Karnataka HC Upholds Exclusion Of Coral Hubs, Eclerx And 96.66%-Margin Mold-Tek From Logica’s IT-Enabled Services Comparables

For AY 2008–09, the assessee reported international transactions with associated enterprises and applied the Transactional Net Margin Method. The Transfer Pricing Officer rejected the assessee’s analysis, selected comparables for the software-development and IT-enabled services segments, and proposed a total transfer-pricing adjustment of ₹18,24,30,387; the Assessing Officer made the adjustment after the Dispute Resolution Panel rejected the assessee’s objections.

The ITAT allowed the assessee’s appeal, excluding specified comparables.

The High Court initially dismissed the Revenue’s appeal, but the Supreme Court’s decision in SAP Labs India (P) Ltd. v. Income Tax Officer led to a remand for reconsideration of the transfer-pricing questions.

Section 260A of the Income-tax Act, 1961 permits an appeal to the High Court on a substantial question of law; the determination of arm’s-length price under Section 92C, including the selection of comparable companies, must comply with the Act and the applicable Rules.

The Court applied the principle that comparables must be assessed by reference to their functional profile and relevant business circumstances, and that companies with materially different functions or business models, or abnormal results attributable to extraordinary circumstances, may be excluded from the comparison.

It relied on SAP Labs India (P) Ltd. v. Income Tax Officer (2023) 454 ITR 121 (SC) for the scope of review on remand; and referred to Rampgreen Solutions (P) Ltd. v. CIT, Principal CIT v. Omniglobe Information Technologies (India) (P) Ltd., CIT v. PTC Software (I) (P) Ltd. and Maersk Global Centres (India) Pvt. Ltd. in considering functional comparability and abnormal profits.

The Court held that the Section 10A turnover question was already concluded against the Revenue by its earlier judgment and fell outside the Supreme Court’s remand, so it did not reconsider that issue.

The exclusion of the six software-development comparables was covered by the High Court’s earlier decision concerning AY 2007–08, which had found no error in the ITAT’s conclusion that those entities were not comparable.

For IT-enabled services, Coral Hubs’ outsourcing-based business model and the functional differences identified by the ITAT supported its exclusion; the Revenue did not contest the relevant factual findings.

Mold-Tek’s reported margin of 96.66% was found to reflect extraordinary circumstances and to distort the comparison, making its exclusion consistent with the purpose of determining an arm’s-length price.

The Revenue accepted that the fifth question did not arise on the facts because the ITAT had not directed the application of any filter; it had only excluded particular companies for stated reasons.

The appeal was dismissed.