TPO Selection Under Rule 10B Does Not Conclude Comparability: Karnataka HC

PCIT Vs Applied Materials India Pvt. Ltd. (Karnataka High Court)

A Comparable Must Perform Comparable Functions: Karnataka High Court Upholds Exclusion of Three Companies

Summary: The Revenue challenged the Bengaluru Tribunal’s direction to exclude Mindtree Ltd., Persistent Systems Ltd. and Larsen & Toubro Infotech Ltd. from the transfer pricing comparables for AY 2013–14. Its contention was that the TPO had selected the companies after applying the prescribed tests under Rule 10B, and that the Tribunal’s contrary findings were perverse.

The High Court examined the reasons for excluding each company. Mindtree carried out research and development and had created substantial intangibles. Persistent Systems earned royalty income and developed products, whereas the assessee did neither. Larsen & Toubro Infotech was a full-fledged software development service provider whose functions differed from the assessee’s limited functions. The Court found the Tribunal’s reasons proper and noted that the Revenue had brought no additional facts or circumstances to show that its findings were perverse.

The substantial questions of law were therefore answered in favour of the assessee, and the Revenue’s appeal was dismissed. The useful point from the decision is that selection by the TPO under Rule 10B does not, by itself, settle functional comparability: the actual functions, product activity, royalty income and intangibles of a proposed comparable remain material. The ruling also turns on the specific factual differences recorded for these three companies; it should not be read as excluding them in every transfer pricing case.