Karnataka HC rejects Revenue appeal: a firm with a 96.66% profit margin is no valid comparable
The High Court upheld the Tribunal exclusion of comparables from a transfer pricing set, including a company whose merger produced super profits that would skew the mean. It found no substantial question of law on the remaining questions after the Supreme Court remand in SAP Labs.
One company the tax officer used to benchmark an IT-enabled services provider earned an operating profit of 96.66 per cent on total cost. On 28 October 2026 the Karnataka High Court held that including it would distort the average and defeat the purpose of transfer pricing analysis, and dismissed the Revenue’s appeal.
Chief Justice Vibhu Bakhru, writing for himself and Justice K.S. Hemalekha, found no substantial question of law in the Tribunal’s exclusion of that company and several others. The appeal concerned Logica Pvt Ltd and assessment year 2008-09.
An adjustment of Rs 18.24 crore
Logica filed its return for 2008-09 on 13 September 2008, declaring a total income of Rs 39,42,40,650. The return was picked up for scrutiny. Because the company had international transactions with associated enterprises, the Assessing Officer referred them to the Transfer Pricing Officer.
Logica had chosen the transactional net margin method and filed its own analysis. The Transfer Pricing Officer rejected it, citing qualitative filters that eliminated many companies, not always using current-year data, a poorly applied related-party filter, and comparables that earned income from on-site services while Logica worked from centres in India.
He built his own sets of twenty comparables each. For software development services the mean margin came to 22.61 per cent of operating cost, producing an adjustment of Rs 16,29,24,390. For IT-enabled services the mean was 23.08 per cent, adding Rs 1,95,05,997, a total of Rs 18,24,30,387.
The Tribunal strikes out comparables
The Dispute Resolution Panel rejected Logica’s objections, and the final assessment order followed on 13 July 2012. Logica appealed to the Income Tax Appellate Tribunal, Bengaluru.
On software services it objected to seven comparables as functionally dissimilar. On IT-enabled services it objected to three: Coral Hubs Ltd and Eclerx Services Ltd as dissimilar, and Mold-Tek Technologies Ltd as having earned abnormal profits. The Tribunal accepted the challenge and allowed the appeal on 18 July 2014.
Back from the Supreme Court
The Revenue appealed under Section 260A of the Income Tax Act, 1961, and the appeal was admitted on 7 April 2015 on five questions. On 13 July 2018 the High Court dismissed it, relying on its decision in Softbrands India Pvt Ltd.
The Supreme Court disposed of the Revenue’s petition with a batch in SAP Labs India (P) Ltd v. Income Tax Officer, (2023) 454 ITR 121. It held that whether the arm’s length price was fixed in line with the Act and Rules may raise questions of law, so such appeals could not be thrown out wholesale.
This appeal was sent back to the High Court for fresh consideration.
Logica has since merged with CGI Information Systems and Management Consultants Pvt Ltd, as recorded on a memo filed on 26 September 2026. Sri E.I. Sanmathi appeared for the Revenue and Ms Tanmayee Rajkumar for the assessee.
One question already closed
The first question concerned telecommunication charges and Section 10A. Revenue’s counsel rightly accepted that the 2018 judgment had settled it against the Revenue, because the Supreme Court’s remand covered only the transfer pricing questions.
Six software comparables stay out
The second and third questions concerned six companies the Tribunal had excluded for a different functional profile: Avani Cimcon Technologies, Celestial Labs, Infosys Technologies, KALS Information Systems, Tata Elxsi and Wipro. Infosys and Wipro were also excluded for premium branding.
The High Court had considered the same companies for assessment year 2007-08 in ITA No. 338/2013 and found no fault in excluding them. The bench held that the questions were squarely covered by that decision in the assessee’s favour.
Coral Hubs and Eclerx
The Tribunal found Coral Hubs had a different business model, since it subcontracted most of its IT-enabled services work to third-party vendors. It also cited earlier Tribunal rulings that Coral Hubs had started a print-on-demand line and had outsourced a considerable part of its business.
The bench noted that none of this was challenged, and that Revenue’s counsel did not contest that Coral Hubs outsourced and did not carry out all activities in-house. These were findings of fact.
The Delhi High Court had excluded the same company in Rampgreen Solutions because it rendered higher-end knowledge process outsourcing, which is not comparable with routine business process outsourcing. The bench noted that Delhi and Bombay decisions took a similar view, and that Eclerx was excluded for like reasons.
A 96.66 per cent margin
The Tribunal excluded Mold-Tek Technologies because of extraordinary profits in the year. It noted the 96.66 per cent figure as abnormally high. It also referred to a Special Bench ruling in Maersk Global Centres (India) Pvt Ltd, which found that another company had merged into Mold-Tek from 1 October 2006, so consolidated results produced super-nominal profits.
The Revenue could not dispute that Mold-Tek reported extraordinary super profits. The Chief Justice said that
“would skew the mean PLI and subvert the process of determining the ALP” (para 29)
if the company were included. The object of the exercise, he said, is to ensure that taxable profits are not shifted through dealings with associated enterprises, so comparables with abnormal results from extraordinary circumstances must be excluded.
The filter-matrix question
The fifth question assumed that excluding one comparable changes the whole accept-reject matrix and forces the search to begin again. Revenue’s counsel fairly said it did not arise on these facts.
The Tribunal had not directed the use of any filter. It had only accepted that certain companies, chosen using filters, had to go for the reasons it gave.
Order
The bench held that the exclusions were not contrary to the Act or Rules and that no substantial question of law arose on questions two to five. Question one stood concluded against the Revenue. The appeal was dismissed. The judgment records no order on costs.