PCIT Vs Verisign Services India Pvt. Ltd. (Karnataka High Court)
Size Matters in Transfer Pricing: Karnataka High Court Upholds Upper Turnover Filter
The controversy
Can a large company be retained as a transfer-pricing comparable merely because it satisfies the filters applied by the Transfer Pricing Officer? Or can differences in turnover, brand value, economies of scale and ownership of intangibles justify its exclusion?
The Karnataka High Court upheld the Tribunal’s approach, holding that an upper turnover filter is rational and legally sustainable. It recognised that these commercial characteristics influence both comparability and profitability.
The Court also declined to interfere with the Tribunal’s reasoned factual findings concerning individual comparables. It rejected the Revenue’s appeal and answered the substantial questions of law in favour of the assessee.
The Revenue challenged the Tribunal’s selection of comparables
The appeal arose from the Bangalore Tribunal’s order dated 15 November 2019 in IT(TP)A No. 2532/Bang/2017, concerning AY 2010–11.
The Revenue questioned the Tribunal’s directions concerning the companies selected for comparison in the transfer-pricing exercise.
Its principal contention was that the Transfer Pricing Officer had chosen comparables after undertaking FAR analysis—functions, assets and risks—and applying the parameters prescribed under Rule 10B.
According to the Revenue, the Tribunal’s exclusion of companies on grounds of functional dissimilarity and turnover could therefore be characterised as perverse.
The appeal had been admitted on 10 June 2021 to examine three substantial questions of law, covering the validity of the turnover filter and the treatment of Infosys, Persistent Systems and Akshay Software Technologies.
An earlier coordinate Bench decision governed the turnover issue
At the hearing, the assessee relied on the Karnataka High Court’s decision in ITA No. 10/2011 and connected appeals, dated 28 August 2026.
Counsel submitted that the questions raised by the Revenue stood covered by that decision in favour of the assessee.
After examining the Tribunal’s order, the appeal papers and the coordinate Bench judgment, the Court accepted this position concerning the turnover-related questions.
It noted that the coordinate Bench had upheld the adoption of an upper turnover filter as rational and legally sustainable.
The present judgment does not specify a numerical turnover ceiling. Its importance lies in recognising the legitimacy of the filter and the commercial considerations supporting it.
Turnover affects more than the size of the balance sheet
The Court identified turnover, brand value, economies of scale, bargaining power and ownership of intangibles as factors influencing comparability and profitability.
This reasoning addresses a practical difficulty in transfer-pricing analysis: companies operating in a broadly similar field may have materially different commercial advantages.
A larger enterprise may possess a recognised brand, greater negotiating strength, scale efficiencies or valuable intangible assets. These characteristics can affect the profitability against which the tested party is compared.
The Court therefore held that the Tribunal’s findings on the turnover-related questions could not be regarded as perverse merely because the Transfer Pricing Officer had applied his own qualitative and quantitative filters.
Infosys and Persistent Systems were rightly excluded
On the question concerning individual companies, the High Court held that the Tribunal had rightly excluded Infosys Technologies Limited and Persistent Systems Limited.
It noted that the Tribunal had assigned reasons concerning these companies in paragraph 8 of its order.
The Court treated those conclusions as factual findings and found no perversity warranting interference.
The short High Court judgment does not reproduce the detailed company-specific analysis. It should therefore be understood as affirming the Tribunal’s reasoned conclusions in this case, rather than as declaring that these companies must be excluded in every transfer-pricing assessment.
Comparability remains dependent on the tested party, the relevant year and the supporting facts.
Akshay Software: the Revenue’s question misstated the outcome
A significant clarification concerned Akshay Software Technologies Limited.
The Revenue’s substantial question proceeded on the footing that the Tribunal had directed its exclusion. However, the High Court observed that the Tribunal had actually included this comparable and remanded the matter for reconsideration.
The Tribunal had recorded its reasons in paragraph 9.
This distinction matters. The decision cannot accurately be reported as approving the exclusion of all three companies named in the Revenue’s question. Infosys and Persistent were excluded; Akshay Software received different treatment.
Revenue’s appeal rejected
Finding that the Tribunal’s conclusions were factual, reasoned and free from perversity, the High Court declined to interfere.
The appeal was rejected, and the substantial questions of law were answered against the Revenue and in favour of Verisign Services India Pvt. Ltd.
Author’s comments
A comparable must be commercially comparable, not merely pass a checklist. The judgment recognises that size-related advantages can influence margins and cannot be disregarded simply because companies operate within the same broad sector.
For practitioners, the useful argument is to connect turnover differences with their effect on scale, brand, bargaining power and intangibles. The case supports the legitimacy of that examination.
Equally, it does not prescribe a universal turnover ceiling or automatic exclusion of named companies. The Tribunal’s recorded reasons and the absence of perversity were central to the result.
The clarification concerning Akshay Software also illustrates why the operative findings deserve closer attention than the wording of an appeal question. The actual treatment of each comparable must be reported accurately.
Cases Discussed:
1. ITA No. 10/2011 and connected appeals, Karnataka High Court, dated 28.08.2026 – Followed; upper turnover filter held rational and legally sustainable.
FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT
Heard Sri. E.I. Sanmathi, learned counsel for the appellants-revenue and learned Senior counsel Sri. T. Suryanarayana for Sri. Tanmayee Rajkumar for respondent-assessee.
2. The above appeal is filed questioning the order of ITAT dated 15.11.2019 in IT(TP)A No.2532/Bang/2017 for the assessment year 2010-2011. The above appeal was admitted on 10.06.2021 to examine the following three 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 since Tribunal has directed the Transfer Pricing Officer/Assessing authority to exclude certain comparable’s on basis of functional dissimilarity ad Turnover Filter 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.Infosys Ltd, M/s.Persistent Systems Ltd, M/s.Akshay Software Technologies Pvt. Ltd 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 Infosys Ltd as comparable on the basis of Turnover filter by even though the said comparable chose by the Transfer Pricing Officer is in accordance with parameter set out in Rule 10B(2) of I.T.Rules?”
3. At the outset, learned Senior Counsel Sri.T.Suryanarayana would submit that in view of the decision of Co-ordinate Bench in ITA No.10/2011 and connected appeals dated 28.08.2026, the substantial questions of law raised in the present appeal would not remain for consideration. It is further submitted that the substantial questions are answered in favour of the respondent-assessee.
4. We have gone through the order of ITAT and appeal papers as well as the decision of the Co-ordinate Bench supra. With regard to substantial question Nos.1 and 3, the Co-ordinate Bench has held that adoption of upper turnover filter is rational and legally sustainable, as turnover, brand value, economies of scale, bargaining power and ownership of intangible materials influence comparability and profitability. In view of the above finding of the Co-Ordinate Bench, the finding of the Tribunal on the above questions cannot be said to be perverse.
5. Insofar as substantial question No.2 is concerned, the same is factual finding and in fact the Tribunal has rightly excluded comparables namely M/s.Infosys Technologies Limited and M/s.Persistent Systems Limited. From the order of the Tribunal, it is seen that the Tribunal has included the comparable of M/s.Akshay Software Technologies Limited and remanded the matter for reconsideration. The Tribunal at paragraph No.8 of its order has assigned reasons for comparables with regard to M/s.Infosys Technologies Limited and M/s.Persistent Systems Limited. With regard to inclusion of M/s. Akshay Software Technologies Limited, the Tribunal has recorded its reasons at paragraph No.9. Since the findings recorded by the Tribunal are factual findings and the same would not suffer from perversity, we are not inclined to interfere with the order passed by the ITAT.
6. Accordingly, appeal stands rejected.
7. The substantial questions of law are answered against the appellants-revenue and in favour of the respondent – assessee.
