Cisco Systems Services BV’s India Branch Keeps Transfer-Pricing Win as Karnataka HC Upholds ITAT’s Exclusion of Infosys, Tata Elxsi, KALS and Bodhtree

The assessee, the Indian branch of a Netherlands-incorporated company, provided software-support and advisory services to the Cisco group and was remunerated on a cost-plus basis.

For AY 2009–10, the Transfer Pricing Officer (TPO) rejected parts of the assessee’s transfer-pricing study, selected a revised set of comparables—including Infosys Ltd., Bodhtree Consulting Ltd., KALS Information Systems Ltd. and Tata Elxsi Ltd.—and proposed a transfer-pricing adjustment.

The Dispute Resolution Panel upheld the relevant comparables and treated foreign-exchange fluctuation gains as non-operating; the Assessing Officer made the adjustment in the final assessment order.

The Income Tax Appellate Tribunal (ITAT) treated foreign-exchange gains arising from operational transactions as operating income and directed the exclusion of the four companies as comparables, following its decision concerning the assessee’s affiliate for the same assessment year.

The Revenue appealed under Section 260A of the Income Tax Act, 1961.

Following the Supreme Court’s decision in SAP Labs India Private Limited v. Income Tax Officer, the High Court reconsidered the transfer-pricing questions.

Section 260A of the Income Tax Act permits an appeal where a substantial question of law arises; transfer-pricing determinations must comply with Section 92C of the Act and Rule 10B of the Income Tax Rules, 1962, including the requirement to assess comparability by reference to the relevant functions, assets and risks.

Under SAP Labs India Private Limited v. Income Tax Officer, transfer-pricing questions may raise substantial questions of law, and foreign-exchange gains or losses may be treated as operating only where they have a direct nexus with the international transaction.

The ITAT may follow its earlier decisions where the relevant facts are materially similar, absent a demonstrated factual distinction or perversity.

The cited decisions, including CIT v. Agnity India Technologies (P.) Ltd., support excluding companies where material differences in function, scale, intangibles, products or activities make them unsuitable comparables.

The Court held that the ITAT’s reliance on its decision concerning the assessee’s affiliate was permissible because that company operated in a similar line of business and the decision concerned the same assessment year; the Revenue did not demonstrate a material factual difference.

On foreign exchange, the ITAT had considered the assessee’s explanation that the gains arose from operational items, including trade-debtor realisations and creditor payments, and no authority had found them attributable to capital transactions.

Given that the assessee’s operating revenue derived entirely from services to its associated enterprise, the Court found no basis to doubt the asserted nexus.

The exclusions of Infosys, Tata Elxsi, Bodhtree and KALS were supported by findings of functional dissimilarity and relevant prior decisions; the Revenue failed to establish perversity in those findings.

The Court also observed that the ITAT had neither disturbed the TPO’s different-year-ending filter nor directed inclusion of comparables rejected by the TPO.

The appeal was dismissed, and any pending applications were disposed of.