ITAT Bangalore TP Benchmarking Ruling 2026 - Infosys Excluded

What Happened?

The Bangalore bench of the Income Tax Appellate Tribunal (ITAT) has issued a landmark order excluding Infosys and three other comparable companies from Transfer Pricing (TP) benchmarking analysis. The tribunal has directed the tax authorities to conduct fresh TP benchmarking with appropriate comparables while allowing working capital adjustment benefits. Additionally, the tribunal has granted Section 10A deduction on the enhanced profits determined after TP adjustment—a major relief for the assessee.

Background & Legal Context

Transfer Pricing benchmarking is governed under Section 92 of the Income Tax Act, 2025 (which carries forward provisions from the 1961 Act). When Indian companies engage in cross-border or specified domestic transactions with related parties, the tax authorities must ensure the transaction price matches the Arm's Length Price (ALP)—the price at which unrelated parties would transact.

The Comparable Company Method is one of the most widely used approaches under TP rules. Under this method, the authorities select comparable independent companies and use their financial metrics (like operating margins, return on assets, etc.) to determine whether the related-party transaction was at arm's length.

The critical issue in this case centered on:

• Selection of Comparables: The Assessing Officer (AO) had selected Infosys and three other companies as comparables to benchmark the assessee's TP. However, the assessee challenged this selection arguing these companies were not truly comparable due to material differences in business operations, scale, risk profile, and functions performed.
• Section 92A Regulations: The detailed Transfer Pricing Rules under Section 92 specify that comparables must be functionally similar, have similar risk profiles, and operate in comparable economic circumstances.
• Section 10A Deduction Issue: Section 10A of the IT Act, 2025 provides deduction of 100% of profits derived from export of software services and information technology services for specified periods. The question arose whether TP adjustment could reduce Section 10A benefits.

What Does This Mean for You?

For IT and Software Services Companies:

This ruling is a game-changer for IT majors and mid-sized software companies engaged in TP disputes. Here's why:

• Stricter Comparability Scrutiny: The tribunal has raised the bar for selecting comparables. Tax authorities cannot simply pick large, well-known companies; they must rigorously justify why those companies are functionally and economically similar to the assessee. If you're facing a TP adjustment based on weak comparables, you now have a strong precedent to challenge.
• Working Capital Adjustment Allowed: The ruling permits adjustment of working capital cycles when benchmarking transfer prices. This is significant because it means the tribunal recognizes that temporary fluctuations in receivables, payables, and inventory don't necessarily indicate an overpricing or underpricing of related-party transactions. For Assessment Years 2025-26 and 2026-27, this could reduce TP additions for many companies.
• Section 10A Protection: Perhaps the most important relief—the tribunal has held that even when TP adjustment is made, Section 10A deduction should not be denied or reduced. This means if you have export profits that qualify for Section 10A, the government cannot indirectly deny this deduction through aggressive TP adjustments. Your Section 10A benefit is protected.
• Fresh TP Study Mandatory: The ruling mandates that the AO conduct a fresh Transfer Pricing study using legally defensible comparables. This gives you the opportunity to present better comparable data, functional analysis, and economic justification in the revised study.

For Non-IT Companies:

If your company has related-party transactions (purchase of goods, royalty payments, management fees, or services from related entities), this ruling applies to you too. The enhanced scrutiny on comparables means:

• You can challenge TP additions if the comparables selected are not genuinely comparable to your business.
• You should document functional differences, risk differences, and contractual differences very carefully in your TP documentation.
• Working capital adjustments can now be justified more easily if your working capital cycle differs from comparables.

What Should You Do Now?

Immediate Actions:

• Audit Your TP Documentation (AY 2025-26 & AY 2026-27): Review the comparables used by the tax authorities in your TP assessment. Cross-check if they satisfy the functional similarity, risk similarity, and economic circumstance tests. Prepare a detailed memo on why selected comparables are or are not appropriate.
• Collect Comparative Financial Data: Identify better, more defensible comparables. Use databases like Prowess, RoyaltyRange, or Bloomberg. Ensure your comparables are from the same industry, similar size (but size should not be the only criterion), and have similar business models.
• Document Working Capital Cycles: Prepare detailed working capital analysis. Show how your Days Sales Outstanding (DSO), Days Inventory Outstanding (DIO), and Days Payable Outstanding (DPO) compare with comparables. If they differ, explain the business reasons (payment terms, industry norms, customer mix, etc.).
• Section 10A Deduction Protection: If you claim Section 10A deduction, ensure proper records showing the breakdown of profits into eligible and non-eligible categories. With this ruling, the tax authorities cannot use TP adjustments to indirectly deny Section 10A benefits.
• File Appeals/Revisions if Pending: If you have pending TP disputes in ITAT or are in the appellate process, cite this ruling in your submissions. It directly supports your position on comparables and working capital.

For Future Transactions:

• Conduct TP studies before finalizing related-party transaction prices. Use multiple benchmarking methods (not just comparable company method).
• Maintain robust contemporaneous TP documentation with detailed functional analysis, economic analysis, and comparables selection rationale.
• Consider using specialized TP professionals for international transactions to ensure compliance and defensibility.

Key Takeaways

• Comparable Selection is Rigorous: Under Section 92 of the IT Act 2025, tax authorities must select truly comparable companies. Merely selecting large or well-known companies is not sufficient. This is a win for taxpayers challenging weak TP adjustments.
• Working Capital Adjustments Now Permitted: Temporary working capital fluctuations don't indicate TP violations. The tribunal has recognized that working capital cycles legitimately vary across companies, and these should not trigger TP additions.
• Section 10A Deduction is Protected: Even after TP adjustment, eligible profits continue to qualify for Section 10A deduction. The government cannot use TP adjustments as a backdoor way to deny Section 10A benefits.
• Fresh TP Study Is Mandatory: The tribunal has ordered re-benchmarking, giving taxpayers another opportunity to present better comparables and justify their transfer prices. This reduces the finality of aggressive TP assessments.
• Applicable to AY 2025-26 & 2026-27: This ruling is highly relevant for current and ongoing assessments. Both IT and non-IT companies with related-party transactions should use this precedent in their defense against TP adjustments.

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