Section 10A computation and transfer pricing comparables: eligible unit profits excluded at source, but turnover alone is not a valid filter.

Profits of an eligible unit under section 10A must be excluded at the stage of computation itself, so losses of another eligible unit are not set off against those profits before the deduction is worked out; the Tribunal applied binding jurisdictional precedent and upheld the assessee's position on this issue. In transfer pricing analysis, turnover alone was held not to be a decisive ground for excluding comparables, because comparable selection must rest on an objective assessment rather than an arbitrary size-based cap; on this point, the exclusion of high-turnover companies was rejected.

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Issues: (i) whether deduction under section 10A of the Income-tax Act, 1961 was to be computed without setting off losses of one eligible unit against the profits of another eligible unit; (ii) whether companies having turnover beyond the selected range could be excluded as comparables for transfer pricing analysis.

Issue (i): Whether deduction under section 10A of the Income-tax Act, 1961 was to be computed without setting off losses of one eligible unit against the profits of another eligible unit.

Analysis: The eligible unit's profits were required to be excluded at the stage of computation itself, and the loss of another unit was not to be adjusted against such profits for the purpose of section 10A. The binding jurisdictional precedent applied the principle that the deduction is to be worked out before the eligible income forms part of the gross total income, and the pendency of further appeal did not dilute its precedential effect.

Conclusion: The deduction under section 10A was correctly directed to be computed without setting off losses of one eligible unit against the profits of another, in favour of the assessee.

Issue (ii): Whether companies having turnover beyond the selected range could be excluded as comparables for transfer pricing analysis.

Analysis: The turnover filter adopted by the first appellate authority was rejected. It was held that turnover by itself was not a valid decisive criterion for exclusion, particularly where the Tribunal had already taken the view that the prescribed comparable selection must rest on objective analysis and not on an arbitrary upper cap based only on size.

Conclusion: The exclusion of high-turnover companies as comparables was not justified, in favour of Revenue.

Final Conclusion: The appeal succeeded on the transfer pricing issue and failed on the section 10A issue, resulting in a mixed outcome with the assessee retaining relief on one substantial question and Revenue prevailing on the other.

Ratio Decidendi: For section 10A computation, eligible unit profits are excluded at the source before set-off principles operate, whereas turnover alone cannot be treated as a determinative filter for excluding comparables in transfer pricing analysis.

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