Functional comparability in transfer pricing upheld where raw-material usage differed but no minimum threshold was prescribed.

In transfer pricing under the transactional net margin method, comparable companies could not be excluded solely because their percentage use of Penicillin-G as a raw material differed where the filter did not prescribe any minimum quantitative threshold. The Tribunal found Torrent Gujarat Biotech Limited and Standard Pharmaceuticals Limited functionally comparable, and accepted Standard Pharmaceuticals Limited as a comparable despite its lower Penicillin-G usage; that view was held to be plausible and non-perverse, so no substantial question of law arose and their inclusion was upheld. The objection based on negative net worth was not entertained because it had not been raised before the authorities and was treated as a factual issue.

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Issues: Whether the Tribunal erred in directing the inclusion of Torrent Gujarat Biotech Limited and Standard Pharmaceuticals Limited as comparables for determining the arm's length price in the transfer pricing exercise.

Analysis: The respondent had adopted the transactional net margin method and the TPO had applied filters that required only companies using Penicillin-G as raw material, but the filter did not prescribe any minimum percentage of use. The TPO himself had accepted Standard Pharmaceuticals Limited as a comparable even though its use of Penicillin-G was lower than that of Torrent Gujarat Biotech Limited. On that basis, the Tribunal held that both companies were functionally comparable and that the percentage of use of Penicillin-G, by itself, was not a determinative exclusion criterion. The contention regarding negative net worth was not raised before the authorities and was treated as a factual issue that could not be permitted for the first time.

Conclusion: The Tribunal's view was held to be a possible and non-perverse view, no substantial question of law arose, and the inclusion of the two companies as comparables was upheld.

Ratio Decidendi: Where the selection filter does not prescribe a minimum quantitative usage threshold, a comparable cannot be excluded solely because its percentage use of a raw material differs, so long as the companies are functionally comparable and the view taken is a plausible one.

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