The High Court of Karnataka has dismissed an appeal filed by the Income Tax Department , reinforcing the finality of the Income Tax Appellate Tribunal ’s (ITAT) factual findings regarding transfer pricing . In a judgment delivered on October 15, 2026 , a Division Bench comprising Justice S.G. Pandit and Dr. Justice Chillakur Sumalatha ruled against the Revenue, affirming that the selection or exclusion of comparable companies remains a data-driven exercise that cannot be disturbed unless the authorities can demonstrate clear legal perversity in the Tribunal's decision-making process.

The dispute centered on the assessment year 2012-13 for M/s. Trident Microsystems India Pvt. Ltd. The Revenue had sought to overturn an ITAT order dated August 14, 2020 , which had directed the Transfer Pricing Officer (TPO) to exclude certain companies, including Genesys International Corporation Ltd., from the list of comparables used to determine the Arm’s Length Price (ALP). The Revenue contended that the Tribunal’s exclusion was unwarranted and ignored the TPO’s initial finding that these companies were functionally similar to the respondent-assessee. However, the High Court found these arguments insufficient to warrant judicial interference .

Judicial Scrutiny of Functional Comparability

In its analysis, the Court emphasized that the burden lies with the Revenue to prove that the Tribunal’s findings were fundamentally flawed. Relying on the principles established in the coordinate bench’s decision in the case of SAP Labs India Private Limited , the Court reiterated that Chapter X of the Income Tax Act, 1961 , functions as a comprehensive framework for transfer pricing . Within this framework, the determination of ALP is a process that demands strict compliance with Rule 10B of the Income Tax Rules .

The Revenue had argued that the TPO’s initial assessment was robust and that the Tribunal erred in its re-evaluation of functional similarity . The Bench observed that the Tribunal had conducted a thorough review of the functional profiles , assets, and risks associated with both the respondent and the chosen comparables before ordering their exclusion. The Court stated, “The Tribunal on taking note of the functionality of the comparable companies and the respondent-Assessee company and also taking note of the functions, assets and risks assumed by the comparable companies as well as the respondent-Assessee company, has rightly come to the conclusion that comparables are functionally dissimilar and rightly directed exclusion of those comparables.”

The High Court further noted that the Revenue had failed to pinpoint any specific instance where the Tribunal ignored relevant evidence or relied on extraneous materials. By failing to provide a logical rebuttal to the Tribunal’s factual assessment, the Revenue’s appeal regarding the functional dissimilarity of Genesys International Corporation Ltd. was summarily rejected. As the Court observed, “The appellants-Revenue has failed to demonstrate the perversity and how the Assessee-Genesys International Corporation Ltd. performs similar function as that of the respondent-Assessee.”

Evaluating the Turnover Filter and Burden of Proof

A critical aspect of the appeal involved the application of the turnover filter . The Revenue challenged the Tribunal’s practice of applying an upper turnover limit of ₹200 crore, arguing that such a filter was arbitrary and lacked a direct relationship to the margins earned by companies in the software development sector. The Court dismissed this challenge, citing the precedent set in the SAP Labs decision. It held that in the absence of a statutory prescription defining specific turnover limits, the adoption of a ₹200 crore threshold by the Tribunal was a rational and logical step.

The Court underscored that factors such as economies of scale, brand value, and bargaining power are inherently tied to a company’s turnover, making the filter a necessary tool for maintaining comparability. Since the Revenue could not demonstrate that this approach was contrary to law or based on a misapprehension of facts, the Court upheld the ITAT’s methodology. The judges clarified that while the taxpayer bears the initial burden of substantiating the ALP, once the TPO exercises the power to substitute comparables, the responsibility shifts to the TPO to justify the inclusion or exclusion of specific entities under the provisions of Section 92C(3) of the Act .

The High Court’s ruling serves as a significant confirmation of the limits of appellate interference in transfer pricing disputes. By demanding that the Revenue prove perversity rather than merely disagreeing with the Tribunal's findings, the Court has narrowed the scope for litigating factual disputes regarding comparable sets. The decision reinforces the independence of the Tribunal as a fact-finding body, provided that its conclusions are grounded in the functional profiles of the companies involved and comply with the statutory requirements of the Income Tax Act and its corresponding Rules.

As the appeal was dismissed in its entirety, the order of the ITAT remains in full force, and the assessment for the year 2012-13 will proceed in accordance with the Tribunal’s directions. No further modifications to the exclusion list or the turnover filter thresholds are permitted under the current ruling, marking a definitive conclusion to the litigation for the parties involved.