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:

The HC held that it would be erroneous to say that turnover and size have no bearing on comparability. It upheld the Tribunal’s decision to exclude Infosys BPO and TCS E-Services from the comparables list. Thus, the final ruling favored Robert Bosch, confirming that large IT/ITES companies cannot be compared with relatively smaller ones for transfer pricing purposes.

FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT

1.For the reasons stated in the application – I.A.No.2/2025, the same is allowed. The delay of 55 days in filing the above captioned appeal is condoned.

2. The Revenue has filed the present appeal under Section 260A of the Income Tax Act, 1961 [the Act], impugning an order dated 09.12.2024 [impugned order] passed by the learned Income Tax Appellate Tribunal [ITAT].

3. The impugned order is a common order passed in IT (TP) A No. 593 / Bang / 2020 in respect of assessment year [AY] 2012-13 as well as IT (TP) A No.446 / Bang / 2020 in respect of AY 2012-13. Whereas IT (TP) A No. 593 / Bang / 2020 was preferred by the Assessee, IT (TP) A No.446 / Bang / 2020 was preferred by the Revenue. The present appeal is confined to the impugned order insofar as it relates to the Revenue’s appeal being IT (TP) A No.446 / Bang / 2020.

4. The Revenue has projected the following questions for consideration of this Court:

“1. Whether the Tribunal was right in ignoring the fact pertaining to availability of segmental financials and wrongly determining the service revenue for the purpose of exclusion of the comparables universal print system ltd and BNR Udhyog Ltd?

2. Whether the Tribunal was right in computing service revenue filter at entity level by ignoring the segmental financials available for the comparables universal print system ltd and BNR Udhyog Ltd.?”

5. The controversy raised relates to the exclusion of the following two entities as comparables for transfer pricing study: Universal Print System Ltd and BNR Udhyog Ltd. According to the Revenue, the FAR [Functional, Asset and Risk] profile of the said two entities is comparable with the Assessee for the purpose of determining the Arm’s length Price [ALP] by following the Transactional Net Margin Method [TNMM] .

6. The Assessing Officer [AO] made a reference to the learned TPO for determining the ALP of the international transactions between the Assessee and its Associated Enterprise. The learned Transfer Pricing Officer [TPO] passed an order dated 27.01.2016 under Section 92CA making an transfer pricing adjustment. The learned TPO inter alia adopted the following filter for selection of comparables for the purpose of transfer pricing analysis.

• “Companies whose SWD / IT enabled Service is less than 75% of the total operating revenues were excluded

The companies whose revenues from software development and related services are more than 75% of their operating revenues are selected as comparables. This is an appropriate filter as this is the stage which will determine the correct comparability. In respect of enterprises whose main sources of income is from service segment, the companies whose income from software development / ITeS comes to more than 75% of the operating revenues have been considered for the ALP study as the other segment may not materially affect the financial results of the company.”

7. The Assessee had objected to the inclusion of the said two comparables on the ground that the two entities were not comparable on the basis of their FAR profile. The said objections were rejected by the learned TPO.

8. The Assessee had appealed the final assessment order before the learned Commissioner of Income Tax Appeals [CIT(A)]. The Learned CIT(A) found that the two entities in question [Universal Print System Ltd and BNR Udhyog Ltd] were required to be excluded, as the filter selected by the learned TPO had not been correctly applied. According to the CIT(A), the filters were required to be applied at entity level and not at the segment level. The relevant extract of the learned CIT(A)’s order is set out below.

“Universal Print Systems Ltd:

The primary contention raised by the assessee is that this comparable company fails the service revenue filter of 75%
applied by the TPO. It is seen that the TPO has taken the BPO segment of this company. While doing so the filters seem to have been applied at segment level. The filters need to be applied at entity level and not at segment level. That being the considered position, I find merit in assessee’s argument with regard to the application of service filter.

As seen from above, this company fails the filter and hence needs to be excluded. Since the company is to be excluded other contentions of the assessee become academic and are not considered. Ground allowed.

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BNR Udyog (seg):

The primary contention raised by the assessee is that this comparable company fails the service revenue filter of 75% applied by the TPO. It is seen that the TPO has taken the BPO segment of this company. While doing so the filters seem to have been applied at segment level. The filters need to be applied at entity level and not at segment level. That being the considered position, I find merit in assessee’s argument with regard to the application of service filter.

As seen from above, this company fails the filter and hence needs to be excluded. Since the company is to be excluded, other contentions of the assessee become academic and are not considered. Ground allowed.”

9. The Revenue appealed the said decision before the Learned ITAT. However, the learned ITAT did not find any fault with the decision of the learned CIT(A). The relevant extract of the impugned order is set out below:

“47. Coming to ground of appeal raised by the revenue against the exclusion of comparable companies namely Universal Print System Ltd and BNR Udhyog Limited, we note that the Id. CIT-A has given categorical finding that these 2 companies do not meet the criteria adopted by the AO /TPO for selecting the comparables. As such these 2 Companies do not meet the criteria of 75% for revenue from the operations of ITES services. This finding of the Id. CIT-A has not been disputed by the learned DR appearing on behalf of the revenue. Accordingly, we do not find any reason to interfere in the finding of the learned CIT-A. Hence, the ground of appeal of the revenue is hereby dismissed.”

10. It is contended on behalf of the Revenue that where details of the comparable segments are available, it would be apposite to determine the ALP on the basis of the financials of the said segment. Clearly, there can be no cavil with the said proposition. In cases where the financials of the relevant segment are available and can be authenticated, there would be no difficulty in determining the ALP on the basis of financials of the given segment. However, in the present case, the issue is not whether financials for a particular segment can be adopted. As noted above, the CIT (A), had faulted the selection of comparables on the basis of the filter adopted. Thus, if the revenues of the comparable segment is less than 75% of the total revenue of the entity, the same could not be selected for purpose of the transfer pricing study on the basis of the selected filter. It would be not open to look into the financials of the segment for overcoming the filter as adopted. We find no infirmity with the said view. Thus, no substantial question of law arises for consideration in this appeal.

11. The appeal is accordingly, dismissed.