PCIT Vs LG Soft India Pvt. Ltd. (Karnataka High Court)
Infosys, Persistent and Thirdware Not Comparable to Software Service Provider: Karnataka High Court Upholds Exclusion
Background of the Case
The Karnataka High Court upheld the exclusion of Infosys Ltd., Persistent Systems Ltd. and Thirdware Solutions Ltd. from the comparables selected for benchmarking LG Soft India Pvt. Ltd., a software development service provider.
The Court found material functional differences between the assessee and these companies. It also disapproved of selecting companies merely because they formed part of a standard departmental set used in multiple cases, without establishing their suitability for the taxpayer under examination.
The Revenue’s appeal arose from the Bengaluru Tribunal’s order dated 28 May 2019 in IT(TP)A No. 3122/Bang/2018, concerning Assessment Year 2014–15.
Revenue Questions the Standard of Comparability
The appeal had been admitted to examine three substantial questions of law.
Broadly, the Revenue contended that the Tribunal had sought exact comparability, whereas the Transactional Net Margin Method required comparable companies to be similar, rather than identical.
It also questioned whether the Tribunal had imposed conditions beyond the law instead of concentrating on differences materially affecting margins. A further question concerned whether arm’s length price determination should recognise that comparability analysis is not an exact science.
The High Court examined those contentions against the actual reasons for which the Tribunal had excluded the companies.
SAP Labs Principles Applied
The Court relied on 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 selection or exclusion of comparables is essentially a factual and data-driven exercise, governed by Rule 10B of the Income-tax Rules.
It also held that the TPO cannot reject a taxpayer’s comparables merely to substitute them with a standard departmental set.
Applying those principles, the Court found that the exclusions in LG Soft India’s case were supported by identifiable functional differences. The dispute therefore could not be resolved merely by asserting that exact identity between companies was unnecessary.
Infosys: Significant Intangibles and Software Product Revenue
The High Court noted that Infosys Ltd. owned significant intangibles and earned substantial revenue from software products.
These characteristics distinguished it from the assessee’s software development service activity.
The Court accepted the Tribunal’s finding that Infosys was functionally dissimilar on the facts under consideration. Its inclusion could not be justified simply because both companies operated within the broad software industry.
The relevant enquiry required examination of the actual business activities and economic characteristics of the companies.
Persistent and Thirdware: Product-Related Activities
The Court separately considered the activities of the other two excluded companies.
Persistent Systems Ltd. was engaged in product development and product design services.
Thirdware Solutions Ltd. was engaged in product development and earned revenue from sale of licences and subscriptions.
The assessee, in contrast, was a software development service provider.
In that factual setting, the Court held that these companies could not be regarded as functionally similar to the assessee. The Revenue failed to demonstrate perversity in the Tribunal’s findings.
Standard Departmental Comparables Cannot Replace Analysis
The High Court expressly observed that Infosys, Persistent and Thirdware formed part of a standard departmental set of comparables used by the TPO in multiple cases.
It noted that this practice had been deprecated in SAP Labs.
The significance of this observation is that repeated use of a company in other assessments does not establish its comparability in the case at hand. The selection must satisfy the requirements of Rule 10B through an examination of the taxpayer and the proposed comparable.
The Court consequently held that the Tribunal had rightly excluded the three companies.
Cigniti and SQS Remand Left Undisturbed
The Tribunal had restored Cigniti Technologies Ltd. and SQS India BFSI Ltd. to the TPO for fresh consideration.
The High Court observed that the Revenue could not be considered aggrieved by this direction.
The companies had not been conclusively rejected. Their suitability remained open for examination by the TPO in the restored proceedings.
Questions Answered Against Revenue
Following SAP Labs and considering the functional findings, the High Court answered the admitted substantial questions of law in favour of the assessee and against the Revenue.
The Revenue’s appeal was dismissed.
The exclusion of Infosys, Persistent and Thirdware remained intact, while the direction for fresh consideration of Cigniti and SQS India BFSI also stood undisturbed.
Author’s Comments
The judgment provides a useful response to the argument that functional objections demand an impermissibly exact match. The absence of a requirement for identical companies does not justify ignoring material differences in products, intangibles or revenue streams.
Equally, the ruling should be applied with attention to the relevant year and business profile. It does not establish permanent exclusion of these companies from every software-related benchmarking exercise. Its conclusion rests on their recorded activities and the assessee’s service-provider profile for Assessment Year 2014–15.
The stronger practical principle is that a standard list cannot substitute for a reasoned comparability analysis. Each inclusion must be supported by the company’s actual functions and reliable financial information relevant to the transaction being benchmarked.
Cases Discussed
- SAP Labs India (P.) Ltd. v. Income Tax Officer, ITA No. 10/2011 and connected appeals, Karnataka High Court, 28 August 2026 — expressly followed; exact TaxGuru judgment URL not independently established.
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 28.05.2019 in IT(TP)A No.3122/Bang/2018 passed by the Income Tax Appellate Tribunal ‘C’ Bench, Bangalore for the assessment year ‘2014-2015’.
2. The appeal was admitted on 10.06.2021 to examine the following substantial questions of law:
“i) Whether on the facts and in the circumstances of the case, the Tribunal is right in law in seeking exact comparability, while searching for comparable companies of the assessee under TNMM whereas the requirement of law and international jurisprudence require seeking similar comparables companies?
ii) Whether on the facts and in the circumstances of the case, while seeking the exact comparability the Tribunal is right in law in imposing condition beyond law whereas the requirement of law is to acknowledge only those differences that are likely to materially affect the margin?
iii) Whether on the facts and in the circumstances of the case, the Tribunal was right in not acknowledging that determination of ALP by carrying out comparability analysis of the comparable companies is an art and not exact science as no two companies are exactly same?”
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 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 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. Such determination must strictly conform to the requirements of Rule 10B of the Rules. The said finding would be aptly applicable to the facts of the present case. The Tribunal has excluded M/s Infosys Ltd., M/s Persistent Systems Ltd. and M/s Thirdware Solutions Ltd., for the reason that the aforesaid companies are functionally dissimilar to the assessee. It is noticed that M/s Infosys Ltd. is functionally dissimilar because it owns significant intangibles and has huge revenues from software products, M/s Persistent Systems Ltd. is engaged in product development and product design services and M/s Thirdware Solutions Ltd. is engaged in product development and earns revenue from sale of licences and subscriptions, whereas, the assessee is a software development service provider. Such being the fact scenario, it cannot be stated that the aforesaid 3 comparables are functionally similar to the assessee. It is noticed that the aforesaid 3 comparables are part of a standard departmental set of comparables that has been used by the TPO in multiple cases, which practice has deprecated by the Coordinate Bench of this Court in SAP Labs India (P) Ltd. (supra).The Tribunal has rightly excluded the same and the learned counsel for the Revenue has failed to point out the perversity in the said finding.
5. Insofar as M/s Cigniti Technologies Ltd and M/s SQS India BFSI Ltd are concerned, these comparables have been restored to the file of the TPO for fresh consideration, as such, the Revenue cannot be said to be aggrieved by this finding.
6. In terms of the decision of the Coordinate bench in SAP Labs India (P) Ltd. (supra), the substantial question of law admitted in these appeals are to be answered in favour of the assessee and against the Revenue. Hence, the appeal filed by the Revenue is dismissed.
