PCIT Vs Synamedia India Pvt. Ltd. (Karnataka High Court)
Comparable Exclusion Needs a Concrete Challenge: Karnataka HC Upholds Relief to Synamedia
The Dispute: Persistent Systems and L&T Infotech
The Karnataka High Court upheld the Tribunal’s exclusion of Persistent Systems Ltd. and Larsen & Toubro Infotech Ltd. from the transfer pricing comparables of Synamedia India Pvt. Ltd.
The Revenue alleged that the Tribunal had disregarded the TPO’s findings and the parameters prescribed under Rule 10B of the Income-tax Rules. However, it failed to place material before the Court establishing why the exclusions were unsustainable or how the Tribunal’s findings were perverse.
Applying its recent judgment in SAP Labs India Pvt. Ltd., the Court answered the substantial questions of law in favour of the assessee and against the Revenue. The appeal was disposed of accordingly.
Revenue Challenges Reliance on an Earlier Tribunal Decision
The appeal arose from the Bangalore Tribunal’s order dated 6 February 2020 in IT(TP)A No. 184/Bang/2017, relating to assessment year 2012–13.
The High Court had admitted the appeal on 15 April 2021 to examine three substantial questions of law.
The Revenue questioned whether the Tribunal could direct exclusion of companies when the TPO had selected them after applying the statutory tests. It specifically challenged the exclusion of Persistent Systems and L&T Infotech as functionally dissimilar, alleging that the Tribunal had followed an earlier order without adequately considering the TPO’s findings and supporting material.
The Department also characterised the Tribunal’s order as perverse, contending that it had ignored Rule 10B while directing the inclusion or exclusion of comparables.
The essential issue was therefore whether the Tribunal’s factual conclusions disclosed a legal defect warranting interference under section 260A.
Tribunal Followed a Decision for the Same Assessment Year
The Tribunal had relied on Evolving Systems Network (India) Pvt. Ltd., IT(TP)A No. 216/Bang/2017, concerning assessment year 2012–13.
Following that decision, it excluded Persistent Systems Ltd. and L&T Infotech Ltd. from a set of ten comparable companies.
The High Court recorded that the Tribunal had arrived at a factual finding. The Revenue did not produce material establishing why the two companies could not have been excluded.
It also failed to demonstrate that the exclusion was contrary to the settled legal position or that the Tribunal’s order suffered from perversity.
The present judgment does not reproduce a detailed company-by-company functional analysis. Its conclusion rests on the Tribunal’s findings, the precedent followed and the inadequacy of the Revenue’s challenge.
SAP Labs: Comparable Selection Is a Factual Exercise
The Court applied the conclusions recorded in SAP Labs India Pvt. Ltd. v. ITO, ITA No. 10/2011 and connected appeals, decided on 28 August 2026.
That judgment recognised that Chapter X constitutes a self-contained transfer pricing framework, covering arm’s length price determination, documentation and assessment of international transactions.
The taxpayer bears the initial burden of determining and substantiating the arm’s length price and maintaining the prescribed documentation. The TPO’s interference must satisfy the conditions under section 92C(3).
Comparable selection is essentially a factual and data-driven exercise. The TPO cannot reject the taxpayer’s comparables merely to replace them with a standard departmental set. Every such determination must conform to Rule 10B.
Once the TPO rejects the taxpayer’s determination and substitutes comparables, the burden shifts to the TPO to justify the inclusion or exclusion.
Broader Principles Reproduced in the Judgment
The Court also reproduced SAP Labs’ conclusions concerning filters and adjustments.
An upper turnover filter of ₹200 crore was recognised as rational and legally sustainable because turnover, brand value, economies of scale, bargaining power and ownership of intangibles can materially influence comparability and profitability.
A 15% related-party transaction filter is ordinarily preferable. A higher threshold of 20% or 25% requires a specific finding that sufficient comparables satisfying the lower threshold are unavailable.
Reliable comparables may be included or excluded at the appellate stage, provided the statutory requirements are satisfied. Working capital adjustment is a comparability adjustment rather than a selection filter, and its grant depends on the facts.
These principles formed the broader legal framework. The immediate decision in Synamedia concerned the Revenue’s failure to establish any defect in the exclusion of the two disputed companies.
Author’s Comments
The judgment reinforces that an allegation of perversity must be supported by the record. Repeating that the TPO applied Rule 10B does not establish that the Tribunal’s contrary conclusion violated that rule.
For an effective challenge, the appellant must identify the relevant material, explain its bearing on comparability and demonstrate the error in the Tribunal’s treatment of it. That foundation was missing here.
The ruling also supports reliance on an earlier comparable-selection decision where the relevant facts justify it. However, it should not be presented as making Persistent Systems or L&T Infotech permanently unsuitable for every taxpayer. Comparability remains specific to the taxpayer, the assessment year and the available evidence.
For practitioners defending a Tribunal order, the useful approach is to connect the precedent relied upon with the relevant functional and financial material. Here, the Tribunal’s factual conclusion survived because the Revenue did not establish why it was legally or factually untenable.
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) – Followed; selection or exclusion of comparables is essentially a factual and data-driven exercise governed by Rule 10B; ₹200 crore upper turnover filter held rational and legally sustainable; 15% RPT filter ordinarily preferable; and working capital adjustment held to be a comparability adjustment dependent upon facts.
2. Evolving Systems Network (India) Pvt. Ltd. – IT(TP)A No. 216/Bang/2017; Assessment Year 2012-13 (ITAT Bangalore) – Followed by the Tribunal for exclusion of Persistent Systems Ltd. and Larsen & Toubro Infotech Ltd. from the set of ten comparable companies.
FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT
1. The above appeal filed by the appellants-revenue questioning the order dated 06.02.2020 passed by the Income Tax Appellate Tribunal, Bengaluru (for short ITAT) in IT(TP)A No.184/Bang/2017 (Annexure-D) for the assessment year 2012-2013 was admitted by this Court on 15.04.2021 to examine the following substantial questions of law:
(1) “Whether, on the facts and in the circumstances of the case and law, the Tribunal is right in directing Transfer Pricing Officer to exclude even when the Transfer Pricing Officer had chosen comparable’s in accordance with Rule 10B and after satisfying required tests prescribed under the Act?
(2) Whether, on the facts and in the circumstances of the case and law, the Tribunal is right in directing Transfer Pricing Officer to exclude Persistent Systems Ltd and Larsen and Tourbo Ltd Persistent Systems Pvt. Ltd and Larson & Tourbo Infotech Ltd as comparable’s by holding that they are functionally dissimilar by following its earlier order without considering the findings and materials bought on record by TPO for computation of ALP which is in accordance with parameters set out in section 92 of the Act and Rule 10B as well?
(3) Whether on the facts and in circumstances of the case, the Tribunal’s order can be said as perverse in nature as Tribunal has ignored Rule 10B while directing TPO to exclude or include certain comparable’s?
2. Heard learned counsel Sri.Y.V.Raviraj for appellants-revenue and learned counsel Ms.Ankur.P.D for learned counsel Sri.K.R.Vasudevan for the respondent-assessee. Perused the entire appeal papers.
3. At the outset it is to be noted that this Court vide judgment dated 28.08.2026 in ITA No.10/2011 and connected appeals in Sap Labs India Private Limited vs. The Income Tax Officer, on consideration of decisions of Hon’ble Apex Court on transfer pricing has arrived at the following conclusion which reads as follows:
(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. In the instant case, the Tribunal placing reliance on the decision of Evolving Systems Network (I) P. Ltd. in IT(TP)A No.216/Bang/2017 for the assessment year 2012-2013 excluded Persistent Systems Ltd and Larson & Tourbo Infotech Ltd., from 10 comparable companies. The appellant-revenue has failed to place material on record to establish how the Tribunal could not have excluded those two comparables and the appellant-revenue has also failed to point out the perversity in the order of the Tribunal. The Tribunal has arrived at a factual finding and the appellant-revenue has failed to demonstrate how the exclusion is contrary to the settled position of law.
5. Thus we are of the opinion that the substantial questions of law are to be answered in favour of respondent-assessee and against appellants-revenue.
Accordingly, the appeal stands disposed of.
