Functionally Dissimilar TP Comparables Rightly Excluded: ITAT Bangalore

ACIT Vs Brocade Communications Systems Pvt. Ltd. (ITAT Bangalore)

A Software Giant Is Not Automatically a Comparable: ITAT Upholds Brocade’s Transfer Pricing Exclusions

Revenue’s appeal returns after a decade

In ACIT v. Brocade Communications Systems Pvt. Ltd., IT(TP)A No. 167/Bang/2015, the Bengaluru Bench of the Income Tax Appellate Tribunal considered the Revenue’s challenge to comparables excluded by the Dispute Resolution Panel (DRP). The case concerned assessment year 2010–11, but the order was pronounced on 21 September 2026 after an earlier Tribunal order had been recalled for adjudication of grounds left undecided.

Brocade provided contract software research and development services and marketing support services to its associated enterprise. It used the transactional net margin method (TNMM) and selected separate sets of comparables for the two segments. The Transfer Pricing Officer (TPO) rejected its selection and proposed adjustments of ₹4.55 crore for software development services and ₹1.31 crore for marketing support services, totalling approximately ₹5.86 crore. Following Brocade’s objections and the DRP’s directions, the adjustment was recomputed at ₹1.35 crore.

Both sides had appealed. In October 2016, the Tribunal dismissed the Revenue’s appeal, but its grounds numbered 5 to 13 had not been adjudicated. The Revenue sought rectification. After further proceedings, including a Karnataka High Court direction to consider its application on merits, the Tribunal recalled its earlier order for deciding those Revenue grounds. The present decision deals with that limited question.

Four proposed comparables fail the functional test

The Revenue first sought to restore Sasken Communication Technologies Ltd., ICRA Techno Analytics Ltd., Persistent Systems & Solutions Ltd. and Persistent Systems Ltd. It argued that the companies satisfied the TPO’s filters and should not have been excluded by the DRP.

The Tribunal examined the DRP’s reasons for each exclusion. Sasken earned revenue from software services, software products and other services, but its annual report did not provide the separate segment information needed to assess the relevant activity reliably. ICRA Techno Analytics carried on several activities, including software development, consultancy, web development, hosting, analytics and business process outsourcing. Again, the available service segment information did not sufficiently separate those activities for comparison with Brocade.

The two Persistent Systems entities raised a related issue. Their reported receipts combined software services and products without usable separate segment figures. The DRP had also noted outsourced software product development, product licensing, royalties and maintenance income. It considered those functions materially different from the services performed by Brocade.

The Revenue argued that Brocade had accepted Persistent Systems & Solutions Ltd. before the TPO and should therefore be unable to object to it before the DRP. The Tribunal rejected that argument. Earlier acceptance of a comparable does not prevent an assessee from challenging it before the DRP if the company fails the required comparison. The task remains to determine the arm’s length price in accordance with the facts and law.

The Tribunal upheld the DRP’s examination of the annual reports. The Revenue had not identified material showing that those findings were wrong. It therefore rejected the challenge to the exclusion of all four companies.

Why Infosys was also excluded

The Revenue separately challenged the removal of Infosys Ltd. The DRP had considered its scale, substantial product revenue, selling and marketing expenditure, technology lab and valuable brand. The Tribunal noted that Infosys had revenue of approximately ₹21,140 crore and that its size and brand value could affect comparability. It agreed that the differences identified by the DRP supported exclusion and dismissed this ground as well.

The point is specific to the comparison before the Tribunal. The order does not say that a large company must always be excluded. It accepts that the differences shown in Infosys’s annual report mattered to the comparison with Brocade and that an accurate adjustment for them was not available on the material considered.

DRP could apply a filter and correct the comparable set

The Revenue also objected to an onsite filter applied to the software development segment and to the DRP’s use of a new filter. The Tribunal found no demonstrated error in applying the onsite filter. It held that the DRP could apply an appropriate filter to reach a correct arm’s length price; the Revenue needed to show why that filter was improper, which it had not done.

More broadly, the Tribunal affirmed the DRP’s power to consider objections and direct the inclusion or exclusion of comparables. It also referred to the Karnataka High Court’s decision in SAP Labs India Pvt. Ltd., dated 28 August 2026, while agreeing with the DRP’s approach. The Revenue’s remaining substantive grounds failed, and its appeal was dismissed.

Author’s comment

This order illustrates why a comparable set cannot be defended by filters alone. A company may pass numerical screens yet combine product income, licensing or diverse services in figures that cannot be separated for a reliable comparison. Annual report evidence and the functions actually performed remain central to the selection.

The procedural holding is useful too. An assessee’s initial acceptance of a company before the TPO does not make it permanently comparable, and the DRP can apply a suitable filter when deciding objections. In both situations, the objective is the same: a defensible arm’s length comparison based on the available facts. Here, the Revenue did not displace the DRP’s company-specific findings, so the exclusions stood.

Cases Discussed

• SAP Labs India Private Limited Vs ITO (Karnataka High Court) – ITA No. 10 of 2011, etc., dated 28.08.2026; relied upon while affirming the DRP’s approach to transfer-pricing comparability.

FULL TEXT OF THE ORDER OF ITAT BANGALORE

1. This is an appeal filed by the Revenue challenging the order of the Ld.DRP dated 28/11/2014 in F.No: 30/DRP-BNG/2014-15.

2. The brief facts of the case are that the assessee is providing contract software research and development services and marketing support services to its AE. The assessee filed its return of income on 28/09/2010. The said return was processed u/s. 143(1) of the Act. Thereafter the case was selected for scrutiny and notice u/s. 143(2) was issued. Notice u/s. 142(1) was issued calling for various details. The assessee also furnished the details called for. The AO, based on the fact that the assessee was having international transactions, had referred the case to the AO for determining the ALP as per section 92CA of the Act.

3. The Ld.TPO had considered the various filters adopted by the assessee including the method adopted as the most appropriate method of TNMM. The assessee had selected 12 comparables in respect of Software Development Services and 5 comparables in respect of Market Support Services. The Ld.TPO rejected the comparables selected by the assessee after conveying the defects to the assessee. The Ld.TPO applied his method and selected the comparables and finally determined the ALP by making a TP adjustment in respect of Software Development Services at Rs. 4,55,25,149/- and in respect of Market Support Services segment at Rs. 1,30,61,872/- and a total adjustment of Rs. 5,85,87,021/-. The AO based on the order of the Ld.TPO had issued a draft assessment order. The assessee filed their objections before the Ld.DRP. The Ld.DRP considered the objections filed by the assessee and issued directions to the Authorities. The Ld.TPO, pursuant to the directions of the Ld.DRP had recomputed the ALP at Rs. 1,34,76,048/-. Then the AO passed the final assessment order by adding the TP adjustment made by the Ld.TPO and also the employee share cost.

4. As against the said proceedings of the AO and DRP, the Revenue filed the appeal before this Tribunal. The assessee also filed a cross appeal before this Tribunal. This Tribunal by a common order dated 21/10/2016 in IT(TP)A No. 331/Bang/2015 and IT(TP)A No. 167/Bang/2015 had allowed the appeal of the assessee for statistical purposes and dismissed the appeal filed by the Revenue.

5. The Revenue filed an application in M.P. No. 124/Bang/2017 u/s. 254(2) of the Act to rectify the error in the common order dated 21/10/2016. The Revenue had contended that the grounds raised by the Revenue in respect of Transfer Pricing issues were not adjudicated by the Tribunal and therefore prayed to recall the order dated 21/10/2016 and adjudicate the grounds raised by the Revenue. This Tribunal vide its order dated 13/09/2017 in M.P. No. 124/Bang/2017 had rejected the said application on the ground that the application was filed after 6 months from the date of the order. This was challenged by the Revenue before the Hon’ble Karnataka High Court in W.P. No. 11834 of 2019 (T-IT) and the Hon’ble High Court vide its order dated 14/08/2025 had set aside the rejection order of this Tribunal and directed the Tribunal to consider the miscellaneous petition filed by the Revenue on merits. This Tribunal also considered the miscellaneous petition on merits and found that the Tribunal had not considered ground numbers 5 to 13 and therefore recalled the order dated 21/10/2016 in IT(TP)A No. 167/Bang/2015 to decide the ground numbers 5 to 13 raised by the Revenue. Pursuant to the said order, the said appeal was heard on 25/06/2026.

6. At the time of hearing, the Ld.CIT.DR submitted that the Ld.DRP order relying on the decision of the other benches of ITAT without considering the facts involved in the present case is bad in law. The Ld.CIT.DR also relied on the findings of the Ld.TPO and submitted that the Ld.TPO had correctly applied the filters and arrived the conclusion to include the comparables and therefore the direction to exclude the comparables by the Ld.DRP is not correct. The Ld.CIT.DR relied on the other grounds and relied on the order of the Ld.TPO and prayed to allow the appeal.

7. The Ld.AR submitted that the Ld.DRP has correctly considered the findings of the Ld.TPO and after perusing the various records such as Annual report, had correctly arrived the conclusion that the comparables selected by the Ld.TPO is liable to be excluded. The Ld.AR also took us through the findings given by the Ld.DRP and submitted that the Revenue had not pointed out how the direction of the Ld.DRP is not correct. The Ld.AR also submitted that the Ld.DRP correctly analysed the issue and also relying on the orders of the Tribunal, had excluded the comparables and therefore the direction of the Ld.DRP is a well considered and a speaking order and not to be interfered by this Tribunal.

8. We have heard the arguments of both sides and perused the materials available on record.

9. We have perused the Ground nos. 5 to 13 raised by the Revenue. Ground nos. 5 and 6 are only general grounds and therefore not adjudicated. As far as Ground no. 7, the Revenue had contended the following comparables are liable to be included:

a) Sasken Communication Technologies Ltd.

b) ICRA Techno Analytics Ltd.

c) Persistent Systems & Solutions Ltd.

d) Persistent Systems Ltd.

10. The Revenue had contended that the above comparables are qualifying all the quantitative and qualitative filters applied by the Ld.TPO and therefore the exclusion by the Ld.DRP is not correct.

11. In order to appreciate the said contention, we have perused the findings given by the Ld.DRP in respect of the above comparables. In respect of Sasken Communication Technologies Ltd, the following finding has been given:

“It is submitted that this company should be rejected as comparable on the ground that it fails turnover filter and is functionally different.

Without prejudice to the above, it is also submitted that Sasken has revenues from Software services, Software products and other services. This is clear from the following extract from the Annual report (page 70). However, no segmental information is available:-

12. Breakup of Revenues are given below:

13. The Company is engaged in the development of computer software. The production and sale of such software cannot be expressed in any generic unit. Hence, it is not possible to give the quantitative details of revenue and the information as required under paragraphs 3, 4C and 4D of part II of Schedule VI to the Companies Act, 1956.

Having heard the objection, on perusal of the annual report, we find that no segmental information is available in respect of three segments. Hence, the TPO was not justified in retaining the above company as comparable. The Assessing Officer, is therefore directed to exclude the above company from comparable.”

12. Similarly, in respect of ICRA Techno Analytics Ltd., the Ld.DRP had observed that this company is functionally different. The Ld.DRP further pointed out that the said company is in the business of software development and consultancy engineering services, web-development and hosting and also in the business of analytics and business process outsourcing. The Ld.DRP observed that the Ld.TPO had not appreciated the fact that service segment includes revenue from various other activities for which no information was available and therefore the company should be excluded.

13. We do not think that the finding of the Ld.DRP is without any materials and therefore the said findings could be found fault with unless some materials are placed by the Revenue. We therefore confirm the direction of the Ld.DRP insofar as Sasken Communication Technologies Ltd. and ICRA Techno Analytics Ltd. are concerned.

14. Insofar as Persistent Systems & Solutions Ltd., the main contention of the Revenue is that the said comparable has been accepted by the assessee before the Ld.TPO and therefore the Ld.DRP is not right in excluding the said company. We do not think that this argument is correct. In our considered view, the assessee can challenge the comparables before the Ld.DRP even though the same was admitted by the assessee before the Ld.TPO. Anyhow the comparables should meet out the various filters and the ALP should be computed strictly in accordance with law and therefore if the objection before the Ld.DRP is against the facts, then the Revenue can challenge the exclusion. The findings given by the Ld.DRP in respect of the said company is as follows:

“It is noticed from the annual report that the entire receipt of ‘5044 million are shown from ‘Sale of software services & Product’, and there is no segmental information available for sale of software services & product respectively. It is also noticed from Note-1 of Schedule-15 that the company is predominantly engaged in outsourced software product development services. The company offers complete product life cycle services. It is also noticed from the Note H to Schedule 15 in regard to revenue recognition, that the company in addition to software services, also earns income from licensing of products, Royalty on sale of products, income from maintenance contract etc. In the annual report, the difference between the OPD (Outsource Product Development) has been highlighted according to which, in IT services, projects starts with well defined requirements, and vendors use time and money as variables to arrive at a reasonable cost estimate for the project. After completion, the project goes into maintenance mode. In product development, requirements are less clearly defined, state most product developers are given ship-dates for the products that are typically determined by the external factors. Once the ship-dates are defined, the budget for the products is frozen. In product development projects, all requirements can never be completely fulfilled in particular version. As a result, most product companies plan multiple product versions for their product. The function of outsource software development product is different from IT services.

In view of the above observation from the annual report, we are of the opinion that the functions performed by the above company are not similar to the function performed by the assessee company. Therefore, the company cannot be retained as comparable. Accordingly, the Assessing Officer is directed to exclude the above company from the comparables.”

15. The Ld.DRP had clearly mentioned about the dissimilarity of this company and held that the company could not be taken as a comparable company to the assessee. The Revenue also not explained how the Ld.DRP is not correct and in such circumstances, we upheld the findings of the Ld.DRP.

16. Similarly, the Ld.DRP also gave a clear finding why the Persistent Systems Ltd. should be excluded for arriving the ALP. The finding given by the Ld.DRP is as follows:

“Having heard the assessee, we examined the annual report from which it is noticed that the entire receipt of ‘504 crores are shown from ‘Sale of software services & Product’. There is no segmental information available for sale of software services & product. It is also noticed from Note-1 of Schedule-15 that the company is predominantly engaged in outsourced software product development services. The company offers complete product life cycle services. It is also noticed from the Note H to Schedule 15 in regard to revenue recognition that the company in addition to software services also earns income from licensing of products, Royalty on sale or products, income from maintenance contract etc., In the annual report, the difference between the OPD (Outsource Product Development) has been highlighted according to which, in IT services, projects starts with well defined requirements, and vendors use time and money as variables to arrive at a reasonable cost estimate for the project. After completion, the project goes into maintenance mode. In product development, requirements are less clearly defined, state most product developers are given ship-dates for the products that are typically determined by the external factors. Once the ship-dates are defined, the budget for the products is frozen. In product development projects, all. requirements can never be completely fulfilled in particular version. As a result, most product companies plan multiple product versions for their product. The function of outsource software development product is different from IT services.

In view of the above observations from the annual report, we are of the opinion that the functions performed by the above company are not similar to the function performed by the assessee company. Therefore, the objection of the assessee in regard to exclusion of the above company from comparable is found acceptable. Accordingly, the Assessing Officer is directed to exclude the above company from the comparables.”

17. The Ld.DRP had examined the functions performed by the comparable company and arrived a conclusion that the said company should not be taken as a comparable company. We are also in total agreement with the findings of the Ld.DRP and upheld the findings for excluding the Persistent Systems Ltd.

18. We are satisfied that the findings given by the Ld.DRP is in consonance with the various orders of this Tribunal wherein this Tribunal had excluded the comparables based on the functionality test for computing the ALP of the international transactions effected by the assessee. We, therefore, dismiss the Ground no. 7 raised by the Revenue as devoid of merits.

19. Insofar as Ground no. 8, the Revenue had disputed the exclusion of Infosys Ltd. by the Ld.DRP. The Ld.DRP in their direction at page 14, had observed as follows:

“Having heard the contention of the Assessee, we examined the Annual Report from which we find that the submission is based on the facts noticed from the Annual Report, In addition to the facts mentioned by the Assessee that income comprised of Rs.20,215 from Software Services and Rs.925 crores from Products. The company Incurred Selling and marketing expenses to extent of 4.6% of total revenue and established A software Engineering and Technology Lab. It has been emphasized that “Infosys” brand is the most Intangible asset the company own. Considering all the above difference in respect of which no accurate adjustment can be made, Respectfully following judicial pronouncements on which the reliance has been placed by the assessee, as the Functional profile of the company for the assessment year remains the same, we direct the Assessing Officer to exclude the above company from comparables.”

20. From the said facts, we noticed that the said company is having a brand value and also earned revenue of Rs. 21,140 crores. The size and brand value will have impact and therefore the Ld.DRP had correctly excluded the company. The view expressed by the Ld.DRP has been accepted by this Tribunal in a numerous orders and therefore we are also accepting the finding of the Ld.DRP and dismiss the Ground no. 8 raised by the Revenue.

21. Insofar as the Ground number 9 is concerned, there is no error in applying the onsite filter for SWD segment for excluding the comparables. The Revenue also not demonstrated, how the onsite filter could not be applied to SWD segment. In such circumstances, the ground raised by the Revenue is not sustainable.

22. Insofar as the Ground no. 10 is concerned, we are of the view that to arrive a correct computation of ALP, the Ld.DRP can apply a new filter. The Revenue should demonstrate how the application of new filter is wrong and against the provisions. When the new filter is also a filter approved by the various judicial decisions, it could not be said that the new filter cannot be applied. In a recent judgment, the Hon’ble Jurisdictional High Court has held that even comparables can be included at the appellate stage, provided the comparables satisfy the requirements of the Act and Rules. Therefore, we do not find any merit in the contention made by the Revenue and therefore dismiss the ground.

23. The Revenue also raised a plea in Ground number 11, we do not think that this ground is a valid one, since as per the scheme of the Act, the Ld.DRP can consider the objections and after satisfying itself, then can issue directions to the authorities either to include or exclude the comparables and thereafter compute the correct ALP. Therefore this ground also does not find merits. We, therefore, dismiss this ground also.

24. Ground numbers 12 and 13 are general grounds and therefore we are not adjudicating the said grounds.

25. We also relied on the latest judgment of the Hon’ble High Court of Karnataka in ITA No. 10 of 2011, etc. dated 28/08/2026 in the case of SAP Labs India Pvt. Ltd., wherein the Hon’ble High Court had given answers to the various issues involved in the Transfer Pricing matters. In the above said judgment, the Hon’ble High Court almost cleared the confusions in the minds of both the assessee and the Revenue. When we applied the judgment to the present facts of the appeal, we are in full agreement with the view taken by the Ld.DRP and therefore, we are dismissing the grounds raised by the Revenue.

26. In the result, the appeal filed by the Revenue is dismissed.

Order pronounced in the open court on 21^st September, 2026.