RPT Threshold Set at 15% in Comparables Selection: Key Points from Recent Tax Tribunal Decision

The Tribunal partly allowed the Revenue's appeal by setting a 15% threshold for Related Party Transactions (RPT) in selecting comparables. It directed further investigation into abnormal profit margins and turnover comparisons, following the Maersk Global Centres case. The Tribunal upheld the exclusion of telecommunication and foreign currency expenses from total turnover, in line with the ACIT v. Tata Elxsi Ltd. decision. The judgment was pronounced on March 31, 2016.

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Issues Involved:
1. Exclusion of comparables with Related Party Transactions (RPT).
2. Exclusion of comparables with abnormal/high profit margins.
3. Exclusion of certain comparables based on turnover.
4. Exclusion of telecommunication and other expenses in foreign currency from total turnover.

Detailed Analysis:

1. Exclusion of Comparables with Related Party Transactions (RPT):
The Revenue contested the CIT(A)'s direction to exclude companies with Related Party Transactions (RPT) from the list of comparables. The Tribunal noted that the CIT(A) did not specify a threshold limit for RPT. It was highlighted that typically, a 15% threshold limit for RPT is considered reasonable. The Tribunal modified the CIT(A)'s order, directing the AO/TPO to apply a 15% RPT threshold for selecting comparables. This ground of the Revenue’s appeal was partly allowed.

2. Exclusion of Comparables with Abnormal/High Profit Margins:
The Revenue challenged the CIT(A)'s decision to exclude companies with abnormal/high profit margins from the list of comparables. The Tribunal referred to the Special Bench decision in Maersk Global Centres (India) (P.) Ltd., which stated that companies cannot be excluded solely based on high profit margins. Instead, further investigation is required to determine if high profits are due to normal business conditions or extraordinary circumstances. The Tribunal directed the AO/TPO to investigate the reasons for high profit margins and decide the issue accordingly.

3. Exclusion of Certain Comparables Based on Turnover:
The CIT(A) had excluded five companies from the list of comparables because their turnover exceeded Rs. 200 crores. The Tribunal found this turnover slab inappropriate, as it could lead to inconsistent results. Instead, a more reasonable parameter or multiple should be applied to compare turnovers. The Tribunal set aside this issue, directing the AO/TPO to apply an appropriate multiple or differential factor regarding the turnover of the comparables and the assessee.

4. Exclusion of Telecommunication and Other Expenses in Foreign Currency from Total Turnover:
The Revenue disputed the exclusion of telecommunication expenses and other foreign currency expenses from the total turnover. The Tribunal referred to the jurisdictional High Court's decision in ACIT v. Tata Elxsi Ltd., which held that such expenses should be excluded from both export turnover and total turnover to maintain consistency in the formula for computing deductions under Section 10A. Following this precedent, the Tribunal upheld the CIT(A)'s decision, finding no error or illegality.

Conclusion:
The Tribunal partly allowed the Revenue's appeal, modifying the CIT(A)'s order regarding the RPT threshold and directing further investigation into high profit margins and appropriate turnover comparisons. The Tribunal upheld the CIT(A)'s decision on excluding telecommunication and foreign currency expenses from the total turnover. The judgment was pronounced on March 31, 2016.

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