What is the significance of the 25% RPT-to-sales threshold under Section 92C?

The 25% threshold is a quantitative filter adopted by the TPO to exclude comparables where related party transactions may distort pricing. The ITAT held that this filter is not discretionary; if a comparable exceeds it, inclusion violates the TPO’s own methodology and renders the ALP adjustment invalid.

Can an objection to a comparable’s eligibility be raised for the first time before the Tribunal?

Yes. While procedural delay is a factor, the ITAT held that if the TPO’s own criteria are violated and the evidence is available on record, the objection must be adjudicated on merit, not dismissed on procedural grounds.

Is the TNMM method binding on the TPO when the assessee has adopted it?

The TPO must respect the method chosen by the assessee unless a better method is justified under Rule 10B. However, the TPO cannot selectively apply filters within that method. If a filter is adopted, it must be uniformly applied to all comparables.

TNMM comparables invalid if related party sales exceed 25%

The Income Tax Appellate Tribunal, Delhi, has clarified a critical threshold in transfer pricing disputes: the inclusion of a comparable entity with related party transactions exceeding 25% of its total sales violates the very filter adopted by the Transfer Pricing Officer. This ruling reinforces procedural discipline in ALP computations under Section 92C and sets a binding standard for future benchmarking exercises.

Background & Facts

The Dispute

The appellant, Great Learning Education Services Private Limited, an Ed-tech company providing technology-enabled higher education and certification programs, entered into international transactions with its Associated Enterprise, Great Learning Singapore. These transactions involved the provision of learner support and customer care services, with a total value of Rs. 13,27,70,884 during the assessment year 2021-22. The Assessing Officer, acting on the directions of the Transfer Pricing Officer (TPO) and the Dispute Resolution Panel (DRP), made an adjustment of Rs. 61,42,097 to the arm's length price (ALP) of these transactions under Section 92C of the Income Tax Act, 1961.

Key Facts

The assessee filed its return of income on 12.03.2022, declaring a loss of Rs. 34,04,17,526.
The return was selected for scrutiny under CASS due to TP risk parameters.
The assessee applied the Transactional Net Margin Method (TNMM) with Operating Profit to Operating Cost (OP/OC) as the Profit Level Indicator (PLI), reporting a margin of 15%.
The assessee proposed 13 comparables in its Transfer Pricing Study Report (TPSR), with a median margin of 6.25%, resulting in no ALP adjustment.
The TPO rejected nine comparables and proposed a new set of 12, including ANZ Support Services India Private Limited (ANZ), computing a median margin of 24.37%, leading to an initial proposed adjustment of Rs. 1,08,17,941.
The DRP directed the TPO to re-examine the functional comparability of ANZ and issue a speaking order.
The TPO, in its order dated 09.09.2024, retained ANZ as a comparable, adjusting the ALP to Rs. 61,42,097 based on a revised margin of 20.32%.
The final assessment order was passed on 11.09.2024.

Procedural History

12.03.2022: Assessee filed return of income for AY 2021-22.
12.12.2023: TPO issued transfer pricing order under Section 92CA(3) proposing initial ALP adjustment.
20.11.2023: Draft assessment order issued by AO under Section 144C(1).
07.08.2024: DRP issued directions under Section 144C(5) directing TPO to re-evaluate comparables.
09.09.2024: TPO issued order giving effect to DRP directions, retaining ANZ and reducing adjustment to Rs. 61,42,097.
11.09.2024: Final assessment order passed by AO under Section 143(3) read with Sections 144C(13) and 144B.
12.03.2026: Hearing before ITAT Delhi.
08.06.2026: Judgment pronounced.

The Parties' Positions

For the Appellant

Contended that ANZ Support Services India Private Limited was functionally dissimilar and should be excluded.
Submitted that ANZ’s related party transactions (RPT) constituted 97.59% of its total sales in FY 2020-21, violating the TPO’s own search criterion of RPT ≤ 25% of sales.
Argued that ANZ primarily engaged in banking and financial services for its parent group (ANZ Banking Group Limited), making it fundamentally different from the assessee’s customer support and administrative services.
Asserted that exclusion of ANZ would reduce the ALP adjustment to nil.

For the Revenue

Argued that ANZ was correctly included as it operated in the ITES/BPO sector and satisfied functional and quantitative filters.
Contended that the RPT objection was raised for the first time before the Tribunal and could not be entertained.
Sought to restore the matter to the TPO for verification, rather than direct exclusion.

Relief Sought

The appellant sought:

Exclusion of ANZ Support Services India Private Limited as a comparable.
Reduction of the ALP adjustment to Rs. Nil.
Setting aside of the assessment order dated 11.09.2024.
Dismissal of penalty proceedings under Section 270A as premature.

The Legal Issue

The central question was whether the inclusion of a comparable entity with related party transactions exceeding 25% of its total sales violates the TPO’s own adopted search criterion under Section 92C, and whether such an inclusion renders the ALP adjustment invalid.

Arguments Presented

For the Appellant

The appellant relied on the TPO’s explicit search criterion: "Reject companies where related party transactions exceed 25% of sales." It submitted that ANZ’s RPT-to-sales ratio for FY 2020-21 was 97.59%, as evidenced by its audited financial statements filed before the Tribunal. The appellant argued that this was not merely a procedural lapse but a substantive violation of the TPO’s own methodology, rendering ANZ ineligible as a comparable under TNMM. It further contended that the DRP’s directions required strict adherence to all filters, including quantitative ones, and that the TPO’s failure to verify this basic criterion was arbitrary.

For the Respondent

The Revenue argued that the RPT objection was raised for the first time before the Tribunal and was therefore not part of the record before the lower authorities. It maintained that ANZ’s business of providing IT-enabled services was functionally aligned with the assessee’s operations and that the TPO had correctly applied the filters. The Revenue sought to remand the matter to the TPO for verification rather than direct exclusion, citing procedural propriety.

The Court's Analysis

The Tribunal undertook a meticulous review of the TPO’s search criteria and the financial data of ANZ. It noted that the TPO had explicitly adopted a 25% RPT-to-sales threshold as a quantitative filter, justifying it with sound economic reasoning: "When the RPT exceeds 25% of sales, it can be said to be the stage when it will start affecting the price paid/received."

"The rationale given for the use of the limit of 25% is sound and this threshold limit has been approved explicitly and implicitly in quite a few judicial pronouncements."

The Tribunal examined ANZ’s audited financial statements for FY 2020-21, which disclosed total revenue of Rs. 7,759.87 million and related party transactions (RPT) from services and interest income aggregating to Rs. 2,290.98 million. This yielded an RPT-to-sales ratio of 29.5%, which exceeds the 25% threshold.

The Tribunal emphasized that the DRP’s directions were clear: ANZ could be included only if it satisfied "all the quantitative filters applied by him." The TPO’s failure to verify this basic criterion, despite having access to the financial statements, constituted a material error. The Tribunal observed that the Revenue’s argument that the objection was raised belatedly could not override the fact that the TPO’s own methodology was breached.

The Tribunal further noted that the assessee had submitted the financial statements of ANZ in the paper book before the Tribunal, and the TPO had not disputed their authenticity. The Tribunal held that the TPO’s duty to apply his own filters was non-delegable and non-negotiable.

The Verdict

The appeal was partly allowed. The Tribunal directed the Transfer Pricing Officer to verify whether ANZ Support Services India Private Limited’s related party transactions exceeded 25% of its total sales for FY 2020-21. If the verification confirms that the RPT-to-sales ratio exceeds 25%, the TPO shall exclude ANZ as a comparable and recalculate the ALP adjustment accordingly. The Tribunal held that if ANZ is excluded, the ALP adjustment shall be reduced to Rs. Nil. The penalty proceedings under Section 270A were dismissed as premature. The TPO is directed to complete this verification and issue a fresh order within 60 days from the date of the judgment.

What This Means For Similar Cases

RPT Filters Are Not Optional - They Are Mandatory

Practitioners must now rigorously verify whether comparables meet every quantitative filter cited by the TPO, especially RPT thresholds.
Any inclusion of a comparable that fails a stated filter renders the entire ALP adjustment vulnerable to challenge.
The burden shifts to the Revenue to prove compliance with its own methodology, not to the assessee to prove non-compliance.

Judicial Scrutiny of TPO Methodology Is Increasing

Tribunals are no longer deferential to TPO conclusions; they are actively verifying the factual basis of comparables.
Financial statements submitted before the Tribunal, even if not placed before lower authorities, can be relied upon if authentic and relevant.
The doctrine of "speaking orders" under Section 144C(5) now extends to verification of all stated criteria, not just functional similarity.

Strategic Implications for TP Documentation

Taxpayers should explicitly document and challenge any comparable that fails a stated filter, even if the challenge is raised for the first time before the Tribunal.
Maintain complete, certified financials of all proposed comparables in the appeal record.
Argue that the TPO’s failure to apply its own filters constitutes a violation of natural justice and procedural fairness under Section 92C(3).

TNMM Comparables Invalid if Related Party Transactions Exceed 25% of Sales: ITAT Delhi Sets Precedent on Arm's Length Price Selection