PCIT Vs Logica Pvt. Ltd. (Karnataka High Court)
Size Matters in Transfer Pricing: Karnataka HC Upholds Upper Turnover Filters
The absence of a statutory turnover ceiling does not prevent the use of a rational upper turnover filter when selecting transfer pricing comparables. In PCIT v. Logica Pvt. Ltd., now merged with CGI Information Systems and Management Consultants Pvt. Ltd., the Karnataka High Court rejected the Revenue’s challenge to the application of an upper turnover limit.
The Court followed SAP Labs India Pvt. Ltd. v. ITO, which recognised that company size, assets employed and risks assumed are relevant to comparability. A rational turnover filter, being essentially a factual determination, warrants interference only where perversity is specifically pleaded and demonstrated.
The judgment was delivered on 28 September 2026 by Chief Justice Vibhu Bakhru and Justice K.S. Hemalekha in ITA No. 520 of 2016, concerning Assessment Year 2009–10, bearing neutral citation 2026:KHC:53696-DB.
TPO Applied a Lower Limit Without an Upper Ceiling
The dispute arose from the selection of comparable companies for the assessee’s Software Development and Information Technology Enabled Services segments.
The Transfer Pricing Officer applied a minimum turnover filter of ₹1 crore, but did not prescribe any upper turnover limit.
Before the CIT(A), the assessee contended that an appropriate turnover range should be used to identify comparable entities. The CIT(A) accepted that company size required consideration and prescribed different ranges for the two business segments.
The Tribunal upheld that approach through its order dated 18 March 2016 in IT(TP)A No. 1664/Bang/2014. The Revenue challenged the Tribunal’s decision under Section 260A of the Income-tax Act, 1961.
Different Turnover Ranges for Different Segments
The judgment records that the assessee’s turnover in the software development segment was ₹323 crore during the relevant financial year.
For that segment, the CIT(A) prescribed a comparable turnover range of ₹1 crore to ₹2,000 crore.
In the ITeS segment, the assessee’s turnover was ₹63 crore for FY 2008–09. The CIT(A) fixed the comparable turnover range for that segment at ₹1 crore to ₹200 crore.
These factual details are significant. The appellate authority had adopted different upper limits by reference to the scale of the assessee’s respective segments. The judgment should therefore not be read as recording that a single ₹200 crore ceiling had been applied uniformly to both segments.
The Tribunal sustained the CIT(A)’s view that an appropriate upper turnover restriction was justified.
Revenue Confined the Appeal to the Turnover Issue
The Revenue initially projected questions concerning the computation of Section 10A deduction and the inclusion or exclusion of several software development and ITeS comparables on grounds of functional similarity.
At the hearing, however, its counsel clarified that those questions arose in a connected appeal, rather than the present appeal.
The Revenue consequently confined its challenge to the application of an upper turnover filter and submitted a memo proposing a question on that issue.
The proposed question referred to a ₹200 crore limit in the software development segment, although the factual narration earlier in the judgment records ₹2,000 crore for software development and ₹200 crore for ITeS.
The Court proceeded to decide the principle governing upper turnover filters. It did not separately reconcile this difference in the wording of the proposed question and the recorded segment-wise facts.
SAP Labs Supported a Rational Turnover Ceiling
The High Court noted that the issue was covered by the coordinate Bench’s decision in SAP Labs India Pvt. Ltd. v. ITO, ITA No. 10 of 2011 and connected matters, decided on 28 August 2026.
It reproduced the reasoning that Rule 10B(2) requires consideration of relevant comparability factors. Market conditions, including market size, matter; so do the assets employed and risks assumed.
Although the statutory framework does not fix either a lower or upper turnover limit, the adoption of a ₹200 crore upper filter in SAP Labs was held to rest on a rational and logical basis.
The absence of an expressly prescribed ceiling therefore did not make the filter arbitrary.
No Precise Scientific Formula for Comparability
The Court also adopted the observation that transfer pricing seeks to determine the arm’s length price of controlled transactions between associated enterprises, an exercise that does not admit of a precise scientific formula.
A rational filter is part of that factual exercise. Its application cannot be disturbed merely because the Revenue prefers a different comparable set.
Following SAP Labs, the High Court held that no substantial question of law arose in the present appeal and dismissed the Revenue’s appeal.
The other originally proposed questions were not adjudicated in this judgment.
Author’s Comments
The useful principle is that company size deserves attention in comparability analysis, even though the statute does not prescribe a fixed turnover band.
Equally, the recorded segment-wise ranges show why practitioners should avoid presenting ₹200 crore as an automatic ceiling applicable to every taxpayer. The assessee’s scale and the facts of the relevant segment remain material.
Care is also needed when reporting this judgment because the proposed question and factual narration use different limits for the software segment. The safest reading is that the Court upheld the permissibility of a rational upper turnover filter, following SAP Labs, while leaving the Tribunal’s order undisturbed.
Cases Discussed
- SAP Labs India Private Limited Vs Income Tax Officer — ITA No. 10 of 2011 and connected matters, Karnataka High Court, decided on 28.08.2026 — Followed; the Court applied the ruling that an upper turnover filter of ₹200 crore is rational and logical notwithstanding the absence of a statutory turnover ceiling, and that such factual determination cannot be interfered with unless perversity is specifically pleaded and demonstrated.
FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT
1. The Revenue has filed the present appeal under Section 260A of the Income Tax Act, 1961 [the Act], impugning the order dated 18.03.2016 passed by the learned Income Tax Appellate Tribunal, Bengaluru [ITAT] in IT(TP)A No.1664/Bang/2014 in respect of Assessment Year [AY] 2009-10. The said appeal was preferred by the Revenue against the order dated 17.10.2014 passed by the learned Commissioner of Income Tax (Appeals)-IV, Bengaluru [the CIT(A)].
2. The principal controversy in the present appeal relates to the application of the turnover filter for determining the comparables for the purpose of the transfer pricing study.
3. The learned Transfer Pricing Officer [the TPO] had applied a minimum turnover filter of `1 crore, but had not applied any upper turnover filter. The learned CIT(A) had found merit in the Assessee’s contention that an filter regarding an appropriate range of turnover ought to be prescribed for selecting comparable entities. The learned CIT(A) accordingly held that the turnover of comparable companies ought to be within the range of `1 crore to `2,000 crores for the Software Development [SWD] segment, while noting that the Assessee’s turnover during the relevant Financial Year [FY] in the said segment was `323 crores. The learned CIT(A) further held that, insofar as Information Technology Enabled Services [the ITeS] segment was concerned, the turnover range ought to be fixed between `1 crore and `200 crores, as the Assessee’s turnover for FY 2008-09 was `63 crores. The learned ITAT upheld the said view.
4. In the present appeal, the Revenue has projected the following questions for consideration of this Court:
“1. Whether on the facts and in the circumstances of the case, the Tribunal erred in holding that the assessing authority is not right in including expenditure incurred in foreign currency from export turnover and from total turnover by relying upon the decision of this Hon’ble Court in case of CIT V/s Tata Elsxi even when the assessing authority has rightly included the according to parameters set out in section 10A and the decision relied upon by the Tribunal has not reached finality?
2. Whether on the facts and in the circumstances of the case, the Tribunal erred in directing the TPO to exclude comparables such as M/s.Kals Information Systems, Bodhtree Consulting Ltd, Tata Elxsi Ltd and Infosys Technology Ltd, Wipro Ltd on the basis of functional dissimilarity and has erred in directing the TPO to include comparables such as M/s.Thinksoft Global Services Pvt. Ltd, FCS Software Solutions Ltd on the ground that they are functionally similar even when the TPO has rightly chosen the said comparables by applying all the required tests and FAR analysis in each case?
3. Whether on the facts and in the circumstances of the case, the Tribunal erred in directing the TPO to exclude comparables M/s.Accentia Technologies Ltd, Cosmic Global and Eclerx Services Ltd, Infosys BPO Ltd and Birla Minacs World Wide Ltd by following its earlier orders which have not reached finality even when the TPO has rightly chosen the said comparables by applying all the required tests and Tribunal erred in not appreciating FAR analysis in each case?”
5. However, the learned counsel appearing for the Revenue submits that none of the aforesaid questions arise for consideration in the present appeal, but arise in the connected appeal. He further submits that, in the preset appeal, the only question that arises for consideration is with regard to the application of the upper turnover filter. He has, accordingly, handed over a memo projecting the following question for consideration of this Court:
“Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in upholding the order of the Commissioner of Income Tax (Appeals) applying an upper turnover limit of Rs.200 crore for the selection of comparable companies in the software development services segment, without examining the comparability of such companies in accordance with Rule 10B of the Income Tax Rules, 1962?””
6. Concededly the issue is covered by the decision of the Co-ordinate Bench of this Court in SAP Labs India Private Limited v. The Income Tax Officer1.
7. This Court has upheld the application of an upper turnover filter. The relevant portion of the said decision is set out below:
“12.2 Although clause (d) of sub-rule (2) of Rule 10B refers to market conditions, including the size of the markets, the factors specified in clause (b), namely, the assets employed and the risks assumed, also play a significant role in benchmarking profits and determining comparability.
12.3 In the absence of any statutory prescription fixing either a lower or an upper turnover limit, the adoption by the Tribunal of an upper turnover filter of Rs.200 crores cannot be said to be arbitrary. On the contrary, the said criterion is founded on a rational and logical basis. Such a determination, being essentially a finding of fact, cannot be interfered with unless perversity is specifically pleaded and demonstrated.
12.4 Ultimately, the entire exercise of transfer pricing is intended to determine the Arm’s Length Price in controlled transactions between associated enterprises. Such an exercise does not admit of any precise scientific formula. Since the upper turnover filter of Rs.200 crores adopted by the Tribunal is found to be rational and logical, this Court finds no reason to interfere with the same.”
8. In the aforesaid view, no substantial question arises for consideration of this Court in the present appeal. The appeal is, accordingly, dismissed.
Note:
1 ITA No.10/2011 and connected matters decided on 28.08.2026
