CIT Vs Huawei Technologies India Pvt. Ltd. (Karnataka High Court)
Summary: The Karnataka High Court, in CIT Vs Huawei Technologies India Pvt. Ltd., dismissed the Revenue’s appeal under Section 260A of the Income Tax Act, 1961, concerning the selection of comparable companies and application of the related-party transaction (RPT) filter for Assessment Year 2006-07. The assessee, engaged in software development and related services, had declared nil taxable income after claiming deduction under Section 10A. Following a reference to the Transfer Pricing Officer under Section 92CA, a transfer pricing adjustment of ₹10,82,34,382 was recommended. The assessee challenged the assessment before the Tribunal, which accepted its objections to the inclusion of certain companies as comparables for determining the arm’s length price of international transactions.
The Revenue challenged the Tribunal’s exclusion of Accel Transmatic Limited, KALS Information Systems Limited, Lucid Software Limited and Tata Elxsi Limited. It contended that the Tribunal had relied on decisions involving other assessees instead of considering the taxpayer-specific functions, assets and risks analysis. The Revenue also questioned the exclusion of companies satisfying the Transfer Pricing Officer’s quantitative and qualitative filters, the application of an RPT threshold of 15% of total revenue, and the direction to reduce expenses excluded from export turnover from total turnover while computing the Section 10A deduction.
The High Court had initially dismissed the Revenue’s appeal on 10 July 2018, relying on its earlier decision in Prl. Commissioner of Income Tax and another v. M/s. Softbrands India Pvt. Ltd. Subsequently, the Supreme Court, in SAP Labs India (P) Ltd. v. Income Tax Officer, (2023) 454 ITR 121 (SC), remanded the connected transfer pricing appeals for fresh consideration. The High Court was therefore required to examine whether the Tribunal’s findings regarding comparables and the RPT filter complied with the Income Tax Act and the applicable Rules.
On reconsideration, the High Court noted that the exclusion of the four disputed comparable companies was covered in favour of the assessee by its decision dated 28 October 2026 in The Commissioner of Income Tax and another v. M/s Logica Private Limited, ITA No. 338/2013. The challenge concerning the 15% RPT filter was likewise covered by the coordinate Bench’s judgment dated 28 August 2026 in SAP Labs India (P) Ltd. v. Income Tax Officer, ITA No. 10/2011. The fifth question, concerning corresponding adjustments to export turnover and total turnover for computing the Section 10A deduction, had already attained finality because the Supreme Court’s remand was confined to transfer pricing issues. Consequently, holding that no substantial question of law arose for consideration, the High Court dismissed the Revenue’s appeal.
Cases Discussed
1. Prl. Commissioner of Income Tax and another v. M/s. Softbrands India Pvt. Ltd. — Karnataka High Court, ITA No. 536/2015 connected with ITA No. 537/2015, decided on 25.06.2018. The High Court’s earlier ruling was relied upon when the present Revenue appeal was initially dismissed on 10.07.2018 for absence of a substantial question of law. The Supreme Court subsequently directed reconsideration of the transfer pricing issues.
2. SAP Labs India (P) Ltd. v. Income Tax Officer (and other appeals) — Supreme Court, (2023) 454 ITR 121 (SC); (2023) 149 taxmann.com 327 (SC), order dated 19.04.2023. The Supreme Court remanded connected transfer pricing appeals, including the present matter, for reconsideration in accordance with its observations on the scope of judicial examination of arm’s length price determinations.
3. The Commissioner of Income Tax and another v. M/s Logica Private Limited — Karnataka High Court, ITA No. 338/2013, decided on 28.10.2026. The High Court treated this decision as covering, in favour of the assessee, the exclusion of Accel Transmatic Limited, KALS Information Systems Limited, Lucid Software Limited and Tata Elxsi Limited as comparable companies.
4. SAP Labs India (P) Ltd. v. Income Tax Officer — Karnataka High Court, ITA No. 10/2011, decided on 28.08.2026. The coordinate Bench’s ruling was followed on the issue concerning application of the 15% related-party transaction filter.
FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT
1. The Revenue has filed the present appeal under Section 260A of the Income Tax Act, 1961 [the Act], impugning an order dated 30.04.2013 [impugned order] passed by the learned Income-Tax Appellate Tribunal, Bengaluru [Tribunal] in ITA No.1338/Bang/2010, in respect of Assessment Year [AY] 2006-07.
2. The respondent [Assessee] had filed the said appeal assailing the Assessment Order dated 24.09.2010 passed by the Assessing Officer [AO] under Section 143(3) read with Section 144C(1) of the Act.
3. The Assessee is engaged in the business of software development and related services. It had filed its return of income for AY 2006-07 declaring its taxable income as nil after claiming deduction under Section 10A of the Act. The Assessee had entered into international transactions. Accordingly, the AO referred the case to the learned Transfer Pricing Officer [TPO]. The learned TPO passed an order issuing directions under Section 92CA of the Act recommending Transfer Pricing Adjustment [TPA] to the extent of ₹10,82,34,382/-.
4. Pursuant to the said directions, the AO issued the draft Assessment Order on 24.09.2010. The Assessee filed its objections against the said order before the Dispute Resolution Panel [DRP]. The DRP disposed of the said objections by an order dated 16.09.2010. Pursuant to the directions issued by the DRP, the AO issued the final assessment order, which was impugned before the learned Tribunal.
5. The learned Tribunal accepted the Assessee’s objections to the inclusion of certain companies as comparables for determining the Arm’s Length Price [ALP] of the international transactions.
6. Aggrieved by the said order, the Revenue has filed the present appeal projecting the following substantial questions of law:
“1. Whether on the facts and in the circumstances of the case and in law the Tribunal was right in super imposing the decisions of the other benches and the decision of the ITAT while rejecting the comparables ((i) Accel Transmatic Limited, (ii) KALS Information Systems Limited (iii) Lucid Software Limited, and (iv) Tata Elxsi Ltd.,) without appreciating the fact that selection of comparables in a case depends on assessee specific FAR analysis?
2. Whether on the facts and in the circumstances of the case and in law the Tribunal was correct in holding that Accel Transmatic Limited, and KALS Information Systems Limited cannot be taken as comparables on the ground of functional difference without appreciating the fact it satisfies all the quantitative and qualitative filters applied by the Transfer Pricing Officer while segmental results have been used and recorded a perverse finding?
3. Whether on the facts and in the circumstances and of the case in law the Tribunal was justified in fixing the related party transaction filtered at 15% of the total revenue without going into the specific facts in the case of the Tax Payer and without adducing the basis for arriving at such cut-off at 15% and recorded a perverse finding?
4. Whether on the facts and in the circumstances of the case and in law the Tribunal was correct in rejecting M/s. Lucid Software Limited as a comparable by placing reliance on the order in the case of the other assessee passed by the Mumbai ITAT without taking into consideration the finding recorded by the Transfer Pricing Officer for selecting as a comparable and recorded a perverse finding?
5. Whether on the facts and in the circumstances of the case and in law the Tribunal was correct in holding that the expenses excluded from export turnover has to be reduced from total turnover for computing deduction under Section 10A of the Act contrary to the provisions of Section 10A of the Act?
7. This Court, by a judgment dated 10.07.2018 had dismissed the present appeal on the ground that no substantial question of law arise. This Court had also referred to its earlier decision dated 25.06.2018 passed in ITA No.536/2015 c/w ITA No.537/2015, captioned Prl. Commissioner of Income Tax and another v. M/s. Softbrands India Pvt. Ltd., in support of the said view.
8. The Revenue had filed an appeal before the Supreme Court which was tagged along with SAP Labs India (P) Ltd. v. Income Tax Officer (and other appeals)1 and other connected matters.
9. The Supreme Court allowed the appeals by an order dated 19.04.2023 and remanded the appeals, including the present appeal, for fresh consideration of the issues relating to transfer pricing in light of the Supreme Court’s observations. Thus, this Court must examine whether the exclusion of the companies as comparables and the use of the Related Party Transaction [RPT] filter disregarded the provisions of the Act and the Rules made thereunder.
10. Question No.1 relates to the exclusion of following companies as comparables:
((i) Accel Transmatic Limited,
(ii) KALS Information Systems Limited
(iii) Lucid Software Limited, and
(iv) Tata Elxsi Ltd.,
11. Question No.2 relates to the exclusion of, Accel Transmatic Limited and KALS Information Systems Limited. And, question No.4 relates to exclusion of M/s Lucid Software Limited, as comparables.
12. Concededly, the exclusion of the aforementioned companies is covered in favour of the Assessee by a recent decision of this Court dated 28.10.2026 passed in ITA No.338/2013, captioned The Commissioner of Income Tax and another v. M/s Logica Private Limited.
13. Question No.3 relates to the use of RTP filter at 15% of the total revenue. Concededly, this issue is also covered by the decision of the Co-ordinate Bench of this Court in SAP Labs India (P) Ltd. v. Income Tax Officer2.
14. Question No. 5, as rightly pointed out by the learned counsel for the parties, stands concluded. The Supreme Court’s order remanding the appeal is confined to the questions relating to the Transfer Pricing Adjustment.
15. Thus, no substantial question of law arises for consideration of this Court.
16. The appeal is, accordingly, dismissed.
Notes:
1 (2023) 454 ITR 121 (SC); (2023) 149 taxmann.com 327 (SC)
2 ITA No.10/2011 decided on 28.08.2026
