Functionally Dissimilar Comparables Cannot Be Retained in Transfer Pricing: ITAT Bangalore Upholds DRP Directions in Brocade Communications Matter
Background and Procedural History
The Bengaluru Bench of the Income Tax Appellate Tribunal, in ACIT Vs Brocade Communications Systems Pvt. Ltd. (IT(TP)A No. 167/Bang/2015), pronounced its order on 21 September 2026 concerning Assessment Year 2010–11. The matter had an unusually long procedural journey spanning over a decade before the substantive transfer pricing grounds were finally adjudicated.
Brocade Communications Systems Pvt. Ltd. was engaged in rendering contract software research and development services and marketing support services to its Associated Enterprise (AE). For the purpose of benchmarking these international transactions, the assessee adopted the Transactional Net Margin Method (TNMM) as the most appropriate method under the Income Tax Act, 1961, selecting separate comparable sets for each service segment.
The assessee filed its return of income on 28/09/2010, which was initially processed under Section 143(1). The case was subsequently selected for scrutiny, and a notice under Section 143(2) was issued. Given the presence of international transactions, the Assessing Officer referred the matter to the Transfer Pricing Officer (TPO) for determination of the Arm's Length Price (ALP) in accordance with Section 92CA of the Income Tax Act, 1961.
Transfer Pricing Adjustments Proposed by the TPO
The assessee had selected 12 comparables for the Software Development Services (SWD) segment and 5 comparables for the Market Support Services segment. The TPO, after applying his own filters and rejecting the assessee's selection, proposed the following TP adjustments:
- Software Development Services: Rs. 4,55,25,149/-
- Marketing Support Services: Rs. 1,30,61,872/-
- Total Adjustment: Rs. 5,85,87,021/-
The assessee raised objections before the Dispute Resolution Panel (DRP), which examined the submissions and issued directions accordingly. Pursuant to the DRP's directions, the TPO recomputed the ALP, bringing the final TP adjustment down to Rs. 1,34,76,048/-. The Assessing Officer passed the final assessment order incorporating this revised TP adjustment along with employee share cost.
Lengthy Procedural Journey: From ITAT to High Court and Back
Both the Revenue and the assessee filed appeals before the Tribunal. By a common order dated 21/10/2016 in IT(TP)A No. 331/Bang/2015 and IT(TP)A No. 167/Bang/2015, the Tribunal allowed the assessee's appeal for statistical purposes and dismissed the Revenue's appeal.
However, it subsequently came to light that Ground Nos. 5 to 13 raised by the Revenue—pertaining specifically to transfer pricing comparability issues—had not been adjudicated in that order. The Revenue filed a miscellaneous petition being M.P. No. 124/Bang/2017 under Section 254(2) of the Income Tax Act, 1961, seeking rectification of the error. This application was rejected by the Tribunal on the ground that it had been filed beyond the six-month limitation period.
The Revenue challenged this rejection before the Hon'ble Karnataka High Court in W.P. No. 11834 of 2019 (T-IT). By its order dated 14/08/2025, the High Court set aside the Tribunal's rejection and directed it to consider the miscellaneous petition on merits. The Tribunal, upon reconsideration, found that Ground Nos. 5 to 13 had indeed not been addressed and accordingly recalled its earlier order in IT(TP)A No. 167/Bang/2015 to decide those specific grounds. The recalled appeal was heard on 25/06/2026, and the present order is the outcome of that hearing.
Ground No. 7: Challenge to Exclusion of Four Comparables
Revenue's Position
The Revenue contended that the following four companies satisfied all quantitative and qualitative filters applied by the TPO and should therefore be reinstated as comparables: