PCIT Vs ATMECS Technologies Pvt. Ltd. (Karnataka High Court)
Nine Giants Exit the Comparable Set: Karnataka HC Upholds ₹200 Crore Turnover Filter
The Karnataka High Court has dismissed the Revenue’s appeal against the exclusion of nine companies from a transfer pricing comparable set by applying an upper turnover filter of ₹200 crore. The ruling in PCIT-1 and Another v. ATMECS Technologies Pvt. Ltd., delivered on 24 September 2026, concerned Assessment Year 2020–21. The Division Bench comprising Chief Justice Vibhu Bakhru and Justice K.S. Hemalekha followed its recent decision in SAP Labs India Pvt. Ltd. v. ITO after the Revenue acknowledged that the issue was covered in the assessee’s favour.
The Dispute: Transfer Pricing Adjustments Exceeding ₹16 Crore
ATMECS Technologies filed its return of income on 5 February 2021, declaring a total income of ₹5,00,90,640. During the assessment proceedings, its international transactions were referred to the Transfer Pricing Officer for determination of the arm’s length price.
By an order dated 8 February 2023, the TPO proposed adjustments aggregating to ₹16,05,36,917. This comprised ₹9,11,44,667 relating to the software development segment and ₹6,93,92,250 towards interest on delayed receivables.
The Assessing Officer issued a draft assessment order under Section 144C of the Income-tax Act. The assessee challenged the rejection of its transfer pricing study and the TPO’s fresh search for comparable companies before the Dispute Resolution Panel.
Among its objections, the assessee sought the exclusion of companies with significantly larger turnovers. The DRP, however, upheld the TPO’s approach, and the dispute subsequently reached the Income Tax Appellate Tribunal.
Tribunal Applies the ₹200 Crore Ceiling
The Tribunal partly allowed the assessee’s appeal through its order dated 2 June 2025. In the facts before it, the Tribunal accepted an upper turnover filter of ₹200 crore and excluded nine out of seventeen comparable companies.
The excluded companies were Mindtree Ltd., Great Software Laboratory Ltd., Larsen & Toubro Infotech Ltd., Wipro Ltd., Nihilent Ltd., Tata Elxsi Ltd., Infosys Ltd., Tata Consultancy Services Ltd. and Cybage Software Ltd.
The Revenue challenged this decision before the High Court under Section 260A, raising several proposed substantial questions of law concerning the Tribunal’s approach to comparability.
Revenue Questions the Introduction and Application of the Filter
The Revenue’s proposed questions challenged both the basis for introducing the turnover filter and the manner in which it was applied.
It questioned whether the Tribunal could adopt a criterion at the appellate stage when that criterion had not formed part of the assessee’s transfer pricing documentation. It also disputed whether companies could be excluded merely because their turnover exceeded ₹200 crore, without demonstrating a material effect on profitability under Rule 10B(3).
Other objections concerned the absence of a corresponding lower turnover filter, the taxpayer’s documentation obligations under Section 92D and Rule 10D, and whether the Tribunal’s approach shifted the burden of establishing comparability.
The Revenue further alleged inconsistency in retaining another company with turnover greater than that of the assessee. It questioned whether selective exclusions required a complete reconsideration of the comparable set and whether the Tribunal had adequately explained its application of stricter criteria to selected companies.
These objections framed a broad challenge. However, the issue actually pursued at the hearing was considerably narrower.
High Court Follows SAP Labs
Before the High Court, counsel for the Revenue confined the challenge to the validity of applying the ₹200 crore upper turnover filter in the given facts.
Counsel also acknowledged that this issue was covered in favour of the assessee by the coordinate Bench’s decision in SAP Labs India Pvt. Ltd. v. ITO, rendered on 28 August 2026 in ITA No. 10/2011 and connected appeals.
Following that decision, the High Court dismissed the Revenue’s appeal. Consequently, the Tribunal’s exclusion of the nine companies remained undisturbed.
The judgment does not separately analyse each of the nine proposed questions. Its conclusion rests on the issue as narrowed during the hearing and the Revenue’s concession regarding the applicable precedent.
What the Decision Actually Establishes
The ruling sustains the ₹200 crore upper turnover filter in this particular dispute. It does not prescribe that figure as a universal statutory ceiling for every software development company or every transfer pricing analysis.
The distinction between the two original adjustments also matters. Although the assessment included a substantial adjustment for interest on delayed receivables, the High Court’s discussion concerns the turnover filter. The judgment therefore cannot be read as deleting the entire ₹16.05 crore adjustment, or as deciding the receivables issue.
Author’s Comments
The decision illustrates the importance of an existing jurisdictional precedent when challenging a Tribunal’s selection of comparables. Although the Revenue proposed several objections involving documentation, consistency and profitability, its challenge ultimately narrowed to an issue already covered by SAP Labs.
For taxpayers, the practical value lies in supporting a turnover-based exclusion with the relevant facts and applicable precedent. ₹200 crore should not be treated as an automatic exclusion rule detached from the particular comparability exercise.
Equally, the outcome should be described precisely: the High Court upheld the Tribunal’s turnover-filter conclusion by following binding coordinate Bench precedent, while leaving the wider questions unexamined separately in this judgment.
Cases Discussed
- SAP Labs India Private Limited Vs Income Tax Officer, ITA No. 10/2011 and connected appeals, Karnataka High Court, decided on 28.08.2026 — Followed; the Revenue conceded that the question concerning application of the ₹200 crore upper turnover filter was covered in favour of the assessee by this coordinate Bench decision.
FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT
1. For the reasons stated in I.A No.1/2026, the delay is condoned and the application is allowed.
2. The Revenue has filed the present appeal under Section 260A of the Income Tax Act, 1961 [the Act] impugning an order dated 02.06.2025 [impugned order] passed by the learned Income Tax Appellate Tribunal [ITAT] in IT(TP)A No.1681/Bang/2024 for the Assessment Year [AY] 2020-21.
3. The respondent [assessee] had filed its return of income tax for the AY 2020-21 on 05.02.2021 declaring a total income of `5,00,90,640/-. The said return was selected for scrutiny. Since the assessee had also entered into an international transaction, the Assessing Officer [AO] made a reference to the Transfer Pricing Officer [TPO]. The learned TPO passed an order dated 08.02.2023 under Section 92CA(3) of the Act making Transfer Pricing Adjustments of `16,05,36,917/-. The said adjustments comprised adjustment of amount of `9,11,44,667/- in respect of SWD1 segment and `6,93,92,250/- as interest on delayed receivables. The AO passed a draft assessment order under Section 144C of the Act. The assessee filed its objections before the Dispute Resolution Panel [DRP], inter alia, assailing the transfer pricing adjustments. The assessee contested the decision of the learned TPO rejecting its transfer pricing study and conducting a fresh search for comparables. However, the learned DRP found no merit in the said contention and held that the TPO was justified in rejecting the transfer pricing study and conducting a fresh search for comparables.
4. The learned TPO had included certain entities as comparable which the assessee contended ought to be excluded. The learned TPO, inter alia¸ rejected the assessee’s contention in respect of certain comparables, including those entities that had significantly a larger turn over than the assessee. Based on the directions issued by the learned DRP, the AO passed the final assessment order on 23.07.2004. The assessee appealed the said assessment order before the ITAT, which was partly allowed by the impugned judgment. The ITAT upheld the assessee’s contention that a turnover filter was required to be used for selecting the comparables. The ITAT held that in the given facts, an upper turnover filter of `200 crores ought to have been applied. Applying the said turnover, the following 9 out of the 17 comparables selected by the TPO were:
(i) Mindtree Limited;
(ii) Great Software Laboratory Limited;
(iii) Larsen & Toubro Infotech Limited;
(iv) Wipro Limited;
(v) Nihilient Limited;
(vi) Tata Elxis Limited;
(vii) Infosys Limited;
(viii) Tata Consultancy Services Limited; and
(ix) Cybage Software Limited
5. The Revenue has filed the present appeal assailing the said order and projecting the following questions for consideration:
1. Whether in the facts and circumstances of the case and in law, the Tribunal is right in excluding certain comparables by introducing new comparability criteria at the appellate stage, when such criteria were neither part of the assessee’s transfer pricing study nor documented in accordance with Rule 10D of the Income-tax Rules, 1962, when determination of arm’s length price as per Section 92C(3) can only be made as per the material available with the TPO?
2. Whether in the facts and circumstances of the case and in law, the Tribunal is right in introducing and applying an upper turnover filter of Rs. 200 crore without demonstrating, in terms of Rule 10B(3), that turnover materially affects profitability?
3. Whether in the facts and circumstances of the case and in law, the Tribunal is right in applying an upper turnover filter without applying a corresponding lower turnover filter, when turnover was treated as a material comparability factor?
4. Whether in the facts and circumstances of the case and in law, the Tribunal is justified in excluding comparables solely on turnover grounds, when the determination of arm’s length price as per Section 92C(3) can be made only based on the material available with TPO, in the absence of any analysis in the assessee’s TP documentation under Rule 10D demonstrating the material impact of turnover on profitability,?
5. Whether in the facts and circumstances of the case, the Tribunal has erred in law in shifting the statutory burden under Rules 10B and 10D from the assessee to the Revenue by permitting exclusion of comparables based on new grounds not substantiated in the transfer pricing documentation?
6. Whether in the facts and circumstances of the case and in law, the Tribunal is right in it’s selective acceptance of new comparability factors at the appellate stage, without requiring complete disclosure and analysis under Rule 10D, is legally sustainable as per Section 92D read with Rule 10D and determination of arm’s length price as per Section 92C(3)?
7. Whether in the facts and circumstances of the case and in law, the Tribunal is right in excluding certain comparables on the ground of high turnover, while simultaneously retaining the company having higher turnover than the taxpayer and as such the inconsistent application of the turnover filter renders the finding of the Tribunal perverse?
8. Whether in the facts and circumstances of the case and in law, the Tribunal is right in accepting new comparability factors, without directing a comprehensive re-evaluation of the entire comparable set resulting in selective exclusion without holistic reassessment leading to an internally inconsistent arm’s length analysis rendering the order of the Tribunal perverse?
9. Whether in the facts and circumstances of the case and in law, the Tribunal is right in introducing a stricter degree of comparability only for selected companies, which has altered the foundational comparability framework adopted by both the assessee and the TPO, without recording reasons for such departure and such selective alteration of the analytical framework has rendered the findings unsustainable and perverse?
6. However, the learned counsel appearing for the Revenue submitted that the only question required to be considered is whether, in the given facts, ITAT was right in introducing an upper turnover filter of `200 crore for selection of comparables.
7. Concededly the said question of law is covered in favour of the assessee by the decision of the Co-ordinate Bench of this Court in Sap Labs India Private Limited vs. The Income Tax Officer: ITA No.10/2011 and connected appeals decided on 28.08.2026.
8. Accordingly, the appeal is dismissed.
Note:
1 Software Development
