocation, or the applicable mark-up. The learned TPO therefore held that such an arrangement would not have been accepted between unrelated parties and that the assessee had failed to demonstrate that the costs incurred by the associated enterprises related to specific revenue streams. Accordingly, he determined the arm’s-length price of the selling commission at nil.
7. The learned CIT-DR strongly supported the order of the learned TPO and submitted that the learned CIT(A) had granted relief without undertaking or explaining the functional analysis.
8. The learned authorised representative strongly supported the order of the learned CIT(A). He submitted that the learned CIT(A) had merely followed a decision in which the issue was restored to the file of the learned Assessing Officer for fresh examination. He further submitted that the precise grievance of the learned Assessing Officer was not clear.
9. We have carefully considered the submissions of the learned CIT-DR and the learned authorised representative and have perused the order of the learned CIT(A). The learned CIT(A) restored the issue to the file of the learned Assessing Officer with a direction to re-examine it in light of the decision of the coordinate bench in the case of the group concern on similar facts.
10. Before addressing the merits, we record our serious concern regarding the manner in which the learned Assessing Officer has filed this appeal. Although the appeal is stated to be against the order of the learned CIT(A), that order has not been enclosed. Further, the assessment order has been filed as if it were directions of the DRP under section 144C of the Act, even though no DRP directions exist for the impugned assessment year and no such issue arises before us. The appeal is also delayed by 63 days. The limitation certificate issued by the Principal Commissioner of Income Tax, Bangalore-2, dated 3 July 2025, states that the order of the learned CIT(A) was received in the office of the learned Assessing Officer on 20 March 2025 and that the learned Assessing Officer was directed to file the appeal. Paragraph 2 of that memorandum is outdated and unrevised, and shows a lack of awareness of the current procedure for filing appeals before the coordinate bench, despite the order of the Hon’ble Supreme Court. It continues to direct the learned Assessing Officer to file the appeal in triplicate, although only e-filing is now available to the Assessing Officer. The document described as objections filed before the DRP under section 144C(2) is, in fact, the order under section 92CA of the Act dated 29 January 2013. Thus, the appeal has been filed before the coordinate bench in a careless manner and is liable to be dismissed on this ground alone. The record also shows that, on 15 October 2025, the ITAT sent an email to the Revenue authorities, including the learned Assessing Officer, pointing out that the grounds of appeal had not been uploaded. Neither the learned Assessing Officer nor the Revenue authorities responded to that defect notice. Further, on 15 December 2025, the Departmental Representative sought an adjournment, stating that he did not have the grounds of appeal and that the same had been requested from the Assessing Officer but had not yet been received. This reflects the state of affairs in the appeal filed by the Revenue. Where the Revenue is expected to put its best foot forward, it has failed to do so by not exercising due care either in approving the appeal or in filing it properly. It is regrettable that an appeal has been filed before the Tribunal by the learned Assessing Officer in this manner and approved by the higher authority in a routine and equally careless manner.
11. On the issue of delay, the condonation petition filed by the learned Assessing Officer states that he was occupied with time-bound matters relating to proceedings under section 148, weekly reporting of pending orders giving effect and rectification matters, and grievances received on the CPGRAMS platform, all of which required immediate attention and substantial resources. It was also stated that the functioning of the ITBA portal had been severely affected by frequent breakdowns and technical glitches, causing considerable delay in routine processes. On these grounds, the learned Assessing Officer sought condonation of the 63-day delay in filing the appeal. We note, with some surprise, that even the learned Assessing Officer has cited the non-functioning of the ITBA portal as a cause of difficulty. This itself indicates the difficulties that assessees and taxpayers may face in such circumstances. With a heavy heart and having regard to the manner in which the appellate forum has been approached by the revenue authorities, we leave the matter at that.
12. As there is no serious objection to the condonation of delay, we condone the 63-day delay in filing the appeal and admit the Revenue’s appeal.
13. On the facts, the assessee adopted the Transactional Net Margin Method as the most appropriate method for benchmarking its software development services segment. In doing so, it treated the selling commission as part of the segmental operating cost, as the transaction was closely linked to that segment. The assessee followed the same approach in earlier years, and the learned TPO accepted it in those years. Although the assessee’s appeals for earlier years were decided by the coordinate bench, those appeals concerned only the selection or rejection of comparables and not the issue arising in the present appeal. For the impugned assessment year also, the learned TPO accepted the Transactional Net Margin Method as the most appropriate method and accepted the software development services transaction as being at arm’s length. However, while benchmarking the payment of selling commission, he treated it as a separate transaction, determined its arm’s-length price at nil, and made the adjustment. The record shows that, in the group case of Mphasis Limited for assessment year 2009-10, the Tribunal held that where selling commission and other related expenses form part of the operating cost and the Transactional Net Margin Method is applied as the most appropriate method, no separate adjustment is warranted. It was also shown to us that Revenue has not challenged that decision before a higher forum. Therefore, once selling commission is treated as part of operating cost for computing the operating margin under the Transactional Net Margin Method, it is not warranted to isolate the selling commission as a separate international transaction and determine its arm’s-length price at nil.
14. The learned CIT(A) dealt with the matter holding that in the group company cases of emphasis Ltd wherein it was held that the selling operating were forming part of the operating expenses and hence determination of the arm’s-length price at rupees Nil was rejected of the selling commission. The coordinate bench in this case has decided this issue for assessment year 2009 – 10 in emphasis Ltd in ITA No. 242/Bangalore/2014 and further by order dated 8 August 2014 the learned CIT – A Violet duty hitting the appeal against the order passed giving effect to the direction of the tribunal order for assessment year 2000 910 and order dated 14 August 2000 24th passed by the learned CIT – A for assessment year 2012 – 13 were considered and followed. The learned and CIT – A following the ITA T decision in considering the fact that the relief was granted to the order giving effect after verification is directed by the coordinate bench, in the same manner the learned assessing officer was directed to do the same. The only issue is that the selling commission is required to be considered as a part of the operating expenses and thereafter the services were benchmarked. It is also found that the learned transfer pricing officer after giving effect to the direction of the learned CIT – A wide order dated 16 June 2025 verified the facts of the respondent and allowed the relief to the assessee by deleting the transfer pricing adjustment of ₹ 23,435,294. – When the learned transfer pricing officer has been granted an opportunity for verification and after verifying has deleted the addition, we do not think that any grievance is there left for the revenue to agitate the same.
15. On a careful perusal of the order of the learned CIT(A), we find no merit in the appeal filed by the learned Assessing Officer. No grounds of appeal have been raised, and the only objection advanced by the learned Departmental Representative relates to the restoration of the matter by the learned CIT(A). We clarify, however, that the learned Assessing Officer/TPO remains free to take an appropriate view if, upon examining the facts, the decision relied upon by the learned CIT(A) is found to be distinguishable.
16. In view of the above, the appeal filed by the learned Assessing Officer is dismissed as being devoid of merit. It is also liable to be dismissed for procedural deficiencies, including the failure to file any grounds of appeal and the attachment of incorrect documents, as noted above.
Order pronounced in the open court on 27th August, 2026.
