THE DIRECTOR OF INCOME TAX vs M/S. CISCO SYSTEMS SERVICES

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IN THE HIGH COURT OF KARNATAKA AT BENGALURU

TH
DATED THIS THE 14 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. 113 OF 2015

BETWEEN:

1. THE DIRECTOR OF INCOME TAX
INTERNATIONAL TAXATION
RASHTROTHANA BHAVAN
NRUPATHUNGA ROAD
BANGALORE

2.
THE ASSISTANT DIRECTOR OF INCOME TAX
INTERNATIONAL TAXATION CIRCLE-1(1)
RASHTROTHANA BAHVAN
NRUPATHUNGA ROAD
BANGALORE-560001
…APPELLANTS
(BY SRI E.I. SANMATHI, ADVOCATE)









Digitally
signed by K
P SWETHA
Location:
High Court
of Karnataka
AND:

1. M/S. CISCO SYSTEMS SERVICES
B.V. INDIA BRANCH
DIVYASHREE CHAMBERS
B WING, NO.11
O SHAUGHNESSEY ROAD
OFF LANGFORD ROAD
BANGALORE-560025
…RESPONDENT

(BY SRI NAGESWAR RAO, ADVOCATE,
SRI K. MALLAHARAO, ADVOCATE,
MS. JINITHA CHATERJEE, ADVOCATE &
MS. DIMPY KUMARI, ADVOCATE)

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THIS INCOME TAX APPEAL IS FILED UNDER SEC.260-A OF
INCOME TAX ACT 1961, PRAYING TO FORMULATE THE
SUBSTANTIAL QUESTIONS OF LAW STATED ABOVE & ALLOW THE
APPEAL AND SET ASIDE THE ORDER PASSED BY THE INCOME-
TAX APPELLATE TRIBUNAL, BANGALORE IN IT(TP)A
NO.270/BANG/2014 DATED:17/10/2014 AND CONFIRM THE ORDER
OF THE DRP CONFIRMING THE ORDER PASSED BY THE
ASSISTANT DIRECTOR OF INCOME TAX,(INTERNATIONAL
TAXATION) CIRCLE-1(1), BANGALORE & ETC.
THIS APPEAL, COMING ON FOR HEARING, THIS DAY,
JUDGMENT WAS DELIVERED THEREIN AS UNDER:
CORAM: HON'BLE MR. VIBHU BAKHRU, CHIEF JUSTICE
and
HON'BLE MRS. JUSTICE K.S. HEMALEKHA

ORAL 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 17.10.2014 [ impugned order ] passed by the learned
Income Tax Appellate Tribunal, Bangalore Bench ‘C’, Bangalore
[ ITAT ] in IT(TP)A No.270/Bang/2014 for the Assessment Year[ AY ]
2009-2010.
2. The respondent [ Assessee ] is the Indian branch office of
Cisco Systems Services B.V., a company incorporated in the
Netherlands. The Assessee is engaged in providing software
support services for the development of software tools,

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applications and processes for the internal use of the Cisco group,
and also renders advisory services. The Assessee is remunerated
on a cost plus basis for the said services. The Assessee had filed
its return of income for AY 2009-2010 on 30.09.2009 declaring a
total income of ` 17,67,97,830/-.
3. Since the Assessee had entered into international
transactions with its associated enterprises [ AEs ], the Assessing
Officer [ AO ] made a reference under Section 92CA of the Act to
the Transfer Pricing Officer [ TPO ]. The Assessee furnished a
Transfer Pricing Study [ TP Study ] to establish that its international
transactions were at the Arm’s Length Price [ ALP ]. The Assessee
had selected Transactional Net Margin Method [ TNMM ] as the
most appropriate method and the operating profit to operating cost
as the Profit Level Indicator [ PLI ]. The Assessee had selected
seventeen comparables, whose average margin worked out to
13.18% as against its own margin of 14.82%.
4. The learned TPO rejected the Assessee’s TP Study, inter
alia , on the ground that some of the comparable companies
selected by the Assessee did not ‘stand scrutiny of comparability

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characteristics as enunciated in Rule 10B’ of the Income Tax
Rules, 1962 [ the Rules ] and that the Assessee had not used the
data relating to the current financial year in which the international
transactions were entered into.
5. The learned TPO applied various filters and rejected twelve
of the comparables selected by the Assessee. On an independent
search, the learned TPO included six fresh comparables, and thus
arrived at a final set of eleven comparables, which included
Bodhtree Consulting Limited, Infosys Limited, M/s. KALS
Information Systems Limited and Tata Elxsi Limited (segmental).
The learned TPO treated the foreign exchange fluctuation gain as
non-operating in nature and determined the arithmetic mean of the
margins of the said comparables at 24.32%. After a working capital
adjustment of (-) 1.73%, the learned TPO determined the adjusted
margin at 26.05%. Applying the said margin to the Assessee’s
`
operating cost of 1,95,83,90,000/-, the learned TPO determined
`
the ALP at 2,46,85,50,595/- as against the price of
` 2,24,86,73,636/- received by the Assessee. The learned TPO, by
an order dated 29.01.2013, determined the shortfall at
` 21,98,76,959/- and directed that the same be treated as transfer

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pricing adjustment under Section 92CA of the Act in respect of the
software development services segment.
6. The AO passed a draft assessment order dated 12.03.2013
incorporating the said adjustment. The draft assessment order also
proposed a disallowance of ` 8,13,30,000/- under Section 40(a) of
the Act in respect of the payments made by the Assessee to its
overseas affiliates towards recharge of international assignee costs
and other costs, on which tax had not been deducted at source;
and recomputed the deduction under Section 10A of the Act.
7. The Assessee filed its objections before the Dispute
Resolution Panel [ DRP ]. The DRP, by its directions dated
12.12.2013 issued under Section 144C(5) of the Act, rejected the
Assessee’s objections relating to the transfer pricing adjustment,
including its objections to the inclusion of Bodhtree Consulting
Limited, Infosys Limited, M/s. KALS Information Systems Limited
and Tata Elxsi Limited as comparables and to the treatment of the
foreign exchange fluctuation gain as non-operating in nature. The
DRP, however, accepted the Assessee’s alternate contention that
the expenses excluded from the export turnover were also required

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to be excluded from the total turnover for computing the deduction
under Section 10A of the Act; and, in respect of the margin of
Larsen & Toubro Infotech Limited, directed the TPO to verify
whether depreciation had been treated as an operating
expense,and, if not, to treat it as such.
8. Pursuant to the directions of the DRP, the AO passed the
final assessment order dated 30.01.2014 under Section 143(3)
read with Section 144C of the Act, inter alia , making a transfer
pricing adjustment of ` 21,22,39,238/- (as revised by the TPO after
treating depreciation as an operating expense in computing the
margin of Larsen & Toubro Infotech Limited) and a disallowance of
` 8,13,30,000/-.The AO determined the total income of the
Assessee at ` 39,25,64,487/-.
9. Aggrieved by the final assessment order, the Assessee
preferred an appeal before the learned ITAT. By the impugned
order, the learned ITAT partly allowed the appeal. The learned
ITAT held that the foreign exchange fluctuation gain arising to the
Assessee on realization of trade debtors, payment to creditors,
etc., was operational income; and directed that the Assessee’s

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margin, which worked out to 37.38% on treating the said gain as
operating income, be verified and accepted, if found correct. The
learned ITAT also directed exclusion of Bodhtree Consulting
Limited, Infosys Limited, M/s. KALS Information Systems Limited
and Tata Elxsi Limited from the list of comparables, following its
decision in the case of the Assessee’s affiliate, Cisco Systems
1
(India) Private Limited v. DCIT , and directed the TPO to rework
the PLI of the comparables after including the operating foreign
exchange gains. The learned ITAT did not find it necessary to
adjudicate the Assessee’s challenge to the rejection of certain
comparables by the TPO, as the learned Authorised
Representative of the Assessee had submitted that the same
would be irrelevant once the foreign exchange fluctuation gain is
considered as operating income. The learned ITAT remitted the
issue relating to the disallowance under Section 40(a) of the Act to
the AO for fresh consideration.


1
IT(TP)A No.271/Bang/2014 dated 14.08.2014

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10. Aggrieved by the impugned order, the Revenue has filed the
present appeal. This Court, by an order dated 14.09.2015,
admitted the appeal on the following substantial questions of law:
“1. Whether, on the facts and in the
circumstances of the case, the Tribunal was
justified in allowing relief to the assessee based
on decision of Tribunal in other decisions of Co-
ordinate Benches, which have not reached
finality and ought to have decided the
comparability of the companies on the basis of
specific facts brought on record by the TPO in
the case of the assessee and recorded
perverse findings?

2. Whether, on the facts and in the
circumstances of the case, the Tribunal erred in
directing to include forex gain/loss as income in
the nature of operating income without
ascertaining the nexus with the business
activity of the taxpayer?

3. Whether, on the facts and in the
circumstances of the case the Tribunal erred in
holding that Bodhtree Consulting Ltd., Infosys
Technologies Ltd., Kals Information Systems
Ltd., Tata Elxsi Ltd., cannot be taken as
comparables, being functionally different when
they satisfy all the qualitative and quantitative
filters applied by the TPO and selection of
comparables in a case depends in transfer
pricing on assessee specific FAR analysis and
Tribunal failed to appreciate that the different
year ending filter applied by the TPO is
necessary to exclude companies which do not
have the same or comparable financial cycle as
the tested party and Tribunal the Tribunal
accepted assessee’s comparables without
adducing any reason for the same and
recorded perverse finding?”

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11. This Court, by a judgment dated 16.07.2018, dismissed the
appeal holding that no substantial question of law arose for
consideration, following its decision in Prl. Commissioner of
Income Tax and another v. M/s. Softbrands India Private
2
Limited .
12. The Revenue appealed the said judgment before the
Supreme Court in C.A. No. 9027/2022 arising out of SLP(Civil) No.
22607/2022, and the said appeal was tagged along with a batch of
matters including an appeal arising from the decision in
Softbrands ( supra ). The Supreme Court did not concur with the
view of this Court in Softbrands ( supra ) and held that questions
relating to transfer pricing adjustments may also give rise to
substantial questions of law. It was necessary to consider whether
the provisions of the Act and the rules made thereunder had been
followed while determining the ALP. The Supreme Court allowed
the said batch of appeals in SAP Labs India Private Limited v.
3
Income Tax Officer, Circle 6, Bangalore and remitted the

2

2018 SCC OnLine Kar 2330
3
(2024) 17 SCC 344

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matters to this Court to consider the questions relating to the
transfer prices afresh.
Re:Question No.1
13. Whether, on the facts and in the circumstances of the case,
the Tribunal was justified in allowing relief to the assessee based
on the decision of the Tribunal in other decisions of Co-ordinate
Benches, which have not reached finality and ought to have
decided the comparability of the companies on the basis of specific
facts brought on record by the TPO in the case of the assessee
and recorded perverse findings?
14. Question No.1 is general in nature. There would be no
infirmity in the learned ITAT deciding the questions based on its
earlier decisions, provided the same were rendered in a relevant
factual context. In the present case, the learned ITAT had followed
its decision in Cisco Systems (India) Private Limited ( supra ),
which was rendered in the case of the Assessee’s affiliate,
engaged in a similar line of business, for the same AY.
15. The said question, as projected by the Revenue, does not
give rise to any substantial question of law.

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Re:Question No.2
16. Whether, on the facts and in the circumstances of the case,
the Tribunal erred in directing to include foreign exchange gain /
loss as income in the nature of operating income without
ascertaining the nexus with the business activity of the taxpayer?
17. A plain reading of this question as projected indicates that it
is on an erroneous assumption that the learned ITAT had directed
inclusion of foreign exchange gain and loss as operating income
without ascertaining the nexus of such income with the business
activities of the Assessee.
18. The learned ITAT had noted that the Assessee had given a
break-up of its foreign exchange gain and had specifically excluded
the exchange loss on purchase of fixed assets. The Assessee had
asserted that the foreign exchange fluctuation gain arose from its
operational transactions, such as realisation of trade debtors,
payments to creditors, inter-company cross charges, etc. The
learned ITAT noted that none of the authorities had returned any
finding that the foreign exchange fluctuation gains were relatable to
any capital receipts or outgoings.

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19. In the aforesaid facts, the learned ITAT held that the gains
arising on realisation of trade debtors and payments to creditors
were operational income. The learned ITAT also followed its
decision in Cisco Systems (India) Private Limited ( supra ),
wherein the foreign exchange fluctuation gain arising on realization
of the proceeds for rendering software development services was
held to be a part of the operating income.
20. There is no material on record to doubt the Assessee's claim
that its foreign exchange fluctuations had arisen on account of
realisation of trade debtors and payments to creditors, etc., which
are a part of its operations.
21. A Co-ordinate Bench of this Court, in its decision dated
28.08.2026 captioned SAP Labs India Private Limited (supra)
has held that foreign exchange gain or loss can be treated as
operating only where it has a direct nexus with the international
transaction. In the present case, the Assessee’s operating revenue
was entirely derived from the services rendered to its AE. The
learned ITAT found that the gain arose on realization of trade

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debtors, payments to creditors, etc. and directed that the
Assessee’s margin be verified and accepted, if found correct.
22. In view of the above, no substantial question of law arises in
this regard.
Re: Question No.3
23. Whether, on the facts and in the circumstances of the case
the Tribunal erred in holding that Bodhtree Consulting Ltd., Infosys
Ltd., Kals Information Systems Ltd., Tata Elxsi Ltd., cannot be
taken as comparables, being functionally different when they
satisfy all the qualitative and quantitative filters applied by the TPO
and selection of comparables in a case depends in transfer pricing
on Assessee specific FAR analysis and Tribunal failed to
appreciate that the different year ending filter applied by the TPO is
necessary to exclude companies which do not have the same or
comparable financial cycle as the tested party and Tribunal the
Tribunal accepted Assessee's comparables without adducing any
reason for the same and recorded perverse finding?
24. The question relates to the learned ITAT’s decision to
exclude the following four companies as comparables: M/s.KALS

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Information Systems Limited, Infosys Limited, M/s.Bodhtree
Consulting Limited, and Tata Elxsi Limited.
25. The learned ITAT directed exclusion of the said companies
following its decision in Cisco Systems (India) Private Limited
( supra ), which was rendered in the case of the Assessee’s affiliate
company, engaged in similar activities, for the same AY.
26. A Co-ordinate Bench of this Court in SAP Labs
(KHC) ( supra ) has also held that there is no prohibition against the
ITAT following its earlier decision where the relevant facts remain
the same; the Revenue has not demonstrated that the facts in the
present case are different.
Re: Infosys Limited
27. In Cisco Systems (India) Private Limited ( supra ), the
learned ITAT had excluded Infosys Limited as a comparable on the
ground that the said company was functionally different and it
owned significant intangible assets and had huge revenues from
software products. Thus, on FAR analysis, it was not similar.
28. It is relevant to note that the learned ITAT in the case of
M/s.Cisco Systems (India) Private Limited ( supra ) also referred

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to its earlier decision in M/s. DPLM Software Solutions Limited
v. DCIT , IT(TP)A. No. 1303/Bang/2012 decided on 28.11.2013. In
the said decision, the learned ITAT had accepted the contentions
that Infosys Limited had, inter alia, generated several inventions
and filed for patents in India and USA;had substantial revenues
from software products, the break-up of which was not
available;and had incurred huge expenditure on research and
development.
29. We may also note that the Delhi High Court in
Commissioner of Income-tax v. Agnity India Technologies (P.)
4
Ltd. had held that the size of a company as well as its intangible
assets would have a bearing on its revenues. Thus, we find no
infirmity with the decision of the learned ITAT directing exclusion of
Infosys Limited from the list of comparables on account of
difference in the functional profiles of the two companies.
Re:Tata Elxsi Limited
30. The learned ITAT, in Cisco Systems (India) Private
Limited ( supra ), had followed its earlier decision in the case of that

4
[2013] 36 taxmann.com 289 (Delhi); (2013) 219 Taxman 26 (Delhi)

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assessee for AY 2007-08, wherein wherein the learned ITAT
accepted the contentions of that assessee that Tata Elxsi Limited
operates in the segment of software development services, which
comprises embedded product design services, industrial design
and engineering services and visual computing labs, besides a
system integration services segment; that no break-up of the sub-
services was available; and that the said company had itself, in its
response to a notice under Section 133(6) of the Act, stated that it
cannot be considered as comparable to any other software
services company because of its complex nature. Accordingly, the
learned ITAT found that the said company was functionally
different. A Co-ordinate Bench of this Court, in its decisionin SAP
Labs (KHC) ( supra ) had 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

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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.”

31. Concededly, the issue whether Infosys Limited and Tata
Elxsi Limited are comparable to a company rendering software
development services is covered by the said decision of the Co-
ordinate Bench. Thus, the learned ITAT's decision to exclude
Infosys Limited and Tata Elxsi Limited from the list of comparables
does not give rise to any substantial question of law.

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Re: Bodhtree Consulting Limited
32. Insofar as Bodhtree Consulting Limited is concerned, the
learned ITAT followed its decision in Cisco Systems (India)
Private Limited ( supra ), wherein the said company was held to be
engaged in the business of software products and in providing
open and end-to-end web solutions, software consultancy and
design and development of software using latest technology, and
thus, not comparable to a company rendering software
development services. The said decision had followed the
decisions of the Mumbai Bench of the Income Tax Appellate
5
Tribunal in Nethawk Networks Private Limited v. ITO and Willis
Processing Services (I) P. Ltd. v. Deputy Commissioner of
6
Income Tax-2(3), Mumbai .
33. The Delhi Bench of the Income Tax Appellate Tribunal in
7
Fiserv India Private Limited v. ITO had also found that Bodhtree
Consulting Limited was not comparable to an assessee engaged in
software development services; and the appeal preferred by the

5
ITA No.7633/Mum/2012 dated 06.11.2013; [2014] 41 taxmann.com 250 (Mumbai –
Trib.)
6
IT Appeal Nos.4429 & 4547/Mum/2012 decided on 01.03.2013; [2013] 30

taxmann.com 350 (Mumbai-Trib.)
7
ITA No.1822/Del/2014, decided on 26.06.2015

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Revenue against the said decision was dismissed by the Delhi
High Court in Principal Commissioner of Income Tax v. Fiserv
8
India (P) Ltd. , as it did not give rise to any substantial question of
law. This Court, in its recent decision in Commissioner of Income
Tax-III v. M/s. Torry Harris Business Solutions Private
9
Limited , has also upheld the exclusion of Bodhtree Consulting
Limited from the list of comparables of an assessee rendering
software development services to its AE, for AY 2009-10.
34. A Co-ordinate Bench of this Court in SAP Labs (KHC)
( supra ), while dealing with ITA No.492/2016 for AY 2009-10, has
also declined to interfere with the exclusion of Bodhtree Consulting
Limited and Infosys Limited from the list of comparables on the
ground of functional dissimilarity, holding that the findings of the
learned ITAT were in conformity with Section 92C of the Act and
Rule 10B of the Rules and did not give rise to any substantial
question of law.


8

[2018] 92 taxmann.com 471 (Delhi)
9
NC: 2026: KHC: 50456-DB

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35. The finding of the learned ITAT that Bodhtree Consulting
Limited is functionally not comparable to the Assessee is a finding
of fact, which is based on relevant material, and cannot be
considered as perverse.

Re: KALS Information Systems Limited

36. Insofar as M/s. KALS Information Systems Limited is
concerned, the learned ITAT followed its decision in Cisco
Systems (India) Private Limited ( supra ) which, in turn, had
followed the decision in Trilogy E-Business Software India
10
Private Limited v. DCIT . In the said decision, the learned ITAT
accepted the plea of the assessee in that case that the said
company had revenues from both software development and
software products and was also engaged in providing training, and
found that the conclusions drawn by the TPO on the basis of the
information obtained under Section 133(6) of the Act were contrary
to the annual report of the said company.


10
ITA No.1054/Bang/2011 dated 23.11.2012

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37. The Bombay High Court, in Commissioner of Income Tax-
11
2, Pune v. Principal Global Services (P.) Limited , had upheld
the view of the Tribunal that M/s. KALS Information Systems
Limited was not an apposite comparable to a company engaged in
software development services, as it was also engaged in
developing software products as well as running a training centre
in the previous year relevant to AY 2009-10. A similar view was
also expressed by the Bombay High Court in Commissioner of
12
Income Tax-II, Pune v. PTC Software (I) (P.) Limited , albeit , in
respect of AY 2007-2008.
38. A Co-ordinate Bench of this Court in SAP Labs
(KHC) ( supra ), while dealing with ITA No.44/2015 for AY 2008-09,
had declined to interfere with the exclusion of, inter alia , KALS
Information Systems Limited, Tata Elxsi Limited and Infosys
Limited from the list of comparables, where the learned ITAT had
followed its decision in 3DPLM Software Solutions Limited
( supra ). Thus, the exclusion of M/s. KALS Information Systems

11

[2018] 95 taxmann.com 315 (Bombay)
12
[2016] 75 taxmann.com 31 (Bombay)

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Limited from the list of comparables does not give rise to any
substantial question of law.
39. The question, as framed, also proceeds on the premise that
the learned ITAT failed to appreciate the different year-ending filter
applied by the TPO and had accepted the Assessee’s
comparables without adducing any reasons. The said premise is
not borne out bythe impugned order. The learned ITAT had not
interfered with the filter applied by the TPO for excluding
companies having a different financial year ending; nor had it
directed inclusion of any of the comparables selected by the
Assessee and rejected by the TPO. As noted above, the learned
ITAT did not find it necessary to adjudicate the Assessee’s
challenge to the rejection of such comparables.
40. In view of the above, the decision of the learned ITAT to
exclude M/s. KALS Information Systems Limited, Infosys Limited,
M/s. Bodhtree Consulting Limited and Tata Elxsi Limited from the
list of comparables does not give rise to any substantial question of
law.

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41. In view of the above, we find no merit in the present appeal.
The appeal is, accordingly, dismissed.
42. Pending applications, if any, stand disposed of.


Sd/-
(VIBHU BAKHRU)
CHIEF JUSTICE


Sd/-
(K.S. HEMALEKHA)
JUDGE




KPS
List No.: 2 Sl No.: 10