THE COMMISSIONER OF INCOME TAX vs M/S. LOGICA PRIVATE LTD.
- Court
- Karnataka High Court
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ITA No. 338 of 2013
TH
RESERVED ON 28 SEPTEMBER 2026
IN THE HIGH COURT OF KARNATAKA AT BENGALURU
TH
DATED THIS THE 28 DAY OF OCTOBER, 2026
PRESENT
THE HON'BLE MR. VIBHU BAKHRU, CHIEF JUSTICE
AND
THE HON'BLE MRS. JUSTICE K.S. HEMALEKHA
INCOME TAX APPEAL NO. 338 OF 2013
BETWEEN:
1. THE COMMISSIONER OF INCOME-TAX
C.R. BUILDING, QUEENS ROAD, BANGALORE
2. THE ASSISTANT COMMISSIONER OF INCOME TAX
CIRCLE- 11 (5)
RASHTROTHANA BHAVAN
NRUPATHUNGA ROAD, BANGALORE
…APPELLANTS
(BY SRI E.I. SANMATHI, ADVOCATE)
AND:
1. M/S. LOGICA PRIVATE LTD.
DIVYASREE TECHNOPOLIS
NO.124-125, YEMLUR P.O., OFF. AIRPORT ROAD
BANGALORE – 560 037
NOW MERGED WITH CGI INFORMATION SYSTEMS AND
MANAGEMENT CONSULTANTS PVT. LTD. #95/1 & 95/2,
ELECTRONIC CITY, TOWER-2, ELECTRONIC CITY
PHASE-1, WEST BANGALORE-560100, AS PER MEMO
DATED 26.09.2026 FILED BY ADVOCATE FOR
RESPONDENT, VIDE ORDER DATED 28.09.2026
…RESPONDENT
Digitally signed
by VEERENDRA
KUMAR K M
Location: High
Court of
Karnataka
(BY MS. TANMAYEE RAJKUMAR, ADVOCATE FOR
MS. MANASA ANANTHAN, ADVOCATE)
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ITA No. 338 of 2013
THIS ITA IS FILED UNDER SECTION 260-A OF INCOME TAX
ACT 1961 PRAYING TO ALLOW THE APPEAL AND SET ASIDE THE
ORDER PASSED BY THE INCOME-TAX APPELLATE TRIBUNAL,
BANGALORE IN ITA No.1129/Bang/2011 DATED 28/02/2013 AND
CONFIRM THE ORDER PASSED BY THE DISPUTE RESOLUTION
PANEL CONFIRMING THE TRANSFER PRICING ADJUSTMENT BY
THE TRANSFER PRICING OFFICER AND CONSEQUENTLY
CONFIRM THE ORDER OF ASSESSMENT PASSED BY THE
ASSISTANT COMMISIONER OF INCOME TAX, CIRLCE 11(5),
BANGALORE & ETC.
THIS INCOME TAX APPEAL HAVING BEEN HEARD AND
RESERVED FOR JUDGMENT, COMING ON FOR PRONOUNCEMENT
THIS DAY, JUDGMENT WAS PRONOUNCED AS UNDER:
CORAM: HON'BLE MR. VIBHU BAKHRU, CHIEF JUSTICE
and
HON'BLE MRS. JUSTICE K.S. HEMALEKHA
C.A.V. JUDGMENT
(PER: HON'BLE MR. VIBHU BAKHRU, CHIEF JUSTICE)
1. The Revenue has filed the present appeal under Section
260A of the Income Tax Act, 1961 [ the Act ], impugning an order
dated 28.02.2013 [ impugned order ] passed by the learned
Income-Tax Appellate Tribunal, Bengaluru [ ITAT ] in ITA
No.1129/Bang/2011, in respect of assessment year [ AY ] 2007-08.
2. The said appeal was preferred by the respondent
[ Assessee ] against the Assessment Order dated 20.09.2011
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ITA No. 338 of 2013
passed by the Assessing Officer [ AO ] under Section 143(3) read
with Sections 144C(5) and 144C(8) of the Act, pursuant to the
directions dated 02.09.2011 issued by the Dispute Resolution
Panel [ DRP ].
3. The present appeal was admitted on 24.03.2014 on the
following questions of law as projected by the Revenue.
“ 1. Whether on the facts and in the
circumstances of the case and in law the Tribunal
was right in super imposing the decisions of the
other benches and the decision of the ITAT while
rejecting the comparables ( (i) Accel Transmatic
Limited, (ii) Avani Cimcon Technologies Limited,
(iii) Celestial Labs Limited, (iv) KALS Information
Systems Limited, (v) Lucid Software Limited, (vi)
Infosys Technologies Limited, (vii) Wipro Limited –
IT Segment and (viii) Tata Elxsi Limited) without
appreciating the fact that selection of comparables
in a case depends on assessee specific FAR
analysis and recorded a perverse finding?
2. Whether on the facts and in the
circumstances of the case and in law the Tribunal
was right in directing that the segmental financials
have to be considered as against the enterprise
financials without appreciating the fact that at the
enterprise level the comparable satisfied all the
filters applied by the Transfer Pricing Officer and
recorded a perverse finding?
3. Whether on the facts and in the
circumstances of the case and in law the Tribunal
was right in directing that segmental financials
have to be considered as against the enterprise
level financials without appreciating the fact the
Transfer Pricing Officer attracted the enterprise
level financials as against the segmental financials
with which he started, on the basis of the
information gathered under Section 133(6) of the
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ITA No. 338 of 2013
Act and detailed analysis thereof and recorded a
perverse finding?
4. Whether on the facts and in the
circumstances of the case and in law the Tribunal
was correct in rejecting M/s. Lucid Software
Limited as a comparable by placing reliance on
the order in the case of the other assessee passed
by the Mumbai ITAT without taking into
consideration the finding recorded by the Transfer
Pricing Officer for selecting as a comparable and
recorded a perverse finding?
5. Whether on the facts and in the
circumstances of the case and in law the Tribunal
was justified in fixing the related party transaction
filtered at 15% of the total revenue without going
into the specific facts in the case of the Tax Payer
and without adducing the basis for arriving at such
cut-off at 15% and recorded a perverse finding?
6. Whether on the facts and in the
circumstances of the case and in law the Tribunal
was right in excluding Infosys Technologies
Limited and Wipro Limited from the list of
comparables due to premium branding without
taking into consideration that brand is not a
variable to determine the profit margin and
recorded a perverse finding?
7. Whether on the facts and in the
circumstances of the case and in law the Tribunal
was correct in not appreciating the law laid down
by the ITAT Vizag in the case of LG Polymers
India Limited , wherein it held that "...brand is only
one of the factors affecting profitability and not the
only factor which affects profitability” and recorded
a perverse finding?
8. Whether on the facts and in the
circumstances of the case and in law the Tribunal
was right in excluding Tata Elxsi Limited as a
comparable on the ground that comparable is
equal to product development, when the
comparable was in software development like
assessee and only the segmentals were
considered and recorded a perverse finding?
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ITA No. 338 of 2013
9. Whether on the facts and in the
circumstances of the case and in law the Tribunal
was justified in allowing the deduction claimed
under Section 10A of the Act by the assessee in
respect of recruitment charges while re-
allocating the entire expenses on the basis of
turnover of 10A and non 10A units by the
Assessing Officer, when the assessee has failed
to provide the details of the employees recruited to
STPI and non-STPI units alongwith the
expenditures incurred on such recruitments?
10. Whether on the facts and in the
circumstances of the case and in law the Tribunal
was justified in allowing the deduction claimed
under Section 10A of the Act by the assessee with
regard to the travel and conveyance charges while
re-allocating the entire expenses on the basis of
turnover of 10A and non 10A units by the
Assessing Officer when the assessee has not
maintained a list of expenditures incurred on all
such employees of the 10A units who have
travelled outside on projects or used cars locally or
utilized the per-diem expenses and recorded a
perverse finding? ”
4. This Court dismissed the present appeal, inter alia , referring
to the decision of this Court dated 25.06.2018 in ITA No.536/2015
c/w ITA No.537/2015, captioned Prl. Commissioner of Income
Tax and another v. M/s. Softbrands India Pvt. Ltd .
5. The Revenue preferred a Special Leave Petition before the
Supreme Court against the order dated 12.07.2018, which the
Supreme Court considered as part of a batch of matters, tagged
with the appeal arising out of this Court’s decision in Prl.
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ITA No. 338 of 2013
Commissioner of Income Tax and another v. M/s. Softbrands
India Pvt. Ltd .( supra ). The Supreme Court, inter alia , held that the
question whether the arm’s length price [ ALP ] had been
determined by following the provisions of the Act and the Rules
made thereunder would also give rise to questions of law. By its
judgment dated 19.04.2023, the Supreme Court set aside the order
dated 12.07.2018 and remitted the present appeal to this Court for
being decided afresh in the light of the observations made therein.
6. The present appeal is required to be considered, bearing in
mind the observations made by the Supreme Court in Sap Labs
1
India (P) Ltd. v. Income Tax Officer (and other appeals) .
7. Concededly, questions No. 9 and 10, as projected above, do
not survive, as they do not relate to Transfer Pricing. As rightly
contended by the learned counsel for the parties, this Court, by its
judgment dated 12.07.2018, had held that the allocation of
recruitment costs between the STPI and non-STPI units was just
and fair, and that no substantial question of law arises insofar as
the impugned order relates to travel and conveyance expenses.
1
(2023) 454 ITR 121 (SC); [2023] 149 taxmann.com 327 (SC)
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ITA No. 338 of 2013
8. In view of the above, this Court heard arguments and
contentions on the other questions as projected.
9. The Assessee filed its original return of income for the AY
2007-08 on 30.10.2007, declaring a total income as Rs.Nil.
Subsequently, on 10.07.2008, it filed a revised return of income
consequent to the amalgamation sanctioned by this Court by an
order dated 16.11.2007, declaring an income of ₹17,57,97,532/-.
The said return was processed under Section 143(1) of the Act on
17.03.2009. The case was selected for scrutiny and a notice dated
10.09.2008 was issued under Section 143(2) of the Act.
10. The Assessee is engaged in the business of providing
Software Development and Consultancy Services and in
developing, distributing and maintaining information technology
related products and services.
11. Since the Assessee had entered into international
transactions, the AO referred the matter to the Transfer Pricing
Officer [ TPO ] to determine the ALP.
12. The learned TPO passed an order dated 30.09.2010 under
Section 92CA of the Act making certain Transfer Pricing
Adjustments, entailing an addition of ₹ 39,73,03,044/-. The tabular
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ITA No. 338 of 2013
statement setting out the summary of the adjustments is set out
below:
Segment Arm’s Length price Price shown Adjustment
Provision of
Software
Development
Services
Rs.276,74,06,586/- Rs.222,46,62,941/- Rs.38,20,29,316/-
Support services Rs.9,79,04,650/- Rs.8,26,30,922/- Rs.1,52,73,728/-
Total Rs.39,73,03,044/-
13. The learned TPO rejected the transfer pricing studies
furnished by the Assessee and determined the ALP based on the
comparable entities as found using the filters.
14. The learned TPO used the Transaction Net Margin Method
[ TNMM ] as the most appropriate method, and it determined the
markup on costs as the Profit Level Indicator [ PLI ]. A tabular
statement listing comparable companies selected by the Assessee
along with the respective values of PLI are set out below:
Sl.No. Name of the Company Mark up on cost
1. Bodhtree Consulting Ltd 18%
2. FCS Software Solutions Ltd 14%
3. Goldstone Technologies Ltd 3%
4. Larsen & Toubro Infotech Ltd. 11%
Melstar Information Technologies
5. 0%
Ltd
6. Orient Information Technology -6%
7. Powersoft Global Solutions Ltd 19%
8. SIP Technology & Exports Limited 25%
9. Sonata Software Ltd 9%
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ITA No. 338 of 2013
10. Synetairos Technologies Limited 11%
11. Trident Info-tech Corporation Ltd 66%
12. VJIL Consulting Limited 7%
Akshay Software Technologies
13. 7%
Limited
Cambridge Technology Enterprises
14. 21%
Ltd
15. ICRA Techno Analytics Ltd 15%
16. Mindtree Consulting Limited 11%
17. Computech International Limited 7%
18. Karuturi Networks Ltd 4%
Arithmetic Mean 13%
15. The TPO did not accept the transfer pricing studies and
selected the following companies as comparables.
Mark up (%age)
Sl. No. Name of the Company
Unadjusted WC
adjusted
1. Accel Transmatic Ltd., (Segment) 21.11 20.82
2. Avani Cimcom Technologies Ltd 52.59 51.79
3. Celestial Labs Ltd. 58.35 54.88
4. Datamatics Ltd 1.38 0.12
5. E-Zest Solutions Ltd 36.12 36.70
25.31
25.73
Flextronics Software Systems Ltd.
6.
(Segment)
7. Geometric Ltd. (Segment) 10.71 10.33
Helios & Matheson Information
8.
Technology Ltd.
36.63
35.03
9. iGate Global Solutions Ltd 7.49 6.33
10. Infosys Technologies Ltd 40.30 39.62
11. Ishir Infotech Ltd. 30.12 31.07
12. KALS Information Systems Ltd 30.55 24.10
13. LGS Global Ltd 15.75 15.86
14. Lucid Software Ltd 19.37 17.74
15. Media Soft Solutions Pvt. Ltd 3.66 2.31
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ITA No. 338 of 2013
16. Megasoft Ltd 60.23 51.94
17. Mindtree Ltd 16.90 16.06
18. Persistent Systems Ltd. 24.52 24.11
19. Quintegra Solutions Ltd. 12.56 9.94
20. R.S.Software (India) Ltd. 13.47 13.84
21. R Systems International Ltd. (Segment) 15.07 13.95
Sasken Communication Technologies
22.
Ltd. (Segment)
22.17
21.77
23. S I P Technologies & Exports Ltd 13.90 11.42
24. Tata Elxsi Ltd (Segment) 26.51 26.55
25. Thirdware Solutions Ltd. (Segment) 25.12 22.21
26. Wipro Ltd. (Segment) 33.65 35.16
ARITHMETIC MEAN 25.14 23.84
16. The learned ITAT accepted the Assessee’s objections in
regard to inclusion of certain companies as comparables as well as
in regard to certain filters.
17. We may now proceed to examine the questions as projected
by the Revenue.
18. The first question relates to the ITAT accepting the
Assessee’s objections in regard to 8 comparables.
i. Re. Accel Transmatic Ltd. [ Accel]
19. The ITAT excluded Accel Transmatic Ltd. [ Accel ], following
the earlier decision of the learned ITAT in Trilogy E-Business
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ITA No. 338 of 2013
2
Software India Pvt. Ltd . The learned ITAT also relied upon the
decision in Telcordia Technologies India (P.) Ltd. v. Assistant
3
Commissioner of Income-tax, Cir 3(3), Mumbai for excluding
.
certain other comparables
20. A plain reading of the impugned order indicates that the
Assessee’s objections regarding the inclusion of Accel as a
comparable were accepted, as it was found to be functionally
different. The impugned order notes the Assessee’s contention that
the annual report for the financial year [ FY ] 2005-2006 indicated
the business activities of the said company as under:
“In regard to Accel Transmatics Ltd. the assessee
submitted the company profile and its annual
report for financial year 2005-06 from which the
DRP noted that the business activities of the
company were as under.
(i) Transmatic system - design, development
and a panuacture of multi function kiosks Queue
management system, ticket vending system
(ii) Ushus Technologies -. offshore
development centre for embedded software, net
work system, imaging technologies, outsourced
product development
(iii) Accel IT Academy (the net stop for
engineers)-training services in hardware and
networking, enterprise system management,
embedded system, VLS! designs, CAD/CAM/BPO
(iv) Accel Animation Studies software services
for 2D/3D animation, special effect, erection, game
asset development.”
2
Order dated 23.11.2012 passed in ITA No.1054/Bang/2011
3
Order dated 11.05.2012 passed in ITA No.7821 (MUM) of 2011
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ITA No. 338 of 2013
21. The Revenue does not dispute that Accel’s activities include
Accel IT Academy, which provides training services. The
Assessee is not engaged in providing any such services. It is also
not disputed that the Revenue’s appeal against the ITAT’s decision
in Trilogy E-Business ( supra ) was dismissed by this Court by an
order dated 10.07.2018 passed in ITA No.171/2013, which has not
been carried further, and that no appeal appears to have been
preferred against the decision in Telcordia ( supra ).
22. The learned ITAT’s finding that Accel is functionally different,
cannot be interfered with by this Court, as the said finding is one of
fact and cannot by any stretch be stated to be perverse.
ii. Re. Avani Cincom Technologies Ltd.
23. The learned ITAT accepted the Assessee’s objection
regarding inclusion of Avani Cincom Technologies Limited [ Avani ]
as a comparable, inter alia , on the ground that the company had
developed a software product named “DXchange”. Its revenue
thus included sales of software products; that is, from a source
other than rendering Software Services.
24. The learned ITAT also referred to its decision in Telcordia
( supra ) where Avani was rejected as an entity comparable with a
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ITA No. 338 of 2013
company engaged in IT services. Additionally, it was noted that
annual accounts for the FY 2006-07 reported an abnormally high
operating margin as compared to other years. The tabular
statement indicating the operating margins of Avani is set out
below:
Particulars Fys 05-06 06-07 07-08 08-09
Operating Revenue 21761611 35477523 29342809 28039851
Operating Expns. 16417661 23249646 23359186 31108949
Operating Profit 5343950 12227877 5983623 (3069098)
Operating Margin 32.55% 52.59% 25.62% -9.87%
25. The question whether Avani’s Income could be considered
as comparable to a company rendering IT services was also
considered by the Division Bench of the Delhi High Court (of which
one of us, Vibhu Bakhru J, was a member) in Alcatel Lucent India
4
Ltd., v. Deputy Commissioner of Income Tax . The said
decision referred to information available on the company's
website, which clearly indicated that it was a product-oriented
company and that its product “DXchange” was available in three
versions. In view of the above, the ITAT’s finding that the
functional profile of Avani is not comparable with the Assessee,
which is largely engaged in providing software services, cannot be
4
[2024]167 taxmann.com 595(Delhi)
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ITA No. 338 of 2013
interfered with in the present appeal. The said finding does not give
rise to any substantial question of law.
iii. Re. Celestial Labs Ltd.[ Celestial]
26. The learned ITAT found that the said company was involved
in research and development. It referred to its director's report,
where it was found that the company applied for income tax
concessions for in-house R&D expenditure. It referred to the
decision of the Mumbai Bench of the learned ITAT in Teva Pharma
5
Private Ltd. v. Additional CIT for AY 2007-08, which reflected
that the company had developed a de novo drug design tool,
“CELSUITE”, related to drug discovery. Undisputedly, the said
company was involved in the research of pharmaceutical products.
27. The Assessee also pointed out that the said company
provides software product services as well as bioinformatics
services, and one of its objections was that the segmental data is
not available.
28. According to the Revenue, the learned ITAT erred in
directing exclusion of the said company as the TPO had issued a
notice under Section 133(6) of the Act and the learned TPO’s order
5
ITA No.6623/Mum/2011
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ITA No. 338 of 2013
indicates that Celestial, had responded to the said notice by stating
that it was mainly in software development services.
29. The learned TPO had also raised specific queries with regard
to the statements made in the draft red herring prospectus and the
company had responded to the same, inter alia , stating as under:
“With reference to our earlier letter dated 6"
February 2010 we further clarify that the name of
the company was changed as Celestial Labs
Limited from Celestial Technologies Limited in the
year 2004. Till the year 2007-08 mainly we have
been working for developing the software tools
and applying to offer the services in the field of bio
technology, pharmaceutical and health care
industry, The developed tool has been offered as
a customized tool in the field of software
development. Although the developed tool as a
product for us , but
mainly we provided the services as software
development. From 2009-10 we are focusing to
manufacture industrial enzymes, herbal and
allopathic formulations.”
30. On the aforesaid basis, the TPO concluded that Celestial
was mainly into software development services.
31. It is material to note that no segmental financials are
available or referred to by the TPO. The learned TPO rested its
decision solely on the response to a notice issued under Section
133(6) of the Act. It is material to note that the learned TPO had
called upon the said company to give details of the revenues by
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ITA No. 338 of 2013
way of software products, either by purchase of software or
development, which were used in customisation services for the FY
2006-07 and FY 2007-08 respectively. In response to the said
query, the said company had provided the details of revenue as
under:
(Amount in Rs.)
Financial Year 2006-07 2007-08
Revenue from customized
services through inhouse
developed products
50,75,100 20,21,12,145
Revenue from third party
Nil Nil
products
Total 50,75,100 20,21,12,145
32. On the basis of the aforesaid response, the learned TPO
concluded that the revenue from in-house development product
was only ₹50,75,100/- for the FY 2006-07 which was only 3.6% of
its operating revenues. However, a plain reading of the query
indicates that the TPO sought details of revenues from customised
services. However, there was no segmental reporting. The
website of the company indicated that “it had a decade of
experience in Insilico Drug Discovery and Development, and
contract research services”.
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ITA No. 338 of 2013
33. Celestial also claimed it supported Pharma, Bio-pharma, and
Biotech manufacturing with customised IT solutions, as well as
contract research work. It was also involved in R&D, commercial
production and marketing of enzymes and nutraceuticals.
34. Celestial, in its response to the statements made on the
website, clearly stated that until 2007-08, it had been developing
software tools and applying them to offer services in biotechnology,
pharmaceuticals, and the healthcare industry. It claimed that
although it had developed a tool as a product, it had mainly
provided services as software development and that from the year
2009-10 it was focusing on the manufacture of industrial enzymes,
herbal and allopathic formulations.
35. Thus, it is clear that Celestial was involved in a specialised
industry. As per its website, it had a decade of experience in
“Insilico Drug Discovery and Development, and contract research
services”.
36. Although Celestial had indicated its revenues from
customised services and in-house development products, it did not
provide any segment reporting for drug discovery and development
or contract research services. Thus, the learned ITAT found that
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ITA No. 338 of 2013
there was no clear basis for the TPO to conclude that the company,
Celestial, was engaged in the business of providing software
development services.
37. It is clear from the above that the functional profile of
Celestial is materially different from that of the Assessee and thus
there is no error in the learned ITAT's decision to direct its
exclusion from the list of comparable entities.
iv. Re. Lucid Software Ltd [Lucid]
38. The said company had developed a product named
“Muulam”, which is used for civil engineering structures. The
product development expenditure is also substantial. In view of the
above, the learned ITAT found that the said company was
functionally dissimilar. Further, its segment details were
unavailable.
39. The learned counsel appearing for the Revenue submitted
that the said company had in response to the notice under Section
133(6) stated that it was a pure software development services
company and there was no reason to disbelieve the same.
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ITA No. 338 of 2013
40. However, the company's website clearly indicated that it was
a provider of “leading edge software products and services to the
global NDT and material sciences industry”. There was no dispute
that its balance sheet also expressly indicated substantial product
development expenditure. It also used a product shown as “Lucid
Online Exam”. Thus, clearly there were grounds to hold that the
company was not a company purely rendering software
development services. Concededly, no segment financials were
available for different segments. Thus, the decision of the ITAT to
reject the same cannot be faulted.
v. Re. KALS Information Systems Ltd. [KALS]
41. The Assessee had objected to the inclusion of KALS on the
ground that its salary expenses were less than 25%. The company
was a product company and not a pure software development
company. Further, the segmental accounts were also not
available.
42. The learned TPO had relied on the said company's response
to the notice issued under Section 133(6) of the Act. The
Assessee has also pointed out that KALS, had income from
revenue from sale of products and training services and the share
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ITA No. 338 of 2013
of revenues from trading in software and training exceeded 25% of
the total income. These figures were culled out from the annual
report.
43. The learned TPO had relied on the company’s response
received to the notice under Section 133(6) of the Act, wherein the
company had stated that “the core of its business may be classified
as that of Pure Software Development service Provider”.
44. The company also claimed that the revenue from ready
made object libraries was only about 0.33% to 3% in the year
2005-06 and 2006-07 and its revenue from domestic training
activities contributed only 0.7% to 8.56% in the years 2005-06 and
2006-07. However, there were no segmental financials available.
45. Additionally, it also claimed that in most cases they executed
projects through the entire Software Development Life Cycle
[ SDLC ] which included delivery, testing as well as training.
However, there is no dispute that it consumed software inventory to
the extent of ₹34,85,914/-, which was substantially higher than the
percentages as indicated by the company in its response to the
notice issued under Section 133(6) of the Act. In the aforesaid
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ITA No. 338 of 2013
circumstances, the ITAT accepted the Assessee’s objections to the
inclusion of the said company.
46. The question whether the said company could be considered
as a comparable to a software company is also covered by the
decision of the Delhi High Court in Commissioner of Income Tax,
6
International Taxation v. UT Starcom Inc. (India Branch) ,
whereby the said Court had dismissed the appeal arising from the
decision of the ITAT in UT Starcom Inc. (India Branch) v. DDIT,
7
Circle 2(2), New Delhi . Thus, we find no infirmity in the learned
ITAT’s decision to exclude KALS from the list of comparables.
vi. Re. Infosys Technologies Ltd. [ Infosys ]
47. The learned ITAT found that Infosys was not a comparable
entity for several reasons. First, the company had substantial
intangible assets, and its brand value alone was valued at ₹22,915
crores. Infosys had a premium brand, which would have a bearing
on its revenues. Further, it was a giant company, and its revenue
was more than ₹13,145 crores. Its expenditure on advertising and
promotion and on R&D was also ₹69 crores and ₹167 crores,
respectively. The Assessee's revenue was relatively insignificant,
6
[2018] 95 taxmann.com 604 (Delhi)
7
IT Appeal No.5848 (Delhi) of 2011 for AY 2007-08
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ITA No. 338 of 2013
and it incurred no expenditure on sales or promotion, as it was
essentially providing services to its associated enterprises . Thus,
Infosys could not be considered comparable to the Assessee on
the basis of FAR analysis.
48. The learned ITAT also noted that the question was covered
by the decision of the Delhi Bench of the ITAT in Agnity India
Technologies Private Limited (ITA No.3856/Del/2010), which has
since been affirmed by the Delhi High Court in Commissioner of
8
Income-tax v. Agnity India Technologies (P.) Ltd. Undeniably,
a company's size, as well as its brand or IPR, would have a
bearing on revenue. In view of the above, we find no infirmity with
the decision of the learned ITAT in excluding Infosys as a
comparable.
vii. Re. Wipro Ltd. [ Wipro ]
49. The said company is a diversified company, and the learned
ITAT accepted that 67% of its sales related to products which
command a premium, resulting in higher profitability. Undisputedly,
the turnover of Wipro is also extremely large as compared to the
Assessee. Thus Wipro cannot be considered as a comparable
entity.
8
[2013]36 taxmann.com 289 (Delhi)
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50. The learned counsel appearing for the Revenue contended
that the brand or the magnitude of turnover is irrelevant to the
determination of the profit margin. However, we find no merit in that
contention. The size of a company is also relevant when
considering a comparable entity. A large company has a different
FAR profile than a small entity. Whilst TNMM is tolerant of
variations, it does not accommodate cases where the disparity in
size is extremely large. Such entities cannot be considered a
comparable for the purpose of determining the ALP. The size of the
company may significantly alter the cost structure. Considerable
expenditure on R&D and brand development would have a bearing
on the margins.
51. Thus, there is no infirmity with the decision of the ITAT in
excluding Wipro from the list of comparables.
viii. Re. TATA Elxsi Limited. [Tata Elxsi]
52. The learned ITAT excluded TATA Elxsi as a comparable on
the ground that it is a niche product company and therefore cannot
be considered comparable on FAR analysis. The segmental
details of the said company are also not available.
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53. Concededly, the question of excluding Tata Elxsi is also
covered by this Court's decision in Sap Labs India Private
9
Limited v. Income Tax Officer . In the said decision this Court
has observed as under:
“28.4 While directing the exclusion of Tata Elxsi
Limited, the Tribunal, upon examining its annual
report, recorded a finding that the company was
engaged in diversified activities, including
embedded systems, product design, industrial
design services, engineering services, visual
computing laboratories, and system integration
and support services. Under these broad
segments, the company was found to be carrying
on multiple diversified product design, engineering
design, and visual computing activities. On that
basis, the Tribunal concluded that the company
was functionally dissimilar to the assessee and,
therefore, not comparable.
28.5 Similarly, while excluding Infosys
Technologies Limited, the Tribunal recorded that
the company is a market leader possessing
significant brand value, substantial research and
development activities, and valuable intangible
assets. Placing reliance upon the judgment of the
High Court of Delhi in the case of Commissioner of
Income-tax vs. Agnity India Technologies (P.) Ltd.,
[2013] 219 Taxman 26 (Delhi), the Tribunal held
that Infosys Technologies Limited could not be
regarded as a suitable comparable.
28.6 We find that the findings recorded by the
Tribunal are in conformity with the provisions of
Section 92C of the Act and Rule 10B of the Rules.
The Revenue has neither pleaded nor
demonstrated that the said findings suffer from
perversity. In the absence of any demonstrated
perversity, the findings recorded by the Tribunal
remain findings of fact and do not give rise to any
substantial question of law.”
9
ITA No.10/2011 and connected matters decided on 28.08.2026
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ITA No. 338 of 2013
Question Nos.2 and 3
54. The said questions are general questions and it would not be
apposite to answer the same without reference to the specific
instances where enterprise financials are rejected.
55. In the present case, the Assessee as well as the learned
TPO had determined TNMM as the most appropriate method for
determining the ALP.
56. Section 92C(1) of the Act requires the ALP in relation to an
international transaction to be determined by an appropriate
method as prescribed. Clause (e) of Rule 10B(1) of the Income Tax
Rules, 1962 prescribes TNMM. The said clause is set out below:
“(e) transactional net margin method, by which, -
(i) the net profit margin realised by the
enterprise from an international transaction [or a
specified domestic transaction] entered into with
an associated enterprise is computed in relation to
costs incurred or sales effected or assets
employed or to be employed by the enterprise or
having regard to any other relevant base;
(ii) the net profit margin realised by the
enterprise or by an unrelated enterprise from a
comparable uncontrolled transaction or a number
of such transactions is computed having regard to
the same base;
(iii) the net profit margin referred to in sub-
clause (ii) arising in comparable uncontrolled
transactions is adjusted to take into account the
differences, if any, between the international
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ITA No. 338 of 2013
transaction [or the specified domestic transaction]
and the comparable uncontrolled transactions, or
between the enterprises entering into such
transactions, which could materially affect the
amount of net profit margin in the open market;
(iv) the net profit margin realised by the
enterprise and referred to in sub-clause (i) is
established to be the same as the net profit margin
referred to in sub-clause (iii);
(v) the net profit margin thus established is then
taken into account to arrive at an arm's length
price in relation to the international transaction [or
the specified domestic transaction];”
57. It is clear from the plain language of clause (e) that the net
profit margin realised by an enterprise from an international
transaction with an associated enterprise is to be first computed
and compared with “the net profit margin realised by the enterprise
or by an unrelated enterprise from a comparable uncontrolled
transaction or a number of such transactions.” Therefore, it is
essential to ascertain a comparable uncontrolled transaction. In
cases where an enterprise which is selected for purposes of
comparing the PLI of the tested entity has various segments, the
uncontrolled transaction would be the segment that is, functionally
similar to the tested entity. Comparing the profit margins of an
enterprise that carries on business activities that are not
functionally similar to the tested entity would not be appropriate.
However, if certain business activities carried on by such entities
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ITA No. 338 of 2013
are similar to the activities carried on by the tested entity, the profit
margins of the same may be compared with the profit margins of
the tested entity to determine the ALP. However, for this purpose, it
would be necessary to ensure credible information to determine the
profit margins arising from such similar activities. This would be
possible only if segmental financial statements are available.
58. There is no impediment for the TPO to ascertain segmental
accounts by calling for information by issuing notices under Section
133(6) of the Act. However, it would be essential to ensure that
such information is credible and duly verified. In the absence of
audited segmental accounts, it may be difficult to ascertain the
reliability of the financial information as submitted without due
reconciliation with the reported financial statements. Thus, the
question whether the financial information as to a particular
segment or business activity is reliable is essentially a question of
fact to be determined on a case-by-case basis.
Question No.4.
59. The question whether the learned ITAT is correct in
excluding Lucid as a comparable is discussed hereinabove in
question No.1.
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60. The question whether the learned ITAT could rely on an
order passed in case of another assessee must be answered in the
affirmative, provided that the learned ITAT concludes that the
material facts of the case relied upon are similar to the facts
relating to the Assessee. In the context of transfer pricing
adjustments, if the learned ITAT comes to the conclusion that the
business activities carried on by the Assessee in another case are
similar to the business activities carried on by the Assessee, it
would be appropriate for the learned ITAT to take a similar view
unless it finds other reasons to distinguish the case from the earlier
precedent.
Question No.5
61. The learned ITAT had used the Related Party Transaction
[ RPT ] filter of 15% of sales thus, in case of entities where the RPT
exceeded 15% of sales, the same were excluded as comparables.
The learned TPO used a filter where RPT was less than 25% of
revenues. There is no dispute that using RPT as a proper filter may
be necessary to determine uncontrolled transactions. According to
the learned TPO, companies with RPT above 25% were required to
be excluded. Accordingly, 50 selected entities were eliminated as
comparables. The learned ITAT further narrowed the RPT filter to
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ITA No. 338 of 2013
15% of revenues. Undisputedly, the learned TPO had not given
any specific reasons for fixing 25% as the RPT filter. It is clear that
the said filter was used to ensure that the financials of the selected
entities are representative of uncontrolled transactions. Further
narrowing the RPT filter, if sufficient comparables can be identified,
would be appropriate, considering that RPTs cannot be accepted
as uncontrolled. The said issue is also covered by the decision of
the Co-ordinate Bench of this court in Sap Labs India Private
Limited v. ITO : order dated 28.08.2026 passed in ITA No.10/2011
and other connected matters. In the said decision, the court
observed as under:
“13.3 Where the taxpayer has selected
comparable companies by applying a 15% RPT
Filter and there is no finding that such
comparables fail to satisfy the requirements of the
Act or the Rules, there is no rational basis for
increasing the RPT threshold to 25%. Where
comparable companies with a lower percentage of
related party transactions are available, adoption
of a lower RPT Filter results in a narrower
tolerance and correspondingly reduces the
influence of related party transactions on the
profitability of the comparable companies. In such
circumstances, adoption of a 25% RPT Filter
would be without any rational basis.
13.4 At the same time, an RPT Filter of 25%
cannot be rejected as impermissible in all cases.
Where either the taxpayer or the TPO
demonstrates that an adequate number of
comparable companies satisfying a lower RPT
threshold are not available, there can be no
objection to adopting a higher RPT Filter. The
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ITA No. 338 of 2013
enhancement of the RPT threshold up to 20% or
25% must, however, be founded upon a specific
finding regarding the non-availability of sufficient
comparable companies satisfying a lower RPT
threshold. In the absence of such a finding,
adoption of a 25% RPT Filter merely as a standard
upper tolerance limit is without any rational basis.
13.5 The exercise of determining the appropriate
RPT Filter is necessarily fact-based and depends
upon the availability of comparable companies in
each case. Except for the contention that
interference with the application of a 25% RPT
Filter by the Tribunal is erroneous, the Revenue
has neither pleaded nor demonstrated any
violation of the provisions of the Act or the Rules,
nor any perversity in the findings recorded by the
Tribunal. Consequently, the adoption of a 15%
RPT Filter by the Tribunal cannot be held to be
arbitrary or without basis.”
62. In the present case, there is no cavil that despite narrowing
of the RPT filter to 15%, the search has yielded a sufficient number
of comparable entities.
63. On the facts, we are unable to accept that the learned
ITAT's finding adopting a lower RPT filter of 15% is perverse.
Question No. 5 is, accordingly, answered against the Revenue and
in favour of the Assessee.
Question Nos.6 and 7
64. As noted above, the learned ITAT excluded Infosys and
Wipro as comparables for several reasons including on the ground
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ITA No. 338 of 2013
that the said companies owned valuable IPR. According to the
Revenue, brand cannot be considered as a variable for determining
the profit margin, and therefore, the learned ITAT’s finding in this
regard is perverse. The said contention is without merit. It is well
settled that an established brand and goodwill are intangible assets
that have a vital bearing on revenue margins. The products and
services of a company with an established brand command a
higher price than unbranded products or services.
65. Thus, the revenues of companies that have established the
brand by incurring expenditure on promotional activities over the
years could not be readily considered as comparable with the
revenues of a company that has not incurred any such expenditure
and does not own any established brand.
66. This question has also been considered by the Delhi High
Court in Principal Commissioner of Income Tax-7 v. Oracle
10
(OFSS) BPO Services (P) Limited . In the said case, the court
found no infirmity with exclusion of Wipro on the ground of its brand
value.
10
[2018] 90 taxmann.com 388 (Delhi)
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ITA No. 338 of 2013
67. The relevant extract of the said decision is set out as under:
"As to the exclusion of M/s Wipro Limited, here
too, the Court is of the opinion that the brand value
of an entity has a significant role in its ability to
garner profits and negotiate contracts. Thus, while
considering the comparables, the likelihood of
profits derived or attributable to the brand having
regard to the consistency of the quality of services
that an entity is able to offer would be relevant;
although functionally, the two entities may be
similar in terms of the services or products they
offer, brand does play its own role in price or cost
determination. If this singular aspect is kept in
mind, the ITAT's approach cannot be faulted with.”
68. The said view was also followed in Avaya India (P) Ltd. v.
11
Assistant Commissioner of Income Tax .
69. The Revenue's contention that the brand is not the only
variable affecting revenue is correct. However, it cannot be
disputed that it is an asset that would have a bearing on profit
margins. Thus, we find no perversity in the learned ITAT’s decision
to reject Infosys and Wipro as comparables, inter alia , on the
ground that they hold valuable IPR and have an established brand.
Question No.8
70. The said question relates to exclusion of Tata Elxsi as a
comparable. The question whether the learned ITAT was correct in
11
[2019] 108 taxmann.com 222 (Delhi)
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ITA No. 338 of 2013
excluding the said company as a comparable is discussed
hereinbefore.
71. In view of the said discussion, the learned ITAT cannot be
faulted for excluding Tata Elxsi as a comparable. Question No. 8 is,
accordingly, answered against the Revenue and in favour of the
Assessee.
72. Although we have addressed the questions as raised, in the
given facts of this case they cannot be considered substantial
questions of law.
73. The appeal is accordingly dismissed.
Sd/-
(VIBHU BAKHRU)
CHIEF JUSTICE
Sd/-
(K.S. HEMALEKHA)
JUDGE
KMV/KPS