Tribunal excludes companies from comparables in Transfer Pricing case, emphasizes functional comparability.

The Tribunal ordered the exclusion of Apitco Limited, Global Procurement Consultants Limited, and TSR Darashaw Limited from the final set of comparables for Transfer Pricing purposes due to significant functional disparities with the assessee. Emphasizing the importance of functional comparability, the Tribunal referenced a previous judgment and clarified that the Department Representative could not challenge the AO's decision on company inclusions. The matter was remanded to the AO/TPO for recalculating the Arm's Length Price of the international transaction, granting the assessee a hearing opportunity, with the appeal allowed for statistical purposes.

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Issues involved:
1. Inclusion of three companies (Apitco Limited, Global Procurement Consultants Limited, and TSR Darashaw Limited) in the final set of comparables for Transfer Pricing purposes.
2. Functional comparability of the selected companies.
3. The right of the Department Representative (DR) to argue for the exclusion of certain companies included by the Transfer Pricing Officer (TPO).

Detailed Analysis:

1. Inclusion of Three Companies in the Final Set of Comparables:

i. Apitco Limited:
The assessee argued against the functional comparability of Apitco Limited, stating that it provided high-end diversified activities. The TPO included Apitco Limited in the comparables list, considering its OP/OC at 40.09%. The Tribunal analyzed Apitco Limited's Annual Report and found that its operations included Micro Enterprises Development, Skill Development, Entrepreneurship Development, Tourism & Research Studies, Project-related Services, Infrastructure Planning & Development, Environment Management, Energy-related Services, Cluster Development, and Asset Reconstruction & Management Services. The Tribunal noted that there was only a slight resemblance between Apitco's 'Market and social research' functions and the services provided by the assessee. The Tribunal concluded that the functional similarity of Apitco Limited was lacking on an entity level with the assessee company and ordered its exclusion from the final set of comparables.

ii. Global Procurement Consultants Limited:
The TPO included this company despite the assessee's objection that it was engaged in providing consultancy services and reviewing procurement processes for various projects funded by the World Bank. The Tribunal reviewed the Annual Report of Global Procurement Consultants Limited and noted its services, including Independent Procurement Review, Procurement audits, and full-time advice on procurement and contract-related aspects. The Tribunal found that the services provided by Global Procurement Consultants Ltd. were significantly different from those rendered by the assessee, which were confined to assisting its AE in identifying customers and facilitating sales of antivirus products. The Tribunal ordered the exclusion of this company from the list of comparables.

iii. TSR Darashaw Limited:
The assessee objected to the inclusion of TSR Darashaw Limited, arguing that its business segments included Registrar and Transfer Agent activity, Records management activity, and Payroll and trust fund activity. The TPO treated it as comparable on an entity level. The Tribunal compared the activities undertaken by TSR Darashaw Limited with the services rendered by the assessee and found a significant functional disparity. The Tribunal noted that considering this company on an entity level rendered the comparison meaningless and ordered its exclusion from the final set of comparables.

2. Functional Comparability of the Selected Companies:
The Tribunal emphasized the importance of functional comparability even under the Transactional Net Margin Method (TNMM), citing the judgment of the Hon'ble jurisdictional High Court in Rampgreen Sales Pvt. Ltd. vs. CIT (2015) 377 ITR 533 (Del). The Tribunal reiterated that comparables must be selected based on similarity, regardless of the method adopted.

3. The Right of the Department Representative (DR) to Argue for the Exclusion of Certain Companies:
The Tribunal examined whether the DR could argue for the exclusion of companies included by the TPO. The Tribunal concluded that the DR, representing the AO, could not argue against the AO's own decision. The Tribunal noted that the Department had no right to file an appeal or cross-objection against the voluntary decision of the AO/TPO that was not subject to any adverse direction by the Dispute Resolution Panel (DRP). The Tribunal clarified that while it had the power to suo motu examine the correctness of the AO/TPO's actions, the DR could not argue against the inclusion of companies decided by the AO/TPO.

Final Decision:
The Tribunal set aside the impugned order and remanded the matter to the AO/TPO for recalculating the Arm's Length Price (ALP) of the international transaction of 'Rendering of services' afresh, in conformity with the Tribunal's discussion. The assessee was to be afforded a reasonable opportunity of hearing. The appeal was allowed for statistical purposes.

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