The TPO has taken a three-year weighted average margin for a comparable under Rule 10CA, but the company fails my turnover filter in the two earlier years. Must those years still go into the weighted average?
No. The Tribunal held that the provisos to Rule 10CA(2) must be read harmoniously with Rule 10B(3) and the proviso to Rule 10B(4), and that where a filter makes an enterprise non-comparable in the earlier two years, the data for those years can have no influence on the determination of transfer prices for the current year and must be ignored. On the facts, if R.S. Software (India) Ltd. was to be a comparable at all, its margins for the two earlier years had to be dropped, because in those years its turnover exceeded Rs 200 crores and it was not comparable.
Decided by the ITAT (N.V. Vasudevan, Vice President and Chandra Poojari, Accountant Member (Bangalore Bench 'C')) on 2021-10-25, reported as IT(TP)A No.229/Bang/2021 (AY 2016-17). It bears on section 92C, section 92C(1), section 92CA, section Rule 10CA, section Rule 10CA(2), section Rule 10CA(3), section Rule 10B, section Rule 10B(2), section Rule 10B(3), section Rule 10B(4) of the Income Tax Act 1961, in Assessment & Scrutiny and How Tax Law Is Read matters.
This is the practical heart of the range regime. Rule 10CA is mechanical on its face — first proviso to sub-rule (2) says that where the comparable undertook similar uncontrolled transactions in either or both of the two preceding years, the weighted average of the three years computed under sub-rule (3) goes into the dataset instead of the current-year price — and the TPO will apply it that way. The Tribunal accepted that a plain reading of the first proviso does not look at comparability year by year, and then refused to stop there: comparability under Rule 10B(3) and the 'influence' rider in the proviso to Rule 10B(4) control. That is what lets you keep a comparable while excluding the years in which it fails your filter, instead of losing the comparable altogether or swallowing a distorted weighted average. The order also fixes the dates that decide whether Rule 10CA applies at all: notified by S.O. 2860(E) dated 19 October 2015 and applicable to international transactions and specified domestic transactions undertaken on or after 1 April 2014, and only where the most appropriate method is RPM, CPM or TNMM.
Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere.
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For AY 2016-17 (financial year 2015-16) the TPO included R.S. Software (India) Ltd. in the set of comparables and, applying the first proviso to Rule 10CA(2), took the weighted average of its margins for the three financial years 2013-14, 2014-15 and 2015-16 — 24.14 per cent, 32.75 per cent and minus 2.09 per cent — arriving at 24.83 per cent. The assessee applied a turnover filter excluding companies with turnover above Rs 200 crores. R.S. Software crossed that threshold in the two earlier years. The question was whether the company should be excluded altogether on the turnover filter by reason of its earlier-year turnover, or whether the earlier two years' margins had to be ignored in computing the weighted average because the company failed the comparability test in those years.
On a harmonious reading of Rule 10CA with Rule 10B(3) and Rule 10B(4), the Tribunal agreed with the assessee: if R.S. Software (India) Ltd. was to be regarded as a comparable at all, the margins for the two earlier years had to be ignored, because in those years the company was to be regarded as not comparable (para 20). The Tribunal separately held that companies whose turnover in the current year exceeded Rs 200 crores were to be excluded from the list of comparables. The appeal was partly allowed.
The Tribunal set out the amendment history — the Finance (No. 2) Act 2014 aligned the Indian regime with international practice, and the amended rules were notified by S.O. 2860(E) dated 19 October 2015, applicable to international transactions and specified domestic transactions undertaken on or after 1 April 2014, and only where the most appropriate method is RPM, CPM or TNMM; the range begins at the 35th percentile and ends at the 65th, and a transaction price within the range is accepted. It then reproduced Rule 10CA(1) to (3) in full and worked through the three provisos to sub-rule (2): the first requires the weighted average of the current and two preceding years where the comparable undertook similar uncontrolled transactions in those years; the second covers the case where the comparable transacted only in the current and immediately preceding year; the third bars a company from the dataset altogether if it undertook no comparable uncontrolled transaction in the current year, however it performed earlier. The Tribunal accepted that on a plain reading of the first proviso the question of comparability is not to be seen while applying the first and second provisos. But Rule 10B(3) permits comparison only where differences do not materially affect price, cost or profit or can be adjusted for, and the proviso to Rule 10B(4) allows earlier-year data only 'if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared'. If a filter makes the enterprise non-comparable in the earlier two years, the data for those years can have no such influence and must be ignored.
Therefore, if at all R.S.Software Ltd., is to be regarded as a comparable company, then the margins for AY 2014-15 and 2015-16 of the company have to be ignored because in those years they are to be regarded as not comparable. We hold accordingly.
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Handle my notice → Ask a CA on WhatsAppNo. The Tribunal held that the provisos to Rule 10CA(2) must be read harmoniously with Rule 10B(3) and the proviso to Rule 10B(4), and that where a filter makes an enterprise non-comparable in the earlier two years, the data for those years can have no influence on the determination of transfer prices for the current year and must be ignored. On the facts, if R.S. Software (India) Ltd. was to be a comparable at all, its margins for the two earlier years had to be dropped, because in those years its turnover exceeded Rs 200 crores and it was not comparable. This was decided by the ITAT (N.V. Vasudevan, Vice President and Chandra Poojari, Accountant Member (Bangalore Bench 'C')) and bears on section 92C, section 92C(1), section 92CA, section Rule 10CA, section Rule 10CA(2), section Rule 10CA(3), section Rule 10B, section Rule 10B(2), section Rule 10B(3), section Rule 10B(4) of the Income Tax Act 1961. It is reported as IT(TP)A No.229/Bang/2021 (AY 2016-17). This is the practical heart of the range regime. Rule 10CA is mechanical on its face — first proviso to sub-rule (2) says that where the comparable undertook similar uncontrolled transactions in either or both of the two preceding years, the weighted average of the three years computed under sub-rule (3) goes into the dataset instead of the current-year price — and the TPO will apply it that way. The Tribunal accepted that a plain reading of the first proviso does not look at comparability year by year, and then refused to stop there: comparability under Rule 10B(3) and the 'influence' rider in the proviso to Rule 10B(4) control. That is what lets you keep a comparable while excluding the years in which it fails your filter, instead of losing the comparable altogether or swallowing a distorted weighted average. The order also fixes the dates that decide whether Rule 10CA applies at all: notified by S.O. 2860(E) dated 19 October 2015 and applicable to international transactions and specified domestic transactions undertaken on or after 1 April 2014, and only where the most appropriate method is RPM, CPM or TNMM. If it applies to you, the first step is this: Establish first whether the range regime applies at all: transaction on or after 1 April 2014, most appropriate method RPM, CPM or TNMM, and enough comparables in the dataset.
For AY 2016-17 (financial year 2015-16) the TPO included R.S. Software (India) Ltd. in the set of comparables and, applying the first proviso to Rule 10CA(2), took the weighted average of its margins for the three financial years 2013-14, 2014-15 and 2015-16 — 24.14 per cent, 32.75 per cent and minus 2.09 per cent — arriving at 24.83 per cent. The assessee applied a turnover filter excluding companies with turnover above Rs 200 crores. R.S. Software crossed that threshold in the two earlier years. The question was whether the company should be excluded altogether on the turnover filter by reason of its earlier-year turnover, or whether the earlier two years' margins had to be ignored in computing the weighted average because the company failed the comparability test in those years. The matter was decided on 2021-10-25 by the ITAT (N.V. Vasudevan, Vice President and Chandra Poojari, Accountant Member (Bangalore Bench 'C')). On those facts the ITAT held as follows. On a harmonious reading of Rule 10CA with Rule 10B(3) and Rule 10B(4), the Tribunal agreed with the assessee: if R.S. Software (India) Ltd. was to be regarded as a comparable at all, the margins for the two earlier years had to be ignored, because in those years the company was to be regarded as not comparable (para 20). The Tribunal separately held that companies whose turnover in the current year exceeded Rs 200 crores were to be excluded from the list of comparables. The appeal was partly allowed.
The Tribunal set out the amendment history — the Finance (No. 2) Act 2014 aligned the Indian regime with international practice, and the amended rules were notified by S.O. 2860(E) dated 19 October 2015, applicable to international transactions and specified domestic transactions undertaken on or after 1 April 2014, and only where the most appropriate method is RPM, CPM or TNMM; the range begins at the 35th percentile and ends at the 65th, and a transaction price within the range is accepted. It then reproduced Rule 10CA(1) to (3) in full and worked through the three provisos to sub-rule (2): the first requires the weighted average of the current and two preceding years where the comparable undertook similar uncontrolled transactions in those years; the second covers the case where the comparable transacted only in the current and immediately preceding year; the third bars a company from the dataset altogether if it undertook no comparable uncontrolled transaction in the current year, however it performed earlier. The Tribunal accepted that on a plain reading of the first proviso the question of comparability is not to be seen while applying the first and second provisos. But Rule 10B(3) permits comparison only where differences do not materially affect price, cost or profit or can be adjusted for, and the proviso to Rule 10B(4) allows earlier-year data only 'if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared'. If a filter makes the enterprise non-comparable in the earlier two years, the data for those years can have no such influence and must be ignored. In the words reproduced by the source cited on this page: "Therefore, if at all R.S.Software Ltd., is to be regarded as a comparable company, then the margins for AY 2014-15 and 2015-16 of the company have to be ignored because in those years they are to be regarded as not comparable. We hold accordingly."
It was decided by the ITAT on 2021-10-25 and is reported as IT(TP)A No.229/Bang/2021 (AY 2016-17). Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere. A Tribunal decision binds the assessing officer and the Commissioner (Appeals) within that Tribunal's jurisdiction, and is persuasive before other benches. It is not binding on a High Court, and a contrary co-ordinate bench decision will be argued against you, so check whether the point has been taken the other way before you build a reply around it. On section 92C, section 92C(1), section 92CA, section Rule 10CA, section Rule 10CA(2), section Rule 10CA(3), section Rule 10B, section Rule 10B(2), section Rule 10B(3), section Rule 10B(4), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. On a harmonious reading of Rule 10CA with Rule 10B(3) and Rule 10B(4), the Tribunal agreed with the assessee: if R.S. Software (India) Ltd. was to be regarded as a comparable at all, the margins for the two earlier years had to be ignored, because in those years the company was to be regarded as not comparable (para 20). The Tribunal separately held that companies whose turnover in the current year exceeded Rs 200 crores were to be excluded from the list of comparables. The appeal was partly allowed. It arises in Assessment & Scrutiny and How Tax Law Is Read matters, on section 92C, section 92C(1), section 92CA, section Rule 10CA, section Rule 10CA(2), section Rule 10CA(3), section Rule 10B, section Rule 10B(2), section Rule 10B(3), section Rule 10B(4) of the Income Tax Act 1961, and was decided by N.V. Vasudevan, Vice President and Chandra Poojari, Accountant Member (Bangalore Bench 'C'). Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. For every comparable the TPO has weighted-averaged, test the filters year by year — turnover, functional profile, related-party threshold — and identify the years in which the company fails. Argue the harmonious construction: the provisos to Rule 10CA(2) do not override Rule 10B(3), and the proviso to Rule 10B(4) permits earlier-year data only 'if such data reveals facts which could have an influence on the determination of transfer prices in relation to the transactions being compared'. Recompute the weighted average under Rule 10CA(3) with the failing years dropped, and put the recomputation on record — the Tribunal accepted the assessee's stand on figures already in the TPO's own chart. Watch the third proviso to Rule 10CA(2) as a separate trap: if the enterprise undertook no comparable uncontrolled transaction in the current year, or its current-year transaction is not comparable, it cannot enter the dataset at all however good its earlier years look.
Validity check could not be completed. Validity check could not be completed — no later-treatment search was carried out, and I did not look for a contrary Tribunal line on whether comparability is tested year by year under the provisos to Rule 10CA(2). The Tribunal itself acknowledged that a plain reading of the first proviso points the other way, so a bench taking the literal view is entirely possible. The rule text reproduced in the order was not independently checked against the current notified text of Rule 10CA. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The paragraph numbering in the copy I read is disordered: the Rule 10CA discussion runs at paragraphs 16 to 20, and is then followed by a paragraph numbered 14 (the turnover-filter conclusion excluding companies above Rs 200 crores in the current year) and by paragraph 45, the final result. Within paragraph 20 the Tribunal describes the two earlier years first as 'the financial years 2013-14 and 2014-15' and, in the concluding sentence, as 'the margins for AY 2014-15 and 2015-16' — the same two years expressed once as financial years and once as assessment years. The current year is financial year 2015-16, AY 2016-17. The profit margins recorded for R.S. Software (India) Ltd. for the three financial years 2013-14 to 2015-16 were 24.14 per cent, 32.75 per cent and minus 2.09 per cent, with a weighted average of 24.83 per cent taken by the TPO. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
On a harmonious reading of Rule 10CA with Rule 10B(3) and Rule 10B(4), the Tribunal agreed with the assessee: if R.S. Software (India) Ltd. was to be regarded as a comparable at all, the margins for the two earlier years had to be ignored, because in those years the company was to be regarded as not comparable (para 20). The Tribunal separately held that companies whose turnover in the current year exceeded Rs 200 crores were to be excluded from the list of comparables. The appeal was partly allowed.
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