THE PR. COMMISSIONER OF INCOME-TAX, CIT(A) vs M/S. LG SOFT INDIA PVT. LTD.,

- 1 -
HC-KAR
NC: 2026:KHC:57056-DB
ITA No. 51 of 2021


CNR: KAHC010459932019




IN THE HIGH COURT OF KARNATAKA AT BENGALURU

TH
DATED THIS THE 8 DAY OF OCTOBER, 2026

PRESENT

THE HON'BLE MR. JUSTICE S.G.PANDIT


AND

THE HON'BLE DR. JUSTICE CHILLAKUR SUMALATHA

INCOME TAX APPEAL NO. 51 OF 2021

BETWEEN:

1. THE PR. COMMISSIONER
OF INCOME-TAX, CIT(A)
TH
5 FLOOR, BMTC BUILDING,
80 FEET ROAD, KORAMANGALA,
BENGALURU-560095.

2. THE DEPUTY COMMISSIONER
OF INCOME TAX, CIRCLE-4(1) (1)
ND
2 FLOOR, BMTC BUILDING,
80 FEET ROAD, KORAMANGALA,
BENGALURU-560095.
…APPELLANTS
(BY SRI. E.I. SANMATHI, ADV.)


AND:

M/S. LG SOFT INDIA PVT. LTD.,
EMBASSY TECH SQUARE,
MARATHAHALLI,
SARJAPUR OUTER RING ROAD,
BENGALURU-560103
PAN: AAACL 3009P
…RESPONDENT
(BY SRI. ANKUR P.D., ADV. FOR
SRI K.R. VASUDEVAN, ADV.)

THIS APPEAL IS FILED UNDER SEC.260-A OF INCOME TAX ACT
1961, ARISING OUT OF ORDER DATED 28/05/2019 PASSED IN
IT(TP)A NO.3122/BANG/2018, FOR THE ASSESSMENT YEAR 2014-









Digitally signed by
NANJUNDACHARI
Location: High
Court of Karnataka

- 2 -
HC-KAR
NC: 2026:KHC:57056-DB
ITA No. 51 of 2021


CNR: KAHC010459932019


2015, PRAYING TO 1. FORMULATE THE SUBSTANTIAL QUESTIONS
OF LAW STATED ABOVE; 2. ALLOW THE APPEAL AND SET ASIDE THE
ORDERS PASSED BY THE INCOME TAX APPELLATE TRIBUNAL,
BENGALURU IN IT(TP)A NO.3122/BANG/2018 DATED 28/05/2019
FOR ASSESSMENT YEAR 2014-2015 ANNEXURE-D AND CONFIRM
THE ORDER OF THE DRP CONFIRMING THE ORDER PASSED BY THE
DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-4(1)(1),
BENGALURU AND ETC.

THIS APPEAL, COMING ON FOR ORDERS, THIS DAY,
JUDGMENT WAS DELIVERED THEREIN AS UNDER:

CORAM: HON'BLE MR. JUSTICE S.G.PANDIT
AND
HON'BLE DR. JUSTICE CHILLAKUR SUMALATHA

ORAL JUDGMENT

(PER: HON'BLE MR. JUSTICE S.G.PANDIT)

This appeal is filed by the Revenue under section 260A
of the Income Tax Act,1961 assailing the order dated
28.05.2019 in IT(TP)A No.3122/Bang/2018 passed by the
Income Tax Appellate Tribunal ‘C’ Bench, Bangalore for the
assessment year ‘2014-2015’.

2. The appeal was admitted on 10.06.2021 to
examine the following substantial questions of law:
“i) Whether on the facts and in the
circumstances of the case, the Tribunal is right in law
in seeking exact comparability, while searching for
comparable companies of the assessee under TNMM

- 3 -
HC-KAR
NC: 2026:KHC:57056-DB
ITA No. 51 of 2021


CNR: KAHC010459932019


whereas the requirement of law and international
jurisprudence require seeking similar comparables
companies?

ii) Whether on the facts and in the
circumstances of the case, while seeking the exact
comparability the Tribunal is right in law in imposing
condition beyond law whereas the requirement of law
is to acknowledge only those differences that are likely
to materially affect the margin?

iii) Whether on the facts and in the
circumstances of the case, the Tribunal was right in
not acknowledging that determination of ALP by
carrying out comparability analysis of the comparable
companies is an art and not exact science as no two
companies are exactly same?”

3. A Coordinate bench of this Court in ITA
No.10/2011and connected appeals in SAP Labs India (P)
Ltd. V. Income Tax Officer, vide judgment dated
28.08.2026, in an identical fact situation has, on a detailed
discussion recorded its conclusion as follows:
“E. CONCLUSION
(i) The Court concludes that Chapter X of the
Income-tax Act, 1961 constitutes a self-contained

- 4 -
HC-KAR
NC: 2026:KHC:57056-DB
ITA No. 51 of 2021


CNR: KAHC010459932019


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

- 5 -
HC-KAR
NC: 2026:KHC:57056-DB
ITA No. 51 of 2021


CNR: KAHC010459932019


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.

- 6 -
HC-KAR
NC: 2026:KHC:57056-DB
ITA No. 51 of 2021


CNR: KAHC010459932019



(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.”

4. The Coordinate bench of this Court in SAP Labs
India (P) Ltd. (supra) has held 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. Such determination must strictly
conform to the requirements of Rule 10B of the Rules. The
said finding would be aptly applicable to the facts of the
present case. The Tribunal has excluded M/s Infosys
Ltd., M/s Persistent Systems Ltd. and M/s Thirdware
Solutions Ltd., for the reason that the aforesaid
companies are functionally dissimilar to the assessee. It is
noticed that M/s Infosys Ltd. is functionally dissimilar

- 7 -
HC-KAR
NC: 2026:KHC:57056-DB
ITA No. 51 of 2021


CNR: KAHC010459932019


because it owns significant intangibles and has huge
revenues from software products, M/s Persistent
Systems Ltd. is engaged in product development and
product design services and M/s Thirdware Solutions
Ltd. is engaged in product development and earns
revenue from sale of licences and subscriptions, whereas,
the assessee is a software development service provider.
Such being the fact scenario, it cannot be stated that the
aforesaid 3 comparables are functionally similar to the
assessee. It is noticed that the aforesaid 3 comparables
are part of a standard departmental set of comparables
that has been used by the TPO in multiple cases, which
practice has deprecated by the Coordinate Bench of this
Court in SAP Labs India (P) Ltd. (supra). The Tribunal
has rightly excluded the same and the learned counsel for
the Revenue has failed to point out the perversity in the
said finding.

- 8 -
HC-KAR
NC: 2026:KHC:57056-DB
ITA No. 51 of 2021


CNR: KAHC010459932019


5. Insofar as M/s Cigniti Technologies Ltd and
M/s SQS India BFSI Ltd are concerned, these
comparables have been restored to the file of the TPO for
fresh consideration, as such, the Revenue cannot be said
to be aggrieved by this finding.

6. In terms of the decision of the Coordinate
bench in SAP Labs India (P) Ltd. (supra), the
substantial question of law admitted in these appeals are
to be answered in favour of the assessee and against the
Revenue. Hence, the appeal filed by the Revenue is
dismissed.


Sd/-
(S.G.PANDIT)
JUDGE


Sd/-
(DR.CHILLAKUR SUMALATHA)
JUDGE

NC
CT:bms
List No.: 1 Sl No.: 12