PCIT Vs Goldman Sachs Services Pvt. Ltd. (Karnataka High Court)
Infosys Out, Actual Working Capital Adjustment In: Karnataka HC Dismisses Revenue’s Appeal
The Dispute: Comparables and Working Capital Adjustment
The Karnataka High Court upheld the Tribunal’s exclusion of Infosys Ltd. and Infosys BPO Ltd. from the transfer pricing comparables of Goldman Sachs Services Pvt. Ltd. It also affirmed the direction to compute working capital adjustment as per actuals, after considering the inclusion or exclusion of comparable companies.
The Revenue challenged both conclusions, alleging that the Tribunal had disregarded the prescribed comparability parameters and the TPO’s analysis.
The Court found that the Tribunal had recorded reasons supported by the material examined. Since the Revenue failed to demonstrate perversity, disregard of relevant facts or departure from settled law, the substantial questions were answered in favour of the assessee and the appeal was dismissed.
Revenue Questions the Tribunal’s Approach
The appeal arose from the Bangalore Tribunal’s order dated 29 January 2020 in IT(TP)A No. 3244/Bang/2018, concerning assessment year 2014–15.
The High Court had admitted the appeal to examine five substantial questions of law. The Revenue questioned whether the Tribunal had sought exact comparability under TNMM, ignored the parameters prescribed under Rule 10B, and wrongly excluded Infosys Ltd. and Infosys BPO Ltd.
It also challenged the direction to grant working capital adjustment, contending that the TPO had disallowed it after examining the material and recording a detailed analysis.
Although the assessee was served, it remained unrepresented before the High Court. The Court nevertheless examined the Tribunal’s order and the Revenue’s submissions on their merits.
Why Infosys Ltd. Was Excluded
The Tribunal had examined the annual report of Infosys Ltd. and found that its profile was not comparable with that of the assessee.
It recorded that Infosys was a giant risk-taking company, engaged in the development and sale of software products, and owned intangible assets.
These were material characteristics affecting the comparison. The exclusion therefore rested on the Tribunal’s examination of the company’s business profile, rather than merely its name or broad industry classification.
The High Court noted that the Tribunal had assigned reasons for excluding Infosys and found no demonstrated basis to disturb that conclusion.
Infosys BPO: Activities Were Not Comparable
For Infosys BPO Ltd., the Tribunal considered the annual reports of both companies and concluded that their activities were not comparable.
The High Court accepted that this was a reasoned factual determination. The Revenue did not establish that the Tribunal had relied on irrelevant facts or omitted relevant material while directing the exclusion.
The judgment therefore supports the exclusion on the record of this case. It does not declare that Infosys BPO must be excluded in every transfer pricing assessment, irrespective of the taxpayer’s functions or the relevant year.
Working Capital Adjustment to Be Computed on Actuals
The High Court expressly held that the Tribunal had rightly directed the TPO to compute working capital adjustment as per actuals, after considering the revised set of comparables.
Following SAP Labs India Pvt. Ltd., decided by the Karnataka High Court on 28 August 2026, the Court explained that working capital adjustment is essentially data-driven and dependent on the facts and circumstances of each case.
There can be no fixed or scientific formula governing its grant in every situation. The manner and extent of the adjustment are not specifically prescribed under the Act or Rules, and the exercise necessarily involves appreciation of facts.
The judgment also reiterated that working capital adjustment is a comparability adjustment, not a selection filter. Its grant or denial must therefore be considered through the relevant factual material.
SAP Labs Principles Applied
The Court reproduced the broader conclusions in SAP Labs, including that comparable selection is a factual and data-driven exercise governed by Rule 10B.
The TPO cannot reject a taxpayer’s comparables merely to replace them with a standard departmental set. The taxpayer bears the initial burden of substantiating the arm’s length price, while the TPO must justify substituted comparables after rejecting the taxpayer’s determination.
The reproduced principles also recognise the relevance of turnover, brand value, economies of scale, bargaining power and intangibles to comparability. However, the immediate findings in this appeal concerned the two Infosys entities and the computation of working capital adjustment.
Author’s Comments
The judgment reinforces the distinction between disagreement with a factual conclusion and demonstrating that the conclusion is perverse. The Revenue must identify the defect through the record—such as reliance on irrelevant material, exclusion of relevant facts or inconsistency with the governing law.
It also provides useful jurisdictional support for seeking working capital adjustment based on actual data, particularly after the comparable set changes. The direction upheld was to compute the adjustment; it was not approval of an unspecified percentage or an automatic adjustment in every case.
The exclusion of Infosys similarly rests on identified commercial features: risk-taking, software products and ownership of intangibles. Practitioners should connect those features to the tested entity’s actual profile.
The practical lesson is that reasoned functional analysis and reliable financial data remain central. A transfer pricing appeal requires more than repeating that the TPO applied the prescribed tests; it must explain why the Tribunal’s contrary findings cannot legally stand.
Cases Discussed:
1. SAP Labs India Private Limited Vs ITO – ITA No. 10/2011 and connected appeals, decided on 28.08.2026 – Followed; comparable selection held factual and data-driven, and working capital adjustment held a comparability adjustment dependent upon the facts of each case.
FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT
The above appeal filed by the Revenue under Section 260A of the Income Tax Act, 1961 is directed against the order dated 29.01.2020 passed by the Income Tax Appellate Tribunal ‘B’ Bench in IT(TP)A NO. 3244/BANG/2018 (Annexure-D).
2. The above appeal was admitted on 02.06.2021 to examine the following Substantial Questions of Law:
1. “Whether the Tribunal was right in law and in fact seeking exact comparability under Transaction Net Margin Method”?
2. “Whether the Tribunal was right in law to ignore the parameters of analysis prescribed under Rule 10b, which are exhaustive and if so, whether it is legally permissible to bypass the same partially or by implication?
3. “In the facts and circumstances of the case, whether the Tribunal was correct in ordering grant of Working Capital Adjustment ignoring the detailed observation of Transfer Pricing Officer on the same in the Transfer Pricing order”?
4. “Whether on the facts and circumstances of the case and in law, the Tribunal is right in law in deleting M/s.Infosys Ltd and M/s.Infosys BPO Ltd as comparable’s without acknowledging the fact that the said comparable’s were chosen by TPO on the basis of materials on record and after applying the requires tests prescribed under the Rules and as such order passed by Tribunal is perverse in nature?”
5. “Whether on the facts and in the circumstances of the case, the Tribunal was right in directing the assessing authority/Transfer Pricing Officer to allow actual working capital adjustment when Transfer Pricing Officer has disallowed the same considering the materials on record and analysis brought on record?”
3. Heard learned Standing Counsel Sri.Y.V.Raviraj for the appellant-Revenue. Though respondent is served, it is un-represented.
4. To examine the above substantial questions of law, we have carefully gone through the impugned order passed by the Tribunal. The Tribunal on assigning reasons has directed the Transfer Pricing Officer i.e., (TP) to exclude M/s.Infosys Ltd. and M/s.Infosys BPO Ltd. from the list of comparables. While excluding the above two comparables, the Tribunal has recorded that M/s.Infosys Ltd. is not comparable to the profile of assessee on going through the Annual Report. Further, it is recorded that the comparable company is a giant risk taking company and is engaged in the development and sale of software products and own intangible assets. To exclude M/s.Infosys BPO Ltd., the Tribunal on taking note of the Annual Report of both the companies, has come to the conclusion that the activities are not at all comparable.
5. Further, the Tribunal has rightly directed the TPO to compute working capital adjustment as per actuals after considering exclusion/inclusion of comparable companies.
6. The Co-ordinate Bench of this Court vide judgment dated 28.08.2026 in ITA No.10/2011 and connected appeals in Sap Labs India Private Limited and The Income Tax Officer, on consideration of the entire case laws on transfer pricing, has recorded the following conclusions:
i. The Court concludes that Chapter X of the Income-tax Act, 1961 constitutes a self-contained code governing transfer pricing, providing a complete statutory framework for determination of the Arm’s Length Price (ALP), maintenance of documentation, and assessment of international transactions.
ii. The initial burden of determining the ALP and maintaining the prescribed documentation rests upon the taxpayer, while the Transfer Pricing Officer can interfere with the taxpayer’s determination only upon satisfaction of the conditions stipulated under Section 92C(3) of the Act.
iii. The selection or exclusion of comparables is essentially a factual and data-driven exercise, and the TPO cannot reject the taxpayer’s comparables merely to substitute them with a standard departmental set. Such determination must strictly conform to the requirements of Rule 10B of the Rules.
iv. The Tribunal’s adoption of an upper turnover filter of Rs.200 crores is rational and legally sustainable, as turnover, brand value, economies of scale, bargaining power and ownership of intangibles materially influence comparability and profitability.
v. An RPT filter of 15% is ordinarily preferable, though a higher threshold of 20% or 25% may be adopted only upon recording a specific finding that sufficient comparable companies satisfying the lower threshold are unavailable.
vi. Foreign exchange gain or loss can be treated as an operating item only when it has a direct nexus with the international transaction. Where such nexus is absent, it cannot form part of the operating revenue or operating cost.
vii. The burden of proof varies according to the nature of the dispute. While the taxpayer bears the initial burden of substantiating the ALP, once the TPO rejects the taxpayer’s determination and substitutes comparables, the burden shifts to the TPO to justify such inclusion or exclusion.
viii. There is no legal prohibition against inclusion or exclusion of comparables at the appellate stage, provided the subsequently relied upon data is reliable and the proposed comparables satisfy the requirements of the Act and the Rules.
ix. The tolerance of ±5% prescribed under Section 92C of the Act is merely a permissible variation and not a standard deduction, and transfer pricing adjustment becomes necessary whenever the variation exceeds the prescribed statutory limit.
x. Working Capital Adjustment is a comparability adjustment and not a selection filter, and its grant depends entirely upon the facts of each case. Findings on such adjustment, like the selection of comparables, ordinarily remain findings of fact and do not warrant interference unless shown to be contrary to the Act or vitiated by perversity.
7. The Co-ordinate Bench has held that the selection or exclusion of comparables is essentially factual and data-driven exercise, the TPO cannot reject the taxpayer’s comparables merely to substitute them with a standard departmental set. Further, it is held that the determination of comparables shall conform to the requirements of Rule 10B of the Income Tax Rules. The Co-ordinate Bench in Sap Labs India Private Limited, supra has held that there can be no fixed or scientific formula for granting Working Capital Adjustment, as the exercise necessarily depends upon the facts and circumstances of each case. The determination of such adjustment is essentially data-driven, and the manner as well as the extent of the adjustment are not specifically prescribed either under the Act or the Rules. Therefore, the grant or denial of Working Capital Adjustment invariably involves an appreciation of facts.
8. In the instant case, the Appellant/Revenue has failed to point out any perversity based on material on record. When the Tribunal has arrived at factual finding, the appellants-revenue have failed to point out as to how the said factual finding is contrary to the settled position of law. The appellants-revenue has also not pointed out as to whether the Tribunal has taken into consideration the irrelevant facts or excluded relevant facts while directing the exclusion of certain comparables.
9. For the reasons recorded above, we are not inclined to entertain the appeal. Accordingly, Substantial Questions of Law are answered in favour of the respondent-assessee and against the Revenue.
Accordingly, the appeal stands dismissed.
