Transfer pricing comparables and section 10A relief were allowed after MAP-based income enhancement was held outside the statutory bar.

ITAT Bangalore held that comparables used for benchmarking software development services were functionally dissimilar, including differences in intangibles, segmental data, product development, R&D activity and abnormal margins, so they were excluded and the arm's length price was to be recomputed after hearing the assessee. It further held that income enhanced under a Mutual Agreement Procedure resolution was not hit by the proviso to section 92CA(4), because that bar applies only to adjustments made by the Assessing Officer under that provision. Deduction under section 10A was therefore allowable on the enhanced income realised under the treaty-based settlement.

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Issues: (i) whether the transfer pricing adjustment in respect of software development services required exclusion of the selected comparable companies and fresh benchmarking of the arm's length price; and (ii) whether deduction under section 10A was allowable on the income enhanced pursuant to the Mutual Agreement Procedure resolution.

Issue (i): whether the transfer pricing adjustment in respect of software development services required exclusion of the selected comparable companies and fresh benchmarking of the arm's length price

Analysis: The assessee and the revenue had comparable sets contested on the ground of functional dissimilarity, ownership of intangibles, lack of segmental data, product development activity, research and development activity, and abnormal margins. The Tribunal followed earlier co-ordinate bench decisions on materially identical facts and held that the impugned companies were not proper comparables for a software development services provider. It therefore directed exclusion of the identified comparables and required the arm's length price to be recomputed after giving the assessee an opportunity of hearing.

Conclusion: The transfer pricing adjustment was set aside to that extent and the matter was restored for recomputation of the arm's length price in favour of the assessee.

Issue (ii): whether deduction under section 10A was allowable on the income enhanced pursuant to the Mutual Agreement Procedure resolution

Analysis: The enhanced income arose not from a domestic transfer pricing adjustment under section 92CA(4), but from a bilateral resolution under the Mutual Agreement Procedure under the applicable treaty and Rule 44H. The Tribunal held that the embargo in the proviso to section 92CA(4) applies to adjustments made by the Assessing Officer under that provision and does not extend to income enhanced under a Mutual Agreement Procedure settlement. It further held that, once the enhanced amount was invoiced and realised as part of the agreed resolution, deduction under section 10A could not be denied on that income.

Conclusion: Deduction under section 10A was allowable on the income enhanced under the Mutual Agreement Procedure, in favour of the assessee.

Final Conclusion: The appeal succeeded on both the transfer pricing comparability issue and the deduction issue, with consequential recomputation directed on the first issue and section 10A relief granted on the second.

Ratio Decidendi: A transfer pricing enhancement under the Mutual Agreement Procedure is distinct from an adjustment made by the Assessing Officer under section 92CA(4), and the statutory bar on deduction in that provision does not apply to income enhanced through a treaty-based bilateral settlement.

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