Exclusion of Functionally Dissimilar Comparables Is a Finding of Fact: Karnataka High Court

The Karnataka High Court dismissed the Revenue’s appeal in SAP India’s transfer pricing case, holding that the exclusion of three comparables as functionally dissimilar raised no substantial question of law.

The Karnataka High Court has held that the Income Tax Appellate Tribunal’s (ITAT) finding that certain companies are functionally dissimilar to the tested party, and so must be excluded from the comparables, is a finding of fact that does not give rise to a substantial question of law [Pr. Commissioner of Income‑Tax‑1 & Ors. v. Sap India Private Limited, 2026-juristway.com-3417-HC(Karnataka)-IT].

Chief Justice Vibhu Bakhru wrote the judgment for a Bench with Justice K.S. Hemalekha in the Revenue’s appeal under Section 260A for assessment year 2020‑21. The company distributes and supports SAP software in India. The Transfer Pricing Officer (TPO) rejected its study for not using current‑year data, chose 11 comparables and proposed an upward adjustment of about ₹185.50 crore; the final adjustment was about ₹174.62 crore.

Transfer pricing compares a related‑party transaction with similar independent ones to find the arm’s length price. The ITAT excluded Quick Heal Technologies, Innovana Think Labs and Tally Solutions. It found that each did more than distribute software: Quick Heal and Innovana were engaged in development and research, and Tally developed packaged software besides trading.

The Revenue argued that the three were functionally similar, that the ITAT had applied a narrower functionality filter without testing the other comparables against it, and that it had excluded them without inquiring into functions and markets.

The Court held that the functional profiles recorded by the ITAT were not disputed, and once accepted, the finding of dissimilarity could not be faulted. The ITAT had not adopted any separate filter; it merely found some of the TPO’s choices functionally dissimilar, so the second question was in substance the same as the first. The questions on inquiry into functions and markets also raised no substantial issue.

Holding that no substantial question of law arose, the Court dismissed the appeal.

2026-juristway.com-3417-HC(Karnataka)-IT