Transfer pricing comparables: accepted functional similarity and turnover alone cannot justify exclusion in service-sector analysis.

In transfer pricing comparability analysis, a company accepted by both sides as functionally comparable cannot be excluded at the appellate stage without a specific challenge and reasons, because the appellate role is adjudicatory and not revisional. Turnover alone is not a determinative basis for exclusion where functional similarity in a service-sector analysis is otherwise established; comparability must be assessed primarily on functions performed, assets employed and risks assumed. On that basis, Mercury Outsourcing Management Ltd., Wipro BPO Solutions Ltd. and Spanco Telesystems & Solutions Ltd. were to be retained or included as comparables, and the transfer pricing adjustment was to be recomputed accordingly.

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Issues: (i) whether Mercury Outsourcing Management Ltd. could be excluded from the list of comparables when it had been accepted as functionally comparable by both the assessee and the transfer pricing authorities; (ii) whether Wipro BPO Solutions Ltd. could be excluded merely on the ground of high turnover; and (iii) whether Spanco Telesystems & Solutions Ltd. was liable to be excluded from the comparables.

Issue (i): whether Mercury Outsourcing Management Ltd. could be excluded from the list of comparables when it had been accepted as functionally comparable by both the assessee and the transfer pricing authorities.

Analysis: A comparable accepted by both sides in the transfer pricing exercise and not specifically challenged before the first appellate authority could not be excluded by that authority on a fresh review of the selection. The power exercised in transfer pricing appeal was adjudicatory and not revisional, and the first appellate authority could not reopen an accepted comparable in the absence of a contest on that issue.

Conclusion: Mercury Outsourcing Management Ltd. had to be retained as a comparable, in favour of the assessee.

Issue (ii): whether Wipro BPO Solutions Ltd. could be excluded merely on the ground of high turnover.

Analysis: Turnover by itself was not treated as a decisive filter under the comparability criteria when the company was otherwise functionally similar in the service sector. The assessee had itself accepted very low-turnover comparables, and no functional dissimilarity was established. The transfer pricing comparison had to be judged primarily on functions performed, assets employed and risks assumed, not on turnover alone.

Conclusion: Wipro BPO Solutions Ltd. was rightly retained as a comparable, against the assessee.

Issue (iii): whether Spanco Telesystems & Solutions Ltd. was liable to be excluded from the comparables.

Analysis: The comparable had been selected by the transfer pricing officer and there was no specific objection pressed before the first appellate authority. In the absence of a substantiated challenge, and in the absence of any reliable basis to exclude it on the facts of the year under appeal, it was directed to be included in the final set of comparables.

Conclusion: Spanco Telesystems & Solutions Ltd. was to be included as a comparable, against the assessee.

Final Conclusion: The transfer pricing adjustment was to be recomputed by taking the above comparables into account, with the resultant addition not exceeding the amount already sustained by the first appellate authority.

Ratio Decidendi: In transfer pricing comparability, an accepted functionally comparable company cannot be excluded without proper contest and reasons, and turnover alone is not a determinative basis for exclusion in a service-sector comparability analysis.

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