PR. COMMISSIONER OF INCOME TAX vs. M/S L G SOFT INDIA PVT LTD

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ITA/30/2021HC KarnatakaKAHC01014731202008 October 2026Bench: S.G.PANDIT,CHILLAKUR SUMALATHA8 pages
AI SummaryDismissed

What did the High Court hold?

The High Court, in its judgment, referred to a coordinate bench's decision in SAP Labs India (P) Ltd. V. Income Tax Officer (dated 28.08.2026). The Court found that the principle laid down in SAP Labs India (P) Ltd. was aptly applicable to the present case. Specifically, the Court highlighted the finding 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 Court noted that the present appeal pertained to the exclusion of M/s. Larsen and Tourbo Infotech Ltd. for being functionally dissimilar to the assessee. The Court observed that the assessee provides software development services, while M/s. Larsen and Tourbo Infotech Ltd. is involved in multiple business segments including services, industrials, and telecom, and operates in various domains like banking, financial services, insurance, media, and entertainment. Given this factual scenario, the Court agreed that M/s. Larsen and Tourbo Infotech Ltd. is not functionally similar to the assessee. The Court also noted that the Revenue's counsel failed to point out any perversity in the Tribunal's factual finding on functional dissimilarity. Therefore, the Court concluded that the substantial questions of law admitted in the appeal should be answered in favour of the assessee and against the Revenue. The appeal filed by the Revenue was dismissed.

What were the facts?

The Revenue, represented by the Principal Commissioner of Income Tax and the Deputy Commissioner of Income Tax, filed an appeal under Section 260A of the Income Tax Act, 1961, against an order dated 27.09.2019 passed by the Income Tax Appellate Tribunal (ITAT) in MP No.95/Bang/2019, arising out of Appeal Proceedings No. IT(TP)A No.3122/Bang/2018. The assessment year in question is 2014-2015. The appeal challenges the ITAT's decision regarding the selection of comparable companies for transfer pricing analysis. The assessee is M/s. L G Soft India Pvt Ltd. The ITAT had held that M/s. Larsen and Tourbo Ltd. could not be taken as a comparable due to functional dissimilarity.

What were the issues?

The High Court was called upon to decide two substantial questions of law: 1. Whether, on the facts and in the circumstances of the case and in law, the Income Tax Appellate Tribunal is correct in holding that M/s. Larsen and Tourbo Ltd. cannot be taken as comparable on the ground of functional dissimilarity, even though the Transfer Pricing Officer (TPO) selected it as per Rule 10B of the Income Tax Rules, 1962? 2. Whether, on the facts and in the circumstances of the case and in law, the Tribunal is right in partially bypassing the parameters of analysis prescribed under Rule 10B of the Income Tax Rules, 1962, which is exhaustive, and as such, can the Tribunal's order be considered perverse? Contentions of the Revenue: The Revenue argued that the ITAT erred in excluding M/s. Larsen and Tourbo Ltd. as a comparable, despite its selection by the TPO based on Rule 10B. The Revenue also contended that the ITAT partially bypassed the exhaustive parameters of Rule 10B, rendering its order perverse. Contentions of the Assessee: The assessee argued that M/s. Larsen and Tourbo Ltd. was functionally dissimilar to its own business operations. The assessee likely supported the ITAT's finding on functional dissimilarity and adherence to Rule 10B.

Which sections of the Income-tax Act were involved?

Section 260-A,Section 92C

AI-generated summary — verify with the full judgment below

HC-KAR IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 8TH 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. 30 OF 2021 BETWEEN:

1.

PR. COMMISSIONER OF INCOME TAX INCOME TAX-4 BMTC COMPLEX, KORAMANGALA BANGALORE.

2.

THE DEPUTY COMMISSIONER OF INCOME TAX CIRCLE-4(1) (1) BENGALURU. …APPELLANTS (BY SRI. SANMATHI E. I., ADV.)

AND:

M/S. L G SOFT INDIA PVT LTD EMBASSY TECH SQUARE MARATHAHALLI, SRAJAPURA ROAD, BENGALURU-560 103 …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 27/09/2019 PASSED IN MP NO.95/BANG/2019 ARISING OUT OF APPEAL PROCEEDINGS NO.IT(TP)A NO.3122/BANG/2018, FOR THE ASSESSMENT YEAR 2014-2015, PRAYING TO A) DECIDE THE FOREGOING QUESTION OF LAW AND / OR SUCH OTHER QUESTIONS OF LAW AS MAY BE

Digitally signed by NANJUNDACHARI Location: High Court of Karnataka HC-KAR FORMULATED BY THE COURT AS DEEMED FIT AND (B) SET ASIDE THE APPELLATE ORDER DATED 27/09/2019 PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, 'C' BENCH, BENGALURU, AS SOUGHT FOR, IN THE RESPONDENT – ASSESSEE’S CASE, IN MP NO.95/BANG/2019 ARISING OUT OF APPEAL PROCEEDINGS NO. IT(TP) NO.3122/BANG/2018 (ANNEXURE-A) FOR ASSESSMENT YEAR 2014-2015 AND GRANT SUCH OTHER RELIEF AS DEEMED FIT, INTEREST OF JUSTICE.

THIS APPEAL, COMING ON FOR ADMISSION, 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 27.09.2019 in MP No.95/Bang/2019 in IT(TP)A No.3122/Bang/2018 passed by the Income Tax Appellate Tribunal ‘C’ Bench, Bangalore for the assessment year ‘2014-15’.

2.

The appeal was admitted on 14.07.2021 to examine the following substantial questions of law: “1. Whether on the facts and in the circumstances of the case and in law, the Income HC-KAR Tax Appellate Tribunal (for short 'the Tribunal') is correct in holding that M/s.Larsen and Tourbo Ltd. cannot be taken as comparable on the ground of functional dissimilarity though the Transfer Pricing Officer has chosen the same as per parameters of Rule 10B of the Income Tax Rules, 1962?

2.

Whether on the facts and in the circumstances of the case and in law, the Tribunal is right in bypassing partially the parameters of analysis prescribed under Rule 10B of the Income Tax Rules, 1962 which is exhaustive and as such the Tribunal's order can be said as perverse in nature?”

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 code governing transfer pricing, providing a complete statutory framework for determination of the Arm's Length Price (ALP), HC-KAR 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% HC-KAR or 25% may be 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 HC-KAR variation and not a standard deduction, and transfer pricing adjustment becomes necessary whenever the variation exceeds the prescribed statutory limit.

(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 issue in the present appeal pertains to the exclusion of M/s.Larsen and Tourbo HC-KAR Infotech Ltd. for being functionally dissimilar to that of the assessee.

5.

As per the records, it is seen that the assessee is a wholly owned subsidiary of LGE that provides software development services in the areas such as mobile application development, digital video broadcast and biometrics software, etc. Whereas, M/s.Larsen and Tourbo Infotech Ltd. is involved in three business segments such as services cluster, industrials cluster and telecom (product engineering services) and it also operates in the domain of banking, financial services and insurance, media and entertainment and travel and logistics. Such being the fact scenario, it cannot be stated that M/s.Larsen and Tourbo Infotech Ltd. is functionally similar to the assessee. The Tribunal was also of the same opinion and has recorded a factual finding that M/s.Larsen and Tourbo Infotech Ltd. is not functionally similar to the assessee. The learned counsel HC-KAR for the Revenue has failed to point out the perversity in the said factual finding recorded by the Tribunal. Such being the circumstances, we are of the considered opinion that, 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.: 10

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