TNMM comparability turned on functional similarity, leading to exclusion of brand-driven and structurally different software and ITES comparables.

Under TNMM with OP/TC as the profit level indicator, comparability must rest on functional similarity, not on quantitative filters alone. Companies were treated as unsuitable where they had different business models, owned strong brands or proprietary products, incurred heavy R&D or marketing spend, operated at much larger scale, or were affected by acquisitions, mergers or restructuring. Mixed product-and-service businesses were also excluded where segmental data was unavailable. Applying these principles, the note records exclusion of several software development and IT-enabled services comparables, including entities with brand advantages, product development activity, extraordinary events, or unreliable segmental results, leading to a reduced transfer pricing adjustment for the assessee.

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Issues: Whether, while benchmarking the assessee's international transactions under the Transactional Net Margin Method, the comparables selected for software development services and IT-enabled services were liable to be excluded on grounds of functional dissimilarity, brand ownership, extraordinary events, absence of segmental information, and materially different risk and scale profiles.

Analysis: The assessee's transactions were benchmarked under TNMM with OP/TC as the profit level indicator. In applying that method, functional similarity remained central, and a company could not be treated as comparable merely because it satisfied some quantitative filters. The exclusions were justified where the comparable had a materially different business model, owned valuable brands or proprietary products, incurred substantial research and marketing expenses, had a far larger turnover, or operated under extraordinary circumstances such as acquisition, merger, or restructuring that affected profitability. The absence of segmental data for mixed product and service businesses also materially impaired comparability. On that basis, Infosys Technologies Ltd. was found unsuitable because of brand ownership, scale, R&D intensity, offshore revenue profile, and risk-bearing entrepreneur status. Wipro Technology Services Ltd. was also found incomparable because of acquisition-driven pricing effects, brand value, and extraordinary business restructuring. Persistent Systems Ltd. was excluded because it was engaged in product development and lacked segmental information. In the IT-enabled services segment, TCS E-Serve Ltd., TCS E-Serve International Ltd., Accentia Technology Ltd., and Infosys BPO Ltd. were held incomparable because of functional divergence, high-end or mixed services, absence of reliable segmental data, brand-related advantages, and extraordinary events affecting results. The Tribunal accordingly applied the comparability principles consistently to reject these companies from the final set.

Conclusion: The disputed comparables were directed to be excluded, and the transfer pricing adjustment stood reduced accordingly in favour of the assessee.

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