PCIT Vs Synamedia India Pvt. Ltd. (Karnataka High Court)
Same Software Sector, Different Functions: Karnataka HC Upholds Exclusion of L&T Infotech and Persistent Systems
Same Software Sector, Different Functions: Karnataka HC Upholds Exclusion of L&T Infotech and Persistent Systems
A shared connection with software development does not, by itself, establish transfer pricing comparability. In PCIT v. Synamedia India Pvt. Ltd., formerly Cisco Video Technologies India Pvt. Ltd., the Karnataka High Court upheld the Tribunal’s exclusion of Larsen and Toubro Infotech Ltd. and Persistent Systems Ltd. after finding that the exclusions rested on reasoned factual comparisons. The Revenue failed to establish perversity or any departure from settled law.
The judgment was delivered on 17 September 2026 by Justice S.G. Pandit and Justice Dr. Chillakur Sumalatha in ITA No. 34 of 2021, concerning Assessment Year 2013–14.
The Dispute Before the High Court
The Revenue challenged the Tribunal’s order dated 19 March 2020 in IT(TP)A No. 2503/Bang/2017 through an appeal under Section 260A of the Income-tax Act, 1961.
The appeal raised two substantial questions of law. The first questioned whether the Tribunal’s order was perverse because it had excluded comparables without adequately considering the Transfer Pricing Officer’s findings, which the Revenue claimed were supported by valid material and Rule 10B(2).
The second challenged the exclusion of companies on grounds of functional dissimilarity, including the Tribunal’s reliance on earlier orders that, according to the Revenue, had not attained finality. The Revenue maintained that the companies satisfied the TPO’s qualitative and quantitative filters and were functionally similar to the assessee.
The central issue was therefore whether the Tribunal’s reasons justified excluding the two companies and whether the Revenue had demonstrated a defect warranting interference.
Functional Comparison Supported L&T Infotech’s Exclusion
The High Court examined the Tribunal’s reasoning concerning L&T Infotech and found that it had compared the functions performed by the assessee with those performed by the proposed comparable.
Although the assessee participated in the software development lifecycle, the Tribunal found that its contribution to development was very limited when compared with L&T Infotech.
This distinction mattered because participation in the same broad industry did not resolve whether the companies performed sufficiently comparable activities. The Tribunal had examined the extent of their respective contributions rather than treating the description “software development” as conclusive.
The High Court held that the Tribunal had assigned proper reasons for excluding L&T Infotech. Its conclusion thus rested on an identified functional difference between the companies.
Persistent Systems: A Separate Finding of Non-Comparability
The High Court also considered the exclusion of Persistent Systems Ltd.
It noted that the Tribunal had recorded its reasons in paragraph 26 of the underlying order. After comparing the assessee with Persistent Systems, the Tribunal reached a factual conclusion that the assessee could not be compared with the services provided by that company.
The High Court’s judgment does not reproduce the complete company-specific analysis concerning Persistent Systems. Its finding is that the Tribunal had undertaken the comparison, supplied reasons and arrived at a factual determination.
The decision consequently supports the exclusion in this assessee’s circumstances for the relevant assessment year. It does not establish that Persistent Systems must be excluded in every software transfer pricing case.
Rule 10B Requires a Factual and Data-Driven Exercise
The Court referred to the coordinate Bench’s judgment dated 28 August 2026 in ITA No. 10/2011 and connected appeals, reproducing its conclusions on the transfer pricing framework.
Those conclusions recognised Chapter X as a self-contained statutory code. The taxpayer bears the initial burden of determining the arm’s length price and maintaining prescribed documentation, while interference by the TPO requires satisfaction of the conditions under Section 92C(3).
The Court also reiterated that selecting or excluding comparables is essentially a factual and data-driven exercise governed by Rule 10B. The TPO cannot reject the taxpayer’s comparables merely to replace them with a standard departmental set. Once the TPO substitutes comparables, the burden shifts to the TPO to justify those choices.
The reproduced principles further recognised that comparables may be included or excluded at the appellate stage where the data is reliable and the statutory requirements are satisfied.
Revenue Failed to Demonstrate Perversity
The decisive finding was that the Revenue had failed to place cogent material demonstrating perversity in the Tribunal’s factual conclusions.
It also failed to explain how excluding L&T Infotech and Persistent Systems contradicted the settled legal position. Its objections therefore did not establish a sufficient basis for disturbing the Tribunal’s reasoned findings.
The High Court answered both substantial questions of law in favour of the assessee and against the Revenue, and disposed of the appeal, leaving the exclusions undisturbed.
Author’s Comments
The judgment highlights the importance of examining what a company actually does and the extent of its contribution. Broad industry descriptions and satisfaction of screening filters cannot substitute for a substantive functional comparison.
Equally significant is the requirement for a concrete appellate challenge. Where the Tribunal gives reasons supported by factual analysis, a challenge alleging perversity must identify the defect through relevant material. Merely disagreeing with the selected comparable set is insufficient.
For taxpayers, the practical lesson is to document functional differences precisely. For the Revenue, it is to confront those differences with evidence. The strength of either position ultimately depends on the quality of the comparability analysis.
Cases Discussed
1. SAP Labs India Pvt. Ltd. Vs ITO – ITA No. 10/2011 and connected appeals, decided on 28.08.2026 (Karnataka High Court)
FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT
1. Revenue is in appeal under Section 260A of the Income Tax Act, 1961 against the order dated 19.03.2020 passed by the Income Tax Appellate Tribunal (for short ITAT) in IT(TP)A No.2503/Bang/2017 (Annexure-D) for the assessment year 2013-2014. The appeal was admitted on 28.07.2021 to examine the following substantial questions of law:
(1) “Whether on the facts and in the circumstances of the case, the Tribunal’s order can be said as perverse since Tribunal has directed Transfer Pricing Officer to exclude certain comparable’s without going in to findings rendered by TPO which are based on valid materials and in accordance with parameters of Rule 10B(2)?
(2) Whether on the facts and in the circumstances of the case, the Tribunal is right in law in erred in excluding certain comparable from list of comparable on the ground of functional dissimilarity by following its earlier orders which has not reached finality and when the said companies satisfied qualitative and quantitative filers applied by Transfer Pricing Officer and they are functionally similar to that of assessee?”
2. Heard learned counsel Sri.Y.V.Raviraj for appellants-revenue and learned counsel Sri.P.D.Ankur for learned counsel Sri.K.R.Vasudevan for respondent-assessee. Perused the appeal papers.
3. The above matter relates to transfer pricing and Co-ordinate Bench of this Court vide judgment dated 28.08.2026 in ITA No.10/2011 and connected appeals, on consideration of decisions of the Hon’ble Apex Court has arrived at the following conclusion:
(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.
4. A perusal of the impugned order passed by the Tribunal indicates that the Tribunal has excluded Larsen and Toubro Infotech Ltd [‘L & T’ for short] and Persistent Systems Limited from the list of comparables. While excluding L & T, the Tribunal has compared the functionality of both the companies i.e., assessee and L & T and has come to the conclusion that though the assessee is involved in software development lifecycle, the contribution that it makes in the development, is very limited when compared to the L & T. The Tribunal has assigned proper reasons for excluding L & T from the list of comparables. At paragraph 26, the Tribunal has assigned reasons for excluding Persistent Systems Limited from the list of comparables. On comparing the assessee-company with the Persistent Systems Limited, the Tribunal has given a factual finding that the assessee company cannot be compared with the service provided by the comparable company.
5. The finding arrived at by the Tribunal is factual and the appellant-revenue has failed to point out perversity on the factual finding by placing cogent material. The appellant-revenue has failed to demonstrate the perversity committed by the Tribunal in exclusion of the above two comparables and also the appellant has failed to demonstrate how the exclusion is contrary to the settled position of law.
6. In the above circumstances, we are of the considered view that the Appellant-Revenue has not made out any ground to interfere with the order of the Tribunal and accordingly, Substantial Questions of Law are answered in favour of the respondent-Assessee and against the appellant-Revenue.
Accordingly, appeal stands disposed of.
