### High Turnover Disparity and Unspecified Functional Overlap Mandate Exclusion or Remand of Comparables in Transfer Pricing.

The Respondent, American Express (India) Pvt. Ltd. (AEIPL), is a 100% subsidiary of American Express International Inc., USA, providing IT-enabled services (ITeS) such as data management and back-office support.

For Assessment Year 2009-10, the assessee reported international transactions with its associated enterprises using the Transactional Net Margin Method (TNMM).

The Transfer Pricing Officer (TPO) made adjustments to the Arm’s Length Price (ALP) by excluding certain comparables selected by the assessee and including others.

On appeal, the ITAT directed the inclusion of four companies (Cepha Imaging, R Systems, Allsec Technology, and CG Vak Software) and the exclusion of two (E-Clerx and Vishal Information/Coral Hub).

The Revenue challenged these inclusions/exclusions and the grant of deduction under Section 10A before the High Court.

1. Whether the ITAT erred in directing the inclusion of M/s Cepha Imaging Pvt. Ltd. without considering functional dissimilarity despite export earning filter compliance?

2. Whether the ITAT erred in including M/s CG Vak Software & Exports Ltd. despite it failing the turnover filter applied by the TPO?

3. Whether the ITAT was justified in allowing deduction under Section 10A in respect of the APGSC unit?

The court applied Section 92CA of the Income Tax Act, 1961 regarding the determination of Arm’s Length Price.

The court relied on the principle that "e-publishing services" are distinct from ITeS as per CBDT Notification No. 890/2000.

Regarding turnover filters, the court applied the precedent from CIT v. Agnity India Technologies (P. Ltd.), which held that giant corporations are not comparable to small captive units.

The court applied PCIT v. Actis Global Services, emphasizing that the scale of operations (size and turnover) is a material factor in FAR (Functions, Assets, and Risk) analysis.

Regarding Cepha Imaging, the court found that while the ITAT addressed the export turnover filter, it failed to adjudicate upon "functional comparability".

Since the Revenue contended that e-publishing is not an ITeS under the relevant CBDT notification, the court determined that the ITAT should have examined whether the functions were truly similar before directing inclusion.

Regarding CG Vak Software, the court rejected the ITAT’s reliance on Chryscapital, noting an extreme mismatch: the assessee’s turnover (approx. ₹782 crores) was nearly 100 times larger than the comparable’s ITeS turnover (approx. ₹86 lakhs).

The court reasoned that such a vast difference in scale significantly impacts operating costs and margins, rendering the companies incomparable under Rule 10B(2).

It answered Question 2 in favor of the Revenue, holding that M/s CG Vak Software & Exports Ltd. must be excluded due to the extreme turnover mismatch.

Questions B, C, D, E, and G were dismissed as they were covered by prior judgments, and the matter was remanded to the TPO for limited verification as per the directions.