Salesforce India Prevails as Karnataka HC Rejects Revenue Challenge to Exclusion of 9 Transfer-Pricing Comparables

In brief

The question

1. Whether the Tribunal was justified in directing the exclusion of the identified comparables in the SWD and MSS segments, despite the TPO’s selection of those companies

The court held

The Court answered all substantial questions of law against the Revenue and in favour of the assessee.

It also directed

It dismissed the appeal, leaving the Tribunal’s directions to exclude the disputed comparables undisturbed.

01Facts

For assessment year 2014–15, the Assessing Officer made transfer-pricing adjustments in a draft assessment order under Sections 143(3) and 144C(1) of the Income-tax Act, 1961.

pp. 3–4

Following the DRP’s directions, a final assessment order was passed.

pp. 3–4

The assessee appealed, and the Tribunal directed the exclusion of several comparables in the Software Development (SWD) and Marketing Support Services (MSS) segments.

pp. 3–4, 7–8

The Revenue appealed under Section 260A, challenging those exclusions.

pp. 3–4, 7–8

The assessee’s SWD and MSS activities and its limited risk profile were set out by the Court.

pp. 8–9, 11

02Issues

i.1. Whether the Tribunal was justified in directing the exclusion of the identified comparables in the SWD and MSS segments, despite the TPO’s selection of those companies

pp. 7–8

ii.2. Whether Infosys Ltd. was comparable to the assessee in the SWD segment, having regard to its intangibles and software-product revenue

p. 7

iii.3. Whether the Tribunal’s order was perverse because it disregarded the TPO’s findings and followed earlier decisions

p. 7

03Law Applied

Sections 92C and 92CA of the Income-tax Act govern determination of the arm’s-length price and empower the TPO to determine it where the information or data used is unreliable or incorrect; the Revenue relied on these provisions in support of the TPO’s independent search for comparables.

pp. 4–5

In assessing comparability, the functions performed, assets employed and risks assumed are relevant considerations.

p. 5, 11

The Court also considered the cited Tribunal decision in LG Soft India (P.) Ltd. v. Dy. CIT and the decision in SAP Labs India Pvt. Ltd., the latter being referred to for the relevance of company size to comparability.

p. 6

The appeal was brought under Section 260A, and the Court considered whether the Tribunal’s findings were shown to be perverse.

pp. 2, 9–10

Provisions in the judgment · 5

Income Tax Act, 1961 Section 260ASection 143Section 144CSection 92CSection 92CA

04Reasoning

The Court considered the assessee’s functions and limited risk profile in both segments, together with the material on record and the Tribunal’s reasons for excluding the comparables.

p. 11

It found those reasons justified and sound, and the Revenue had not demonstrated perversity in the Tribunal’s findings.

p. 11

The Court therefore declined to substitute its view for the Tribunal’s conclusions on comparability.

p. 11