Karnataka HC Upholds exclusion of Infosys & TCS due to huge size & turnover

Karnataka HC Upholds exclusion of Infosys BPO & TCS E-Services on ground of huge size and turnover

Facts:

• Robert Bosch Engineering and Business Solutions Pvt. Ltd. is an Indian company that provides software and IT enabled services only to its parent/group companies abroad. It works as a captive service provider, meaning it earns a fixed profit margin and does not take big business risks.
• For Assessment Year 2012–13, the tax department examined whether the company’s international transactions were priced at arm’s length, meaning whether the prices charged were consistent with fair market value,
• The Transfer Pricing Officer (TPO) chose some big companies like Infosys BPO Ltd. and TCS E-Services Ltd. as comparables to measure Robert Bosch’s profits.
• Robert Bosch objected, saying these companies were too big compared to it. Infosys and TCS had huge turnovers, brand value, global presence, more assets, and higher risks, while Robert Bosch was a much smaller company with limited operations and no brand advantage.
• The Income Tax Appellate Tribunal (ITAT) agreed with Robert Bosch and removed Infosys BPO and TCS E-Services from the comparables list.
• The Revenue (Income Tax Department) appealed to the Karnataka High Court, arguing that size and turnover should not be reasons to reject these companies as comparables.

Issues:

• Whether companies with significantly higher turnover and size, such as Infosys BPO and TCS E-Services, can be treated as valid comparables for a smaller captive service provider like Robert Bosch.
• Whether turnover and size differences impact the FAR (Functions, Assets, Risks) analysis in determining comparability for transfer pricing.

Observations:

• Turnover and Size Are Relevant: The HC said: “Indisputably, a company that has a significantly large turnover cannot be considered as a comparable with an assessee, whose turnover is a small fraction of that of the said entity.” This means, turnover is not just a number—it directly affects how a company functions and competes.
• FAR Profile Must Match: Comparability must be judged on the basis of FAR (Functions performed, Assets employed, and Risks assumed). Bigger companies have more assets, more brand recognition, and face different types of risks compared to smaller companies. Hence, their FAR profile is not the same.
• Impact of Economies of Scale: Large companies with high turnover benefit from economies of scale lower costs per unit, better bargaining power, better talent pool, advanced infrastructure, etc. Small companies do not have such advantages, so comparing their profitability with large companies would be unfair.
• Risk Differentiation: A huge company and a small company do not carry the same level of business risk. For example, a company like Infosys BPO faces global competitive risks and can absorb shocks better than a smaller company like Robert Bosch.

Conclusion: