Turnover and size have Impact on comparability: Karnataka HC Upholds exclusion of Infosys & TCS Citing size & turnover [Read Order]
In cases where the financials of the relevant segment are available and can be authenticated, there would be no difficulty in determining the ALP on the basis of financials of the given segment

Karnataka HC
Karnataka HC
In a recent case, the Karnataka High Court upheld the exclusion made on Infosysy & TCS while considering the comparable holding that turnover and size have impact on comparability
Robert Bosch Engineering and Business Solutions Pvt. Ltd. is an Indian company that provides software and IT enabled services only to its parent/group companies abroad. It works as a captive service provider, meaning it earns a fixed profit margin and does not take big business risks.
For Assessment Year 2012–13, the tax department examined whether the company’s international transactions were priced at arm’s length, meaning whether the prices charged were consistent with fair market value, The Transfer Pricing Officer (TPO) chose some big companies like Infosys BPO Ltd. and TCS E-Services Ltd. as comparables to measure Robert Bosch’s profits.
The assessee objected stating that these companies were too big compared to it. Infosys and TCS had huge turnovers, brand value, global presence, more assets, and higher risks, while Robert Bosch was a much smaller company with limited operations and no brand advantage. The Income Tax Appellate Tribunal (ITAT) agreed with Robert Bosch and removed Infosys BPO and TCS E-Services from the comparables list.
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The Revenue (Income Tax Department) appealed to the Karnataka High Court, arguing that size and turnover should not be reasons to reject these companies as comparables. The court have to consider whether companies with significantly higher turnover and size, such as Infosys BPO and TCS E-Services, can be treated as valid comparables for a smaller captive service provider like Robert Bosch. Whether turnover and size differences impact the FAR (Functions, Assets, Risks) analysis in determining comparability for transfer pricing.
The controversy raised relates to the exclusion of the following two entities as comparables for transfer pricing study: Universal Print System Ltd and BNR Udhyog Ltd. According to the Revenue, the FAR [Functional, Asset and Risk] profile of the said two entities is comparable with the Assessee for the purpose of determining the Arm's length Price [ALP] by following the Transactional Net Margin Method [TNMM] .
The Assessing Officer [AO] made a reference to the TPO for determining the ALP of the international transactions between the Assessee and its Associated Enterprise. The Transfer Pricing Officer [TPO] passed an order dated 27.01.2016 under Section 92CA making an transfer pricing adjustment.
The TPO inter alia adopted the following filter for selection of comparables for the purpose of transfer pricing analysis.
“Companies whose SWD / IT enabled Service is less than 75% of the total operating revenues were excluded
The companies whose revenues from software development and related services are more than 75% of their operating revenues are selected as comparables. This is an appropriate filter as this is the stage which will determine the correct comparability. In respect of enterprises whose main sources of income is from service segment, the companies whose income from software development / ITeS comes to more than 75% of the operating revenues have been considered for the ALP study as the other segment may not materially affect the financial results of the company."
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The primary contention raised by the assessee is that this comparable company fails the service revenue filter of 75% applied by the TPO. It is seen that the TPO has taken the BPO segment of this company. While doing so the filters seem to have been applied at segment level. As the company fails the filter and hence needs to be excluded. Since the company is to be excluded, other contentions of the assessee become academic and are not considered. Ground allowed."
It is contended on behalf of the Revenue that where details of the comparable segments are available, it would be apposite to determine the ALP on the basis of the financials of the said segment. Clearly, there can be no cavil with the said proposition. In cases where the financials of the relevant segment are available and can be authenticated, there would be no difficulty in determining the ALP on the basis of financials of the given segment.
The Chief Justice Vibhu Bakhru and Justice C M Joshi held that “if the revenues of the comparable segment is less than 75% of the total revenue of the entity, the same could not be selected for purpose of the transfer pricing study on the basis of the selected filter. It would be not open to look into the financials of the segment for overcoming the filter as adopted. We find no infirmity with the said view. Thus, no substantial question of law arises for consideration in this appeal.”
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