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

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ITA/51/2021HC KarnatakaKAHC01045993201908 October 2026Bench: S.G.PANDIT,CHILLAKUR SUMALATHA8 pages
AI SummaryDismissed

What did the High Court hold?

The High Court of Karnataka, in its judgment, relied on a coordinate bench's decision in SAP Labs India (P) Ltd. v. Income Tax Officer. The court held that the selection or exclusion of comparables is a factual and data-driven exercise, and the Transfer Pricing Officer (TPO) cannot reject taxpayer comparables merely to substitute them with a standard departmental set. Such determination must strictly conform to Rule 10B of the Income-tax Rules. The Tribunal had excluded M/s Infosys Ltd., M/s Persistent Systems Ltd., and M/s Thirdware Solutions Ltd. because they were functionally dissimilar to the assessee, a software development service provider. Infosys owned significant intangibles and had revenue from software products, Persistent Systems was engaged in product development and design services, and Thirdware Solutions was involved in product development and earned revenue from license sales. The court found these exclusions justified, noting that these companies were part of a standard departmental set, a practice deprecated by the coordinate bench. The court also noted that M/s Cigniti Technologies Ltd. and M/s SQS India BFSI Ltd. were restored to the TPO for fresh consideration, meaning the Revenue was not aggrieved by this finding. Consequently, the substantial questions of law were answered in favor of the assessee and against the Revenue.

What were the facts?

The Revenue, comprising the Principal Commissioner of Income-tax and the Deputy Commissioner of Income-tax, filed an appeal before the High Court of Karnataka against an order dated May 28, 2019, passed by the Income Tax Appellate Tribunal (ITAT) in IT(TP)A No. 3122/Bang/2018. The appeal pertains to the assessment year 2014-2015. The core of the dispute revolves around the selection and exclusion of comparable companies for determining the Arm's Length Price (ALP) under transfer pricing regulations. The ITAT's order, which is under challenge, had presumably made certain directions regarding the comparability analysis. The High Court admitted the appeal to examine substantial questions of law.

What were the issues?

The Tribunal had to decide the following substantial questions of law: 1. Whether the Tribunal was correct in law in demanding exact comparability when the law and international jurisprudence require seeking similar comparables under the Transactional Net Margin Method (TNMM)? 2. Whether the Tribunal was correct in law in imposing conditions beyond the law while seeking exact comparability, when the law requires acknowledging only those differences that materially affect the margin? 3. Whether the Tribunal was correct in not acknowledging that the determination of ALP through comparability analysis is an art and not an exact science, given that no two companies are identical? The Revenue's contentions, as implied by the questions of law, are that the Tribunal erred in its approach to comparability analysis. The Revenue likely argued that the Tribunal's requirement for exact comparability and its imposition of conditions beyond statutory requirements were incorrect. The Revenue may have contended that the Tribunal failed to appreciate that comparability analysis is inherently imprecise. The judgment does not explicitly record the Revenue's arguments beyond the framing of the questions of law. The Assessee's contentions are not explicitly detailed but are understood to be in support of the Tribunal's findings.

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. 51 OF 2021 BETWEEN:

1.

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

2.

THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-4(1) (1) 2ND 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 HC-KAR 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 HC-KAR 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 HC-KAR 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 HC-KAR 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.

HC-KAR (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 HC-KAR 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.

HC-KAR

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

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