Court affirms factual and data-driven approach in selection of comparables and working capital adjustments, dismissing Revenue's appeal for lack of perversity.
In a significant ruling dated September 17, 2026, the Karnataka High Court (Division Bench) dismissed the appeal filed by the Principal Commissioner of Income Tax (CIT) challenging the Income Tax Appellate Tribunal's (ITAT) order concerning transfer pricing adjustments against Goldman Sachs Services Pvt. Ltd. The appeal, framed under Section 260A of the Income Tax Act, 1961, revolved around the correctness of excluding Infosys Ltd. and Infosys BPO Ltd. from the list of comparable companies used to determine the arm's length price (ALP), and the appropriateness of granting working capital adjustment.
The Court, comprising Justices S.G. Pandit and Dr. Chillakur Sumalatha, upheld the ITAT's findings that the selection or exclusion of comparables is inherently a factual and data-driven exercise. The Tribunal had excluded Infosys Ltd. on the basis that it was a large risk-taking entity engaged in software product development and owning significant intangible assets, which made it functionally incomparable with the assessee. Similarly, Infosys BPO Ltd. was found not comparable due to differing business activities.
The Court emphasized that the Transfer Pricing Officer (TPO) cannot reject taxpayer-chosen comparables merely to replace them with a standard departmental set and must adhere strictly to the parameters prescribed under Rule 10B of the Income Tax Rules, 1962. The burden to justify inclusion or exclusion of comparables shifts to the TPO once the taxpayer's comparables are rejected.
On the issue of working capital adjustment, the Court observed that it is a comparability adjustment and not a selection filter. Its grant or denial depends on the specific facts of each case and generally amounts to a finding of fact. The Tribunal directed the TPO to compute the working capital adjustment based on actuals after considering the revised set of comparables, which the Court found to be a reasonable and factually supported order.
The Court also relied on a recent coordinate bench judgment in Sap Labs India Pvt. Ltd. v. Income Tax Officer, which laid down comprehensive principles concerning transfer pricing, including the statutory framework of Chapter X of the Income Tax Act, the burden of proof, and the non-existence of a fixed formula for working capital adjustments.
The Revenue was unable to demonstrate any perversity, misapplication of law, or consideration of irrelevant material by the Tribunal in its factual determinations. Consequently, the Court answered the substantial questions of law in favor of the assessee and dismissed the Revenue's appeal.
This judgment reinforces the principle that transfer pricing disputes require meticulous factual analysis and that judicial interference is unwarranted unless there is clear perversity or legal error. It also underlines the importance of adherence to statutory provisions and procedural safeguards in selecting comparables and making transfer pricing adjustments.
Bottom Line:
Income Tax - Transfer pricing - Selection/exclusion of comparables and grant of working capital adjustment are essentially factual and data-driven exercises - Tribunal's exclusion of Infosys Ltd. and Infosys BPO Ltd. as comparables and direction to compute working capital adjustment on actuals upheld in absence of perversity.
Statutory provision(s):
Income Tax Act, 1961 Section 260A, Income Tax Rules, 1962 Rule 10B
