PCIT Vs Yokogawa India Ltd. (Karnataka High Court)
Transfer Pricing Comparables Require Reasoned FAR Analysis: Karnataka High Court Rejects Revenue’s Appeal in Yokogawa
Background of the Case
The Karnataka High Court rejected the Revenue’s appeal against a Tribunal order concerning selection, exclusion and reconsideration of transfer pricing comparables.
The Court found that the Tribunal had either recorded factual findings of functional dissimilarity or restored particular companies to the Transfer Pricing Officer for verification. The Revenue failed to demonstrate perversity or an incorrect factual finding warranting interference under Section 260A.
The appeal arose from the Bengaluru Tribunal’s order dated 17 May 2023 in IT(TP)A No. 849/Bang/2022, relating to Assessment Year 2017–18.
The Tribunal had partly allowed Yokogawa India Ltd.’s appeal, directing exclusion of certain companies and reconsideration of others. The Revenue challenged those directions before the High Court.
Taxpayer’s Comparables Cannot Be Rejected Without Reasons
The Court noted that the TPO had rejected certain comparables proposed by the assessee merely by stating that they manufactured different products, without assigning adequate reasons.
The Tribunal had therefore restored those companies to the TPO for examination of their functions, assets and risks—FAR analysis—against those of the assessee.
The direction was conditional: if the companies were comparable and satisfied the filters applied by the TPO, they were to be considered for inclusion.
The High Court observed that the Revenue could not be regarded as aggrieved by this direction for verification. The Tribunal had not ordered unconditional inclusion; it had required a proper examination of comparability.
Functional Dissimilarity Supported Exclusion
The Tribunal had excluded Annanya Interface & Controls Pvt. Ltd. and Dembla Valves Ltd., recording that their manufacturing activities were functionally dissimilar to those of the assessee.
Before the High Court, the Revenue could not identify documents disproving those findings.
The Court reiterated that selection or exclusion of comparables is essentially a factual and data-driven exercise. It found no demonstrated perversity in the Tribunal’s conclusion concerning these two companies.
Their exclusion therefore did not give rise to a substantial question of law.
Unclear Manufacturing Activity Required Verification
The Tribunal had restored Abak Elcerofab Engg. Pvt. Ltd. to the TPO because the nature of its manufacturing activity was not discernible.
This was another instance where the Tribunal sought clarification of the relevant facts rather than conclusively accepting or rejecting a company on an incomplete record.
The High Court found no basis to interfere with that approach.
Fifteen Per Cent RPT Filter Ordinarily Preferable
The Tribunal had also remanded Limitorque India Ltd., Flowserve India Controls Pvt. Ltd. and Koso India Ltd. for verification of related-party transactions and application of an RPT threshold of 15%.
The High Court referred to its coordinate Bench judgment in SAP Labs India (P.) Ltd. v. ITO, ITA No. 10/2011 and connected appeals, dated 28 August 2026.
That judgment held that a 15% RPT filter is ordinarily preferable. A higher threshold of 20% or 25% may be adopted only after recording a specific finding that sufficient comparable companies satisfying the lower threshold are unavailable.
The Court stressed that the Tribunal had not finally rejected these companies. It had only required verification against the prescribed threshold. The Revenue again failed to establish an error warranting interference.
Broader Transfer Pricing Principles Reiterated
The judgment reproduced the conclusions in SAP Labs, including that Chapter X constitutes a self-contained transfer pricing framework.
The taxpayer bears the initial responsibility to determine the arm’s length price and maintain documentation. However, interference with that determination must satisfy the conditions under Section 92C(3).
Once the TPO rejects the taxpayer’s determination and substitutes comparables, the burden shifts to the TPO to justify the inclusion or exclusion.
The reproduced principles also recognise that a standard departmental set cannot replace the taxpayer’s comparables without the analysis required by Rule 10B. Reliable comparables may be considered at the appellate stage, subject to the statutory requirements.
Other conclusions concerned turnover filters, foreign exchange fluctuations, tolerance limits and working capital adjustments. These formed part of the precedent reproduced; the present appeal principally concerned comparables and RPT verification.
No Substantial Question of Law Established
The High Court concluded that the Revenue had not demonstrated perversity or an incorrect factual determination in the Tribunal’s order.
Following SAP Labs, it held that no substantial question of law arose and rejected the appeal.
The Tribunal’s exclusions and directions for reconsideration consequently remained undisturbed.
Author’s Comments
The judgment reinforces the need for company-specific reasoning in transfer pricing analysis. A statement that a company manufactures different products must be supported by an examination showing why that difference affects comparability.
The RPT finding is also qualified. Fifteen per cent is ordinarily preferable, not an inflexible threshold applicable regardless of circumstances. A higher limit requires a recorded justification concerning availability of suitable comparables.
Equally, the decision should not be read as insulating every comparability finding from High Court scrutiny. The Court examined the Tribunal’s reasoning and rejected the appeal because the Revenue failed to demonstrate perversity or factual error in this case.
Cases Discussed
- SAP Labs India (P.) Ltd. Vs Income Tax Officer — ITA No. 10/2011 and connected appeals, Karnataka High Court, judgment dated 28 August 2026; followed. No exact TaxGuru judgment URL verified.
FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT
This appeal is filed by the Revenue under section 260A of the Income Tax Act,1961 assailing the order dated 17.05.2023 in IT(TP)A No.849/Bang/2022 passed by the Income Tax Appellate Tribunal ‘A’ Bench: Bangalore for the assessment year ‘2017-18’, wherein, the appeal filed by the assessee was allowed in part and some of the comparables were remanded back to the TPO for reconsideration of the same and some of the comparables selected by the TPO were directed to be excluded.
2. Heard learned counsel Sri. E I Sanmathi for the Revenue and Sri.Nageshwar Rao D.D., learned counsel for the assessee. Perused the entire appeal papers.
3. A Coordinate bench of this Court in ITA No.10/2011and connected appeals in SAP Labs India (P) Ltd. V. Income Tax Officer vide judgment dated 28.08.2026, in an identical fact situation on considering various judgments of the Hon’ble Apex Court in the matter of Transfer Pricing has, on a detailed discussion recorded its conclusion as follows:
“E. 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. The main issue sought to be raised by the Revenue in this appeal pertains to exclusion and inclusion of some of the comparables by the Tribunal. We have carefully perused the impugned Order passed by the Tribunal. It is noticed that insofar as the comparables of the assessee excluded by the TPO are concerned, the Tribunal has arrived at the finding that the TPO has not assigned any reasons for rejecting the comparables and has simply stated that these companies are involved in manufacturing different products. Thus, the Tribunal has remanded the matter back to the TPO for verification of the FAR of the comparables with that of the assessee and if found comparable as per the filters applied by the TPO, to consider the same for inclusion. The Revenue cannot be said to be aggrieved with this portion of the Order in remanding the matter back to the TPO.
5. With regard to the comparables selected by the TPO, insofar as M/s Annanya Interface & Controls Pvt. Ltd. and Dembla Valves Ltd., are concerned, the Tribunal has recorded a factual finding that the manufacturing activities undertaken by M/s Annanya Interface & Controls Pvt. Ltd. and Dembla Valves Ltd., cannot be compared to the assessee and that they are comparables functionally dissimilar and hence, excluded the same. The learned counsel for the Revenue has not been able to point out any documents which would disprove the aforesaid finding. The Coordinate bench of this Court in SAP Labs India (P) Ltd.(supra) has held that 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. The learned counsel for the Revenue has failed to point out the perversity in the finding of the Tribunal in excluding M/s Annanya Interface & Controls Pvt. Ltd. and Dembla Valves Ltd.
6. Insofar as Abak Elcerofab Engg Pvt. Ltd., is concerned, the comparable was remanded back to the TPO since it was not discernible as to what the manufacturing activity of Abak Elcerofab Engg Pvt. Ltd. is. With regard to Limitorque India Ltd., Flowserve India Controls Pvt. Ltd., and Koso India Ltd. are concerned, these comparables as well were remanded back to the TPO to verify the RPT filter and apply it at the threshold of 15%. As stated above, a Coordinate bench of this Court in SAP Labs India (P) Ltd. (supra) has held that 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. Be that as it may. The Tribunal has not rejected the aforesaid comparables, but has merely remanded the matter back to the TPO to verify the RPT filter and apply it at the threshold of 15%. The Revenue cannot be said to be aggrieved with the aforesaid finding. The learned counsel for the Revenue has failed to point out the perversity or any incorrect factual finding by the Tribunal in the impugned Order.
7. Thus, in terms of the decision of the Coordinate bench in SAP Labs India (P) Ltd. (supra), we are of the considered opinion that no substantial question of law would arise for consideration in this appeal and hence, appeal is rejected.
