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Issues: (i) Whether the filter excluding companies having export sales of less than 75% of total revenue was a valid comparability criterion under transfer pricing analysis; (ii) whether the filter excluding companies having related party transactions in excess of 25% of operating revenues was a valid comparability criterion; (iii) whether the filter excluding persistent loss-making companies or companies with diminishing revenues was a valid comparability criterion.
Issue (i): Whether the filter excluding companies having export sales of less than 75% of total revenue was a valid comparability criterion under transfer pricing analysis.
Analysis: The assessee was a low-risk captive service provider rendering back-office and support services predominantly to foreign associated enterprises. Since its ITES segment largely catered to export markets, the geographical orientation of the comparables was held to be relevant. In such circumstances, companies deriving less than 75% of their revenues from exports could justifiably be excluded for comparability purposes.
Conclusion: The export sales filter was held to be valid, and the Revenue succeeded on this issue.
Issue (ii): Whether the filter excluding companies having related party transactions in excess of 25% of operating revenues was a valid comparability criterion.
Analysis: Under transfer pricing principles, a controlled transaction must be compared with an uncontrolled transaction. The presence of substantial related party transactions could materially affect margins because pricing between related entities is not purely market-driven. A threshold of 25% of operating revenues was treated as a fair benchmark for excluding companies whose results may be influenced by controlled dealings.
Conclusion: The related party transactions filter was held to be valid, and the Revenue succeeded on this issue.
Issue (iii): Whether the filter excluding persistent loss-making companies or companies with diminishing revenues was a valid comparability criterion.
Analysis: Persistent losses cannot be presumed from a single year of loss, particularly where the tested party is in its first year of operations and may itself incur losses due to initial set-up costs and depreciation. Loss-making comparables are not to be mechanically rejected unless the facts show sustained loss behaviour or other abnormal circumstances affecting comparability.
Conclusion: The persistent loss-making filter was rejected as a valid filter, and the assessee succeeded on this issue.
Final Conclusion: The Revenue's appeal succeeded on the export sales and related party transaction filters, while the exclusion of persistent loss-making companies was not sustained. The assessee's delayed appeal was not admitted, and the matter was remitted for recomputation of the transfer pricing margin in accordance with the findings.
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