TaxTMI 
TaxTMI 
Arm's Length Price Determination u/s 92C: Comparability Analysis: Economic Relevance of Turnover and Related-Party Transactions
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....scale that can affect profitability and comparability. • An RPT filter of 15% is ordinarily preferable where a sufficient pool of reliable comparables meeting that threshold is available. A higher threshold of 20% or 25% may be adopted only upon a specific finding that sufficient lower-RPT comparables are unavailable. • Selection of comparables and application of filters remain data-driven factual exercises. However, appellate scrutiny under section 260A remains available where the exercise disregards the Act or Rules, or where the findings are shown to be perverse. Background & Context Transfer-pricing analysis seeks to determine whether the price or margin arising from a controlled transaction is consistent with the arm's length standard. Section 92 of the Income-tax Act, 1961 provides that "any income arising from an international transaction shall be computed having regard to the arm's length price." The provision also requires allowances for expense or interest arising from an international transaction to be determined on that basis. The mechanism is set out in Section 92C. Section 92C(1) requires the arm's length price to be dete....
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....to the facts and circumstances" of the particular transaction and which provides "the most reliable measure" of the arm's length price. Under Rule 10C(2), the choice requires consideration of the nature of the transaction, functional analysis, availability and reliability of data, degree of comparability, availability of reliable adjustments, and reliability of assumptions. More specifically, Rule 10B(2) requires comparison by reference to: the characteristics of the property or services; "the functions performed, taking into account assets employed ... and the risks assumed"; contractual allocation of responsibilities, risks and benefits; and market conditions, including geographical location and "size of the markets". Rule 10B(3) permits an uncontrolled transaction to be treated as comparable only where differences are not likely materially to affect price, cost or profit, or where reasonably accurate adjustments can eliminate their material effects. Detailed Analysis Turnover is a comparability factor, not a standalone statutory bar In 2026 (9) TMI 711 - KARNATAKA HIGH COURT, the Court rejected the proposition that size becomes irrelevant merely because the teste....
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....alysis in the particular case. RPT filter: preference for the lowest practicable tolerance The RPT filter serves a distinct purpose. It is designed to minimise the possibility that the profitability of a proposed comparable has itself been influenced by dealings with related parties. The objective is to select uncontrolled comparables, while recognising that a demand for entities having no related-party dealings at all may unduly reduce the available pool. The Court described the RPT filter as a permissible tolerance. Its governing proposition is that the percentage should ideally be the lowest possible among available reliable comparables. Where a 15% filter yields an adequate number of comparables that otherwise satisfy the Act and Rules, there is no rational basis merely to raise the threshold to 25%. A lower threshold narrows the tolerance and reduces the possible influence of related-party dealings on the comparable's margin. Conversely, the Court did not treat a 25% RPT filter as legally impermissible. A threshold of 20% or 25% may be adopted where sufficient comparables satisfying a lower threshold are unavailable. That departure requires a specific recorded ....
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....ng analysis is replaced, the comparables selected or rejected by the Transfer Pricing Officer must independently satisfy Rule 10B. A standard departmental set cannot substitute for transaction-specific functional, asset and risk analysis. The party seeking inclusion or exclusion of a comparable must also substantiate the factual basis of that request. If the Transfer Pricing Officer introduces or retains a comparable, the selection must be justified by relevant material and a Rule 10B-compliant analysis. The Court further held that these issues do not become immune from scrutiny merely because they are fact intensive. In an appeal under section 260A, the enquiry is whether the Act and Rules were followed and whether the Tribunal's findings are perverse. A challenge that simply seeks a fresh preference between competing factual views will not suffice. A challenge demonstrating disregard of material comparability criteria, unsupported thresholds or a finding contrary to the record may raise a substantial question of law. Practical Implications • Document turnover comparability as an economic issue. The analysis should identify whether material scale differences....