Transfer pricing comparables must reflect normal business conditions and reliable segmental data for arm's length pricing.

In transfer pricing analysis under the transactional net margin method, comparability must rest on functional similarity and reliable data. Companies showing abnormal profit trends may be excluded where those figures do not reflect normal business conditions, and entities lacking adequate segmental data are not suitable comparables. On that basis, Bodhtree Consulting Ltd. was rejected because of wide margin fluctuations, and E-Infochip Bangalore Ltd. was rejected because its combined software and IT-enabled services segment lacked proper segmental disclosure. The arm's length price was therefore required to be recomputed after excluding those comparables, with the adjustment restored for fresh determination.

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Issues: Whether, in determining the arm's length price of the assessee's international transactions under the transactional net margin method, the comparable set could include companies with abnormal or non-comparable margins and missing segmental data, and whether the transfer pricing adjustment required recomputation after excluding such companies.

Analysis: The assessee's method under the transactional net margin method was accepted in principle, but the dispute centered on the choice of comparables. The Tribunal held that comparability must be tested on functional similarity and reliable data, and that abnormal profit margins by themselves do not automatically justify exclusion unless the surrounding facts show that the profits do not reflect normal business conditions. Applying that approach, Bodhtree Consulting Ltd. was found unsuitable because its margins showed wide fluctuations over the relevant years and did not reflect a stable normal business trend. E-Infochip Bangalore Ltd. was also held unsuitable because the available material showed that it was engaged in software development and IT-enabled services as a combined segment, with no adequate segmental data for a proper comparability exercise. The Tribunal therefore accepted the assessee's objection to these two comparables and directed recomputation of the adjustment after their exclusion.

Conclusion: The transfer pricing adjustment was not sustained in its existing form and the matter was sent back for fresh working after excluding the two rejected comparables, resulting in relief to the assessee.

Final Conclusion: The appeal succeeded only to the extent of recomputation of the arm's length price on a revised comparable set, and the assessment was restored to the transfer pricing authority for fresh determination.

Ratio Decidendi: A comparable may be excluded in transfer pricing analysis where abnormal profit trends or absence of reliable segmental data show that it does not reflect normal business conditions or true functional comparability.

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