PCIT Vs Infineon Technologies India Pvt. Ltd. (Karnataka High Court)
Calling It “Perverse” Is Not Enough: Karnataka HC Upholds Exclusion of Transfer Pricing Comparables
The Dispute: Revenue Challenges Exclusion of Six Companies
The Karnataka High Court dismissed the Revenue’s appeal challenging the Tribunal’s exclusion of certain companies from the transfer pricing comparables. The Court held that the Tribunal had assigned reasons for its conclusions and that the Revenue had failed to demonstrate either perversity or departure from settled law.
The disputed companies were Infosys Ltd., Tata Elxsi Ltd., Persistent Systems Ltd., KALS Information Systems Ltd., Aztecsoft Software Ltd. and Bodhtree Consulting Ltd.
Following its recent decision in SAP Labs India Pvt. Ltd., and referring to the Bombay High Court’s decision in Barclays Technology Centre India Pvt. Ltd., the Court concluded that no substantial question of law arose for consideration.
Questions Raised by the Revenue
The appeal arose from the Bangalore Tribunal’s order dated 4 March 2020 in ITA No. 159/Bang/2019, concerning assessment year 2006–07.
The appeal had been admitted on 10 June 2021 to examine four substantial questions of law. These broadly alleged that the Tribunal had ignored the parameters prescribed under Rule 10B, excluded comparables without considering the TPO’s reasons and improperly rejected high-turnover companies.
In particular, the Revenue questioned the exclusion of Infosys, Persistent Systems and Tata Elxsi on turnover grounds. It argued that brand value might generate revenue but did not necessarily increase profit margins.
During the hearing, the Revenue filed a memo reframing one question to specifically challenge the exclusion of all six companies, alleging that the Tribunal had ignored the TPO’s findings and acted contrary to Rule 10B.
Comparable Selection Requires Facts and Data
The High Court applied the principles recorded by its coordinate Bench in SAP Labs India Pvt. Ltd. v. ITO, ITA No. 10/2011 and connected appeals, decided on 28 August 2026.
That judgment recognised that the selection or exclusion of comparables is essentially a factual and data-driven exercise. The TPO cannot reject the taxpayer’s comparables merely to substitute them with a standard departmental set.
At the same time, comparable selection must strictly conform to Rule 10B. The principle therefore requires a reasoned examination of the relevant material; it does not place the taxpayer’s selection beyond scrutiny.
In the present case, the High Court specifically noted that the Tribunal had assigned reasons in paragraph 11 of its order for arriving at its conclusion.
Turnover and Related-Party Transaction Filters
The Court reproduced the SAP Labs conclusion that an upper turnover filter of ₹200 crore is rational and legally sustainable. Turnover, brand value, economies of scale, bargaining power and ownership of intangibles can materially influence comparability and profitability.
This addressed the Revenue’s broader challenge to the relevance of business scale in selecting comparables.
The Court also reiterated that a 15% related-party transaction filter is ordinarily preferable. A higher threshold of 20% or 25% may be adopted only after recording a specific finding that sufficient comparable companies satisfying the lower threshold are unavailable.
The judgment thus emphasises that the application of filters must have a reasoned factual foundation, particularly where the authority departs from the ordinarily preferable threshold.
Bodhtree: Bombay High Court Decision Applied
The assessee relied on PCIT v. Barclays Technology Centre India Pvt. Ltd., reported in 409 ITR 108 (Bom.), in addition to SAP Labs.
The Karnataka High Court expressly held that the Barclays decision answered the issue concerning the exclusion of Bodhtree Consulting Ltd.
The present judgment does not reproduce the detailed reasoning from Barclays. Its significance here lies in the Court’s express reliance on that authority to resolve the Bodhtree issue. The ruling should therefore be described within that scope, without attributing additional company-specific findings to this judgment.
Other Transfer Pricing Principles Reproduced
The Court also reproduced SAP Labs’ conclusions concerning the burden of proof and adjustments.
The taxpayer bears the initial burden of substantiating the arm’s length price and maintaining prescribed documentation. The TPO’s interference must satisfy section 92C(3). Where the TPO rejects the taxpayer’s determination and substitutes comparables, the burden shifts to the TPO to justify that selection.
Reliable comparables may be included or excluded at the appellate stage, subject to statutory requirements. Foreign exchange gains or losses qualify as operating items only where they have a direct nexus with the international transaction.
The erstwhile ±5% tolerance is a permissible variation, not a standard deduction. Working capital adjustment is a comparability adjustment, rather than a selection filter, and depends on the facts.
Author’s Comments
The decisive feature was the Revenue’s failure to show how the Tribunal’s reasoned findings were perverse or legally unsustainable. Merely describing an order as perverse does not establish the defect.
The judgment provides useful jurisdictional support for defending reasoned comparable selection, including the application of turnover and related-party transaction filters. However, it should not be read as permanently excluding these six companies from every transfer pricing exercise. Comparability remains dependent on the assessment year, relevant data and the taxpayer’s functional profile.
For practitioners, the lesson is practical: preserve the evidence supporting each inclusion or exclusion and explain how it satisfies Rule 10B. A properly supported factual conclusion is far more defensible than a company list adopted without analysis.
Cases Discussed:
1. SAP Labs India Private Limited Vs ITO – ITA No. 10/2011 and connected appeals, decided on 28.08.2026 – Followed; selection/exclusion of comparables held factual and data-driven, subject to Rule 10B; ₹200 crore upper turnover filter and ordinarily preferable 15% RPT filter recognised.
2. Principal Commissioner of Income Tax-I Vs Barclays Technology Centre India Pvt. Ltd. – 409 ITR 108 (Bom.) – Followed on the issue concerning exclusion of Bodhtree Consulting Ltd.
FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT
The above appeal filed by the appellants-revenue questions the order dated 04.03.2020 by the Income Tax Appellate Tribunal (for short ITAT) in ITA No.159/Bang/2019 (Annexure-A) for the assessment year 2006-2007. The appeal was admitted on 10.06.2021 to examine the following substantial questions of law:
(1) “Whether the Tribunal was right in law to ignore the parameters of analysis prescribed under Rule 10b, which are exhaustive and if so, whether it is legally permissible to bypass the same partially or by implication?
(2) Whether on the facts and circumstances of the case and in law, the Tribunal is right in law in excluding/including certain comparable’s ignoring the parameters of analysis prescribed under Rule 10B, which are exhaustive and, if so, whether it is legally permissible to bypass the same partially or by implication?
(3) Whether on the facts and in the circumstances of the case, the Tribunal’s order can be said as perverse since Tribunal has excluded certain comparable’s without going into reasons assigned by Transfer Pricing Officer?
(4) Whether on the facts and in the circumstances of the case, the Tribunal is right in law in rejecting Infosys Ltd., Persistent Systems Ltd and Tata Elxsi Ltd on ground of high turnover without acknowledging that there is no direct relationship between brand value and margin earned by the Company, brand may generate revenue of the Company but does not increase the profit margin?”
2. Learned counsel Sri.E.I.Sanmathi for the appellants- revenue during the course of hearing has filed memo re-framing question No.2 which reads as follows:
“Whether on the facts and in the circumstances of the case, the Tribunal’s order can be said as perverse in nature in directing Transfer Pricing Officer to exclude comparables, Infosys Ltd., Tata Eixsi Ltd., Persistent Systems Ltd., Kals Information Systems Ltd., Aztec Software Ltd and Bodhtree Consulting Ltd., ignoring the findings of the Transfer Pricing Officer and contrary to Rule 10B of IT Rules?”
3. Heard learned counsel Sri.E.I.Sanmathi for appellants-revenue and learned counsel Ms.Tanmayee Rajkumar, for respondent-assessee.
4. The above matter relates to transfer pricing and Co-ordinate Bench of this Court vide judgment dated 28.08.2026 in ITA No.10/2011 and connected appeals in Sap Labs India Private Limited vs. The Income Tax Officer, on consideration of decisions of Hon’ble Apex Court has arrived at the following 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.
5. Learned counsel Sri.E.I.Sanmathi for the appellants contended that the exclusion of comparables such as Infosys Ltd., Tata Elxsi Ltd, Persistent Systems Ltd., KALS Information Systems Ltd., Aztecsoft Software Ltd., and Bodhtree Consulting Ltd. are contrary to the Rule 10B of the IT Rules.
6. However, the learned counsel for respondent-assessee would contend that the issue raised by the appellant-revenue is covered by the decision of this Court referred to above as well as the decision of the Division Bench of Mumbai High Court in Principal Commissioner of Income Tax – I vs. Barclays Technology Centre India Pvt. Ltd., reported in 409 ITR 108 (Bom).
7. This Court has held that selection or exclusion of comparables is essentially a factual and data driven exercise and the TPO cannot reject the tax payers’ comparables only to substitute them with a standard departmental set. Such determination must strictly conform to the requirements of Rule 10B of the Rules. Further it is also observed that 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. The Tribunal at paragraph No.11 of its order has assigned reasons to arrive at its conclusion.
8. Insofar as exclusion of Bodhtree Consulting Limited, Barclays Technology Centre India Pvt. Ltd. (Supra) answers the issue.
9. The finding of the Tribunal is entirely one on facts and the revenue has failed to show as to how findings arrived at by the Tribunal is perverse in nature. The revenue has also failed to demonstrate how the exclusion or inclusion of comparables are in any manner opposed to the settled position of law. In the light of the decision of SAP Labs India (P) Ltd., as well as Barclays Technology Centre India Pvt. Ltd.(Supra), we are of the considered view that no substantial question of law arises for consideration and accordingly, appeal stands dismissed.
