Karnataka HC: Rs 22,915 crore brand keeps Infosys off software firm comparables, 2013 Revenue appeal dismissed

A division bench led by Chief Justice Vibhu Bakhru upheld the Tribunal decision to drop eight companies, including Infosys, Wipro and Tata Elxsi, from the transfer pricing benchmark for Logica Private Ltd for assessment year 2007-08, and backed a 15 per cent related-party filter, holding that size and brand change margins and that none of the Revenue questions was a substantial question of law.

A transfer pricing dispute that began with a 2010 order adding ₹39.73 crore to the income of Bengaluru software company Logica Private Ltd has ended with the Karnataka High Court finding nothing to correct. The Revenue filed its appeal thirteen years ago.

Chief Justice Vibhu Bakhru, writing for himself and Justice K.S. Hemalekha, held on 28 October 2026 that the Income Tax Appellate Tribunal was entitled to throw out Infosys, Wipro and six other companies as comparables. The Revenue had shown no perversity in any of it.

Dismissed in 2018, remitted by the Supreme Court

The appeal, ITA No. 338 of 2013, was filed by the Commissioner of Income-Tax and the Assistant Commissioner, Circle 11(5), Bengaluru, under Section 260A of the Income Tax Act, 1961. It challenged the Tribunal order of 28 February 2013 in ITA No. 1129/Bang/2011 for assessment year 2007-08.

The High Court admitted the appeal on 24 March 2014 on ten questions of law, each framed around a claim that the Tribunal had recorded a perverse finding.

On 12 July 2018 the High Court dismissed the appeal, following its own ruling in Principal Commissioner of Income Tax v. Softbrands India Pvt. Ltd. The Revenue took that order to the Supreme Court, which heard it in a batch tagged with the Softbrands appeal.

By its judgment of 19 April 2023 in SAP Labs India (P) Ltd. v. Income Tax Officer, the Supreme Court held that whether an arm's length price was determined by following the Act and the Rules can itself raise questions of law. It set aside the 2018 order and sent the appeal back for a fresh decision.

Two of the ten questions fell away at the outset. Questions 9 and 10 concerned Section 10A deductions for recruitment and travel costs, not transfer pricing, and both sides agreed they did not survive the 2018 judgment, which had found the allocation of recruitment costs just and fair. The bench heard the rest.

E.I. Sanmathi appeared for the Revenue. Tanmayee Rajkumar, for Manasa Ananthan, appeared for the assessee, which by a memo of 26 September 2026 was recorded as now merged with CGI Information Systems and Management Consultants Pvt. Ltd.

Nil return, then a Rs 39.73 crore adjustment

Logica filed its original return for AY 2007-08 on 30 October 2007 declaring nil income. After the High Court sanctioned an amalgamation on 16 November 2007, it filed a revised return on 10 July 2008 declaring income of ₹17,57,97,532.

The case was picked for scrutiny. Because Logica had international transactions with its associated enterprises, the Assessing Officer referred it to the Transfer Pricing Officer to fix the arm's length price.

The company provides software development and consultancy services and develops, distributes and maintains IT products. The TPO rejected its transfer pricing study and, by an order of 30 September 2010 under Section 92CA, made adjustments totalling ₹39,73,03,044. Of that, ₹38,20,29,316 related to software development services and ₹1,52,73,728 to support services.

Both sides used the Transactional Net Margin Method with mark-up on cost as the profit level indicator. Logica's own set of 18 comparables produced an arithmetic mean of 13 per cent. The TPO's set of 26 companies produced a mean of 25.14 per cent, or 23.84 per cent after working-capital adjustment.

The Dispute Resolution Panel confirmed the adjustment on 2 September 2011, and the Assessing Officer passed the final order on 20 September 2011 under Section 143(3) read with Sections 144C(5) and 144C(8). The Tribunal then accepted Logica's objections to several comparables and to the filters the TPO had applied. That is what the Revenue attacked.

Eight companies, eight reasons they were dropped

The bench took the excluded companies one by one. Accel Transmatic Ltd went first: its annual report showed kiosk manufacture, an embedded software centre, an IT training academy and an animation studio.

The Revenue did not dispute that Accel runs a training academy while Logica does nothing of the kind. The Tribunal's finding that Accel was functionally different was a finding of fact that could not be called perverse.

Avani Cimcon Technologies Ltd had developed a software product called DXchange, so its revenue included product sales. Its operating margin jumped to 52.59 per cent in 2006-07 against 32.55 per cent the year before and 25.62 per cent the year after.

The Delhi High Court had reached the same conclusion on Avani in Alcatel Lucent India Ltd. v. Deputy Commissioner of Income Tax. The Chief Justice had sat on that bench.

Celestial Labs Ltd was the Revenue's strongest case. The TPO had issued a notice under Section 133(6) and Celestial replied that it was mainly in software development, with in-house product revenue of ₹50,75,100, about 3.6 per cent of its operating revenue. But the TPO's query had asked only about customised services, and there was no segmental reporting at all.

Celestial's own website claimed a decade of experience in in-silico drug discovery and contract research, and it had developed a drug design tool called CELSUITE. It gave no segment figures for drug discovery or contract research. The bench held its functional profile was materially different from Logica's and saw no error in its exclusion.

Lucid Software Ltd had built a product called Muulam for civil engineering structures and carried substantial product development expenditure on its balance sheet. Its website described it as a provider of software products and services to the NDT and material sciences industry.

KALS Information Systems Ltd told the TPO it was a pure software development service provider. Yet it consumed software inventory worth ₹34,85,914, far above the small product and training percentages it had claimed. Neither Lucid nor KALS had segmental accounts.

Tata Elxsi was a niche product company with no segmental details. The bench recorded that its exclusion was already covered by the co-ordinate bench ruling of 28 August 2026 in SAP Labs India Private Limited v. Income Tax Officer, which found such Tribunal findings consistent with Section 92C and Rule 10B and free of any demonstrated perversity.

Why Infosys and Wipro were never comparable

Infosys carried a brand valued at ₹22,915 crore, revenue above ₹13,145 crore, advertising spend of ₹69 crore and R&D spend of ₹167 crore. Logica's revenue was relatively insignificant and it spent nothing on sales promotion, since it was essentially serving its associated enterprises. The Tribunal had relied on Agnity India Technologies, since affirmed by the Delhi High Court.

Wipro was a diversified company, and the Tribunal accepted that 67 per cent of its sales came from products commanding a premium. Its turnover was also extremely large compared with Logica's. The Revenue's counsel argued that brand and turnover are irrelevant to profit margin. The bench found no merit in that.

A large company has a different FAR profile from a small one, the Chief Justice wrote, and size can significantly alter cost structure. TNMM tolerates variations, but the bench held that “it does not accommodate cases where the disparity in size is extremely large” (para 50). Heavy R&D and brand spending would also affect margins.

On questions 6 and 7, the bench accepted the Revenue's point that brand is not the only variable affecting revenue. But an established brand and goodwill are “intangible assets that have a vital bearing on revenue margins” (para 64), and branded products command higher prices.

The Delhi High Court had upheld Wipro's exclusion on brand grounds in Oracle (OFSS) BPO Services and followed that view in Avaya India.

No segmental accounts, no comparison

Questions 2 and 3 asked whether the Tribunal could insist on segmental rather than enterprise-level financials. The bench declined to answer them in the abstract. It instead read Rule 10B(1)(e) of the Income Tax Rules, which defines TNMM by reference to the net profit margin from a comparable uncontrolled transaction.

Where a company chosen for comparison has several segments, the uncontrolled transaction is the segment that is functionally similar to the tested entity. Comparing a multi-activity enterprise's overall margin would not be appropriate. Credible information on the similar segment is possible only if segmental financial statements exist.

The TPO may gather segmental data through Section 133(6) notices, but it must be credible and verified. Without audited segmental accounts, the bench said, reliability is hard to assess unless the information is reconciled with the reported financial statements. Whether a given segment's figures are reliable is a question of fact, decided case by case.

Question 4 asked whether the Tribunal could lean on an order passed in another assessee's case. Yes, the bench held, provided it finds the material facts similar. If the other assessee carried on similar business activities, the Tribunal should take a similar view unless it has reasons to distinguish the case.

The 15 per cent related-party filter survives

The TPO had excluded companies whose related-party transactions exceeded 25 per cent of revenue, eliminating 50 of the entities it had shortlisted. The Tribunal tightened the filter to 15 per cent. The Revenue's question 5 said the Tribunal gave no basis for 15 per cent.

The bench turned that around. The TPO had given no specific reason for choosing 25 per cent either. The filter exists to make sure the comparables reflect uncontrolled transactions, and narrowing it is appropriate where enough comparables still emerge, since related-party dealings cannot be treated as uncontrolled.

The co-ordinate bench in SAP Labs had already held that where a lower filter yields adequate comparables, raising the threshold to 25 per cent has no rational basis. A 25 per cent filter is permissible only on a specific finding that enough comparables at a lower threshold are unavailable.

Here there was no dispute that the 15 per cent search found a sufficient number of comparables. Question 5 went against the Revenue.

Order

The bench answered question 8, on Tata Elxsi, against the Revenue and in favour of the assessee. It found no infirmity in the Tribunal's exclusion of the other seven companies or its adoption of the 15 per cent related-party filter.

Although it addressed each question as raised, the bench held that on the facts “they cannot be considered substantial questions of law” (para 72).

ITA No. 338 of 2013 was dismissed. The judgment was reserved on 28 September 2026 and pronounced on 28 October 2026. The order makes no direction as to costs.