Transfer pricing comparables, section 10A turnover adjustment, and ESOP expenditure treatment were all upheld on established precedent.

In transfer pricing analysis, Infosys Technologies Ltd. was treated as functionally dissimilar because of diversified software and product development activities and exceptionally large turnover, while L&T InfoTech Ltd. was excluded for want of segmental data; the exclusion of both companies from the comparables set was upheld. For section 10A computation, telecommunication charges and similar expenditure were to be excluded from both export turnover and total turnover, following SAK Soft Ltd. and Tata Elxsi Ltd., and that approach was upheld. ESOP expenditure was also treated as revenue expenditure, in line with Biocon Ltd., and that treatment was upheld.

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Issues: (i) whether Infosys Technologies Ltd. and L&T InfoTech Ltd. were comparable companies for transfer pricing purposes; (ii) whether telecommunication charges and other expenditure were to be excluded from export turnover and total turnover while computing deduction under section 10A; (iii) whether expenditure on employees stock option plans (ESOPs) was allowable as revenue expenditure.

Issue (i): whether Infosys Technologies Ltd. and L&T InfoTech Ltd. were comparable companies for transfer pricing purposes

Analysis: Infosys Technologies Ltd. was found to be functionally dissimilar because it carried on diversified software development and product development activities and had exceptionally large turnover. L&T InfoTech Ltd. was found unsuitable as no segmental data was available, and the same view had been taken in earlier comparable cases.

Conclusion: The exclusion of Infosys Technologies Ltd. and L&T InfoTech Ltd. from the comparables set was upheld.

Issue (ii): whether telecommunication charges and other expenditure were to be excluded from export turnover and total turnover while computing deduction under section 10A

Analysis: The exclusion of such expenses from both export turnover and total turnover was held to be in line with the Special Bench view in SAK Soft Ltd. and the Karnataka High Court ruling in Tata Elxsi Ltd.

Conclusion: The direction to exclude telecommunication charges and other expenditure from both export turnover and total turnover was upheld.

Issue (iii): whether expenditure on employees stock option plans (ESOPs) was allowable as revenue expenditure

Analysis: The claim was treated as covered by the Special Bench decision in Biocon Ltd., which supported allowance of ESOP expenditure as revenue in nature.

Conclusion: The treatment of ESOP expenditure as revenue expenditure was upheld.

Final Conclusion: The Revenue's challenge failed on all substantive issues, while the assessee obtained relief only on the comparability issue relating to the exclusion of Infosys Technologies Ltd. and L&T InfoTech Ltd.

Ratio Decidendi: Functionally dissimilar companies, particularly those with diversified operations or lacking segmental data, are not comparable for transfer pricing analysis; for section 10A, the same expenditure excluded from export turnover must also be excluded from total turnover; ESOP expenditure may be allowable as revenue expenditure where so held on the applicable facts and precedent.

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