Order directs recomputation of ALP under proviso to section 92C(2) and excludes telecom expense under section 10A

ITAT directed the AO/TPO to recompute the assessee's ALP for international transactions with the AE per the Bench's directions and to make adjustments if the margin differential exceeds the 5% bandwidth under proviso to section 92C(2). The Tribunal also held that for deduction under section 10A the telecom expense of Rs. 8,15,037 must be excluded from both export turnover and total turnover (following the HC principle), restoring parity and correcting the AO's earlier computation. The appeal was partly allowed with these directions.

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Issues: (i) Whether the transfer pricing adjustment of Rs.3,77,22,565 made under section 92CA by adopting the TPO's comparables and methodology is sustainable; (ii) Whether telecommunication expenses of Rs.8,15,037 should be excluded from both export turnover and total turnover while computing deduction under section 10A.

Issue (i): Whether the ALP adjustment under transfer pricing is valid.

Analysis: The Tribunal examined comparability criteria applied by the TPO including turnover range, functional similarity, related party transaction limits, working capital adjustment, and treatment of foreign exchange gains. Prior coordinate Bench decisions and Dun & Bradstreet guidance were applied to exclude comparables with turnover exceeding Rs.200 crores and to reject functionally dissimilar entities identified on factual and segmental grounds. Comparables with related party transactions exceeding 15% of revenue were directed to be excluded after verification. Foreign exchange gains/losses were directed to be included in operating revenue/cost for both the assessee and comparables. The Tribunal retained a reduced set of comparables and directed AO/TPO to recompute ALP using the directed filters, segmental margins where applicable, and working capital adjustment, and to apply the proviso to section 92C(2) (5% bandwidth) to determine whether an adjustment is required.

Conclusion: Transfer pricing adjustment set aside in part and AO/TPO directed to recompute ALP in accordance with Tribunal's directions; adjustment will stand only if recomputed margin differs beyond the 5% bandwidthdirection in favour of the assessee on comparability and treatment issues, subject to recomputation.

Issue (ii): Whether telecommunication expenses of Rs.8,15,037 must be reduced from both export turnover and total turnover for section 10A computation.

Analysis: The Tribunal applied the jurisdictional High Court ruling that adjustments excluded from export turnover must be correspondingly excluded from total turnover to maintain parity between numerator and denominator when computing deduction under section 10A.

Conclusion: Directed AO to reduce Rs.8,15,037 from both export turnover and total turnover when computing the section 10A deductionruling in favour of the assessee.

Final Conclusion: The appeal is partly allowed: transfer pricing directions given for recomputation of ALP applying specified comparability filters, working capital and foreign exchange adjustments and 5% bandwidth test; section 10A deduction recomputed in favour of the assessee by excluding the specified telecommunication expenses from both export and total turnover.

Ratio Decidendi: For transfer pricing, comparables must satisfy size and functional similarity filters (including reasonable turnover range and related party transaction limits), foreign exchange gains/losses form part of operating revenue/cost, and ALP must be determined after appropriate filters, segmental margins and working capital adjustments and tested against the 5% bandwidth under proviso to section 92C(2); for section 10A, any expense excluded from export turnover must also be excluded from total turnover to preserve parity between numerator and denominator.

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