PCIT Vs E4E Business India Pvt. Ltd. (Karnataka High Court)
Transfer Pricing: Karnataka HC Upholds Exclusion of Accurate Data Converters, Dismisses Revenue’s Appeal
Introduction
The Karnataka High Court dismissed the Revenue’s appeal challenging the exclusion of M/s. Accurate Data Converters Limited from the list of comparables for transfer pricing purposes. The Court upheld the Tribunal’s factual determination, observing that the Revenue had neither produced contrary material nor established perversity in the findings.
The judgment emphasises that selection or exclusion of comparables requires examination of the actual facts and supporting data. A challenge to such findings must demonstrate a legally sustainable defect rather than merely express disagreement with the conclusion.
Background of the Dispute
The Revenue filed an appeal under Section 260A of the Income Tax Act, 1961, challenging the Bengaluru Tribunal’s order dated 19 February 2020 in ITA No. 2112/Bang/2018.
The appeal concerned transfer pricing issues arising in the assessment of E4E Business India Pvt. Ltd. for AY 2007-08. It was admitted on three substantial questions of law relating to exclusion of comparables and application of the Internal Transactional Net Margin Method (TNMM).
The questions referred to functional dissimilarity, the onsite revenue filter, the employee cost filter and differences between international associated enterprise transactions and domestic transactions with unrelated parties.
Questions Raised by the Revenue
The Revenue questioned whether the Tribunal could direct exclusion of companies when the Transfer Pricing Officer had selected them after Functions, Assets and Risks (FAR) analysis and application of the parameters under Rule 10B.
It specifically challenged the exclusion of Eclerx Services and Mold-Tek Technologies, contending that these companies satisfied the qualitative and quantitative filters applied by the TPO.
The Revenue also disputed the exclusion of Accurate Data Converters and the direction concerning Internal TNMM. It referred to differences in geography, functions, assets, risks, capital employed, labour costs and legal provisions between the relevant transactions.
Although these issues appeared in the admitted questions, the High Court’s operative factual discussion centred on the exclusion of Accurate Data Converters Limited.
Assessee’s Submissions
The assessee submitted that the Tribunal had correctly confirmed the CIT(A)’s direction to exclude Accurate Data Converters. It argued that the finding was factual and that the Revenue had produced no material warranting its reversal.
The assessee relied on the Karnataka High Court’s decision in SAP Labs India Private Limited v. Income Tax Officer, ITA No. 10/2011 and connected appeals.
That decision recognised comparability analysis as a factual and data-driven exercise. It also explained that the TPO cannot reject a taxpayer’s comparables merely to replace them with a standard departmental set.
Principles Reiterated by the High Court
The Court reproduced the conclusions of the coordinate Bench in SAP Labs. These included the principle that Chapter X provides a complete statutory framework for determining the arm’s length price.
The taxpayer bears the initial responsibility for determining the ALP and maintaining prescribed documentation. Interference by the TPO must satisfy the conditions under Section 92C(3).
The reproduced principles further recognised that comparability must conform to Rule 10B. Where the TPO rejects the taxpayer’s determination and substitutes comparables, the burden shifts to the TPO to justify the inclusion or exclusion.
Other conclusions concerned turnover and related party transaction filters, treatment of foreign exchange fluctuations, appellate consideration of comparables, statutory tolerance and working capital adjustments. These formed part of the precedent reproduced by the Court; they were not separately examined as factual controversies in this appeal.
Why Accurate Data Converters Was Excluded
After examining the assessment order, the CIT(A)’s order and the Tribunal’s order, the High Court held that the Tribunal had correctly directed exclusion of Accurate Data Converters.
The Court recorded that the conclusion on functional non-comparability followed consideration of the assessee’s contention and material concerning outsourcing of a major portion of its work.
The Revenue had not placed material on record to establish the contrary. The Court observed that, without material disproving the relevant outsourcing position, the Revenue could not successfully challenge the exclusion.
Crucially, the Revenue failed to demonstrate that the factual finding involved consideration of irrelevant material, exclusion of relevant material, or any other perversity.
Decision and Key Takeaway
The High Court answered the substantial questions of law in favour of the assessee and against the Revenue. Accordingly, the appeal was dismissed.
The ruling highlights the importance of an evidence-based challenge in transfer pricing litigation. Where the appellate authorities have reached a factual conclusion on comparability, the party seeking interference must identify contrary evidence or a demonstrable defect in the reasoning.
The judgment should also be read within its factual scope. While the admitted questions referred to Internal TNMM and other comparables, the Court’s substantive application of the law focused on Accurate Data Converters and the Revenue’s failure to establish perversity in its exclusion.
Cases Discussed
- SAP Labs India Private Limited Vs Income Tax Officer (Karnataka High Court); ITA No. 10/2011 and connected appeals; 28/08/2026. Followed regarding the factual and data-driven character of transfer pricing comparability, requirements of Rule 10B, justification for substituting comparables, and the limited scope of interference with factual findings.
FULL TEXT OF THE JUDGMENT OF KARNATAKA HIGH COURT
The above appeal filed under Section 260A of the Income Tax Act, 1961 is directed against the order dated 19.02.2020 in ITA No.2112/Bang/2018 (Annexure-A) for the assessment year 2007-2008 passed by the Income Tax Appellate Tribunal, ‘C’ Bench, Bengaluru and the above appeal was admitted on 10.02.2022 to examine the following substantial questions of law:
“(1) Whether on the facts and in the circumstances of the case, the Tribunal’s order can be said as perverse in nature as the Tribunal has directed the Transfer Pricing Officer/Assessing authority to exclude certain comparable’s on basis of functional dissimilarity even though the Transfer Pricing Officer has chosen comparable’s on basis of FAR analysis and in accordance with parameters set out Rule 10B of the I.T.Rules?
(2) Whether on the facts and in the circumstances of the case, the Tribunal is right in law in directing the Transfer Pricing Officer to exclude comparable’s namely, M/s.Eclerx Services and M/s.Mold-Tek-Technologies on basis of functional dissimilarity and onsite revenue filter even though the said comparable’s satisfied qualitative and quantitative filters applied by Transfer Pricing Officer?
(3) Whether on the facts and in the circumstances of the case, the Tribunal is right in law in directing the Transfer Pricing Officer to exclude M/s.Accurate Data Convertor’s Ltd on the basis that it is failing employee cost filter and directed to apply Internal Transaction Net Margin Method (for short) TNMM method for determining Arm’s Length Price ignoring that Internal TNMM not appropriate method as there are differences between the international AE transaction and the domestic non AE transaction in terms of the geography, functions performed, assets employed, risk taken, capital employed, labour cost, legal provisions, assets employed, labour cost and legal provisions etc.”
2. Heard learned counsel Sri.E.I.Sanmathi for the appellant-Revenue and learned Senior Counsel Sri.A.Shankar for learned counsel Sri.S.Annamalai for respondent/assessee.
3. The above appeal relates to transfer pricing and the Tribunal directed the Transfer Pricing Officer (TPO) to exclude Accurate Data Converters Limited and directed to apply Internal Transaction Net Margin Method (for short TNMM method) for determining Arm’s Length Price . It is submitted that the TNMM method is not appropriate method.
4. However, learned Senior Counsel Sri.A.Shankar would submit that the Tribunal is justified in confirming the order of CIT(A) insofar as direction to exclude M/s.Accurate Data Converters Limited. Learned Senior Counsel also would point out that the finding arrived at by the Tribunal is factual and to over turn the factual finding the appellant-revenue has not placed on record any material. Further he would submit that this Court in Sap Labs India Private Limited vs. The Income Tax Officer in ITA No.10/2011 and connected appeals has concluded that 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. It is further observed that such determination must strictly conform to the requirements of Rule 10B of the Rules.
5. Having heard the learned counsel for the parties and on perusal of entire appeal papers, we are not inclined to interfere with the impugned order passed by the Tribunal.
6. A Co-ordinate Bench of this Court on analyzing the decision of the Hon’ble Apex Court in the matter of transfer pricing in Sap Labs India Private Limited (supra) has concluded as follows:
(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.
7. In the instant case the question is as to whether the Tribunal was justified in directing the exclusion of M/s. Accurate Data Converters Limited. On going through the order of Assessment order, order passed by the CIT(Appeals) as well as the order passed by the Tribunal, we are of the considered opinion that the Tribunal rightly directed the exclusion of M/s.Accurate Data Converters Limited.
8. Taking note of the assessee’s contention and material, that it has also outsourced major portion of its work, arrived at conclusion that Accurate Data is not functionally comparable to asessee company. As such directed to exclude the said company from comparables. The appellant-revenue has not placed on record any material to prove contra, unless the appellant-revenue places material to prove that the assessee has not outsourced the major part of its work, it is not open for the appellant-revenue to contend that direction to exclude M/s.Accurate Data Converters Limited is not correct. The appellant-revenue has failed to point out any perversity and has further failed to point out taking of irrelevant material and excluding relevant material while arriving at factual finding. Thus the substantial questions of law are answered in favour of respondent-assess and against appellant-revenue.
Accordingly, the appeal stands dismissed.
