Functional comparability in transfer pricing fails where diversified merchant-banking activity lacks reliable segmental data.

A company engaged in diversified merchant-banking, capital-markets, structured finance, private equity and cross-border M&A activities was not functionally comparable to an assessee rendering only non-binding advisory and support services. Because the company's annual and directors' reports showed varied financial services income and no reliable segmental data to isolate an advisory-only profile, the similarity required for transfer pricing analysis was absent. It was therefore excluded from the comparable set, and the transfer pricing adjustment based on that company was deleted.

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Issues: Whether Motilal Oswal Investment Advisors Private Limited was functionally comparable with the assessee for benchmarking the international transaction of non-binding advisory and support services, and whether it could be excluded from the comparable set for determination of arm's length price.

Analysis: The assessee rendered non-binding advisory and support services, whereas the selected comparable was found to have undertaken multiple and diversified activities, including cross-border M&A activity, capital markets business, structured finance, private equity, and other merchant-banking related functions. The annual report and directors' report showed that the company had completed numerous assignments and derived income from varied advisory and financial services, with no reliable segmental reporting available to isolate a comparable advisory-only profile. In these circumstances, the functional profile of the company was materially different from that of the assessee, and the comparable lacked the similarity required for transfer pricing analysis under the arm's length principle.

Conclusion: Motilal Oswal Investment Advisors Private Limited was not a good comparable and had to be excluded from the comparables set. The transfer pricing adjustment based on that company was deleted, and the issue was decided in favour of the assessee.

Ratio Decidendi: A company engaged in diversified merchant-banking and capital-markets activities, without reliable segmental data, cannot be used as a comparable for an assessee providing only non-binding advisory services.

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