Transfer pricing comparables under TNMM must match business model, risks and environment; government-owned entities were excluded.

Under TNMM, comparability depends on functional similarity as well as similarity in business model, assets employed, risks assumed and operating environment. Government companies and public sector undertakings with policy-driven control, government support and materially different functions were found unsuitable as comparables for a captive provider of low-risk business support services on a cost-plus basis. Applying Rule 10B(2) of the Income-tax Rules, 1962, the analysis concluded that such entities do not stand on the same platform as the tested party and therefore cannot reliably benchmark its international transaction. The disputed government-owned entities were excluded from the final comparables set, and the transfer pricing adjustment based on them could not be sustained.

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Issues: Whether government companies and public sector undertakings could be included as comparables for benchmarking the assessee's international transaction of provision of business support services under the transactional net margin method.

Analysis: Comparability under transfer pricing requires not only functional similarity but also similarity in business environment, assets employed, risks assumed and business model. Applying Rule 10B(2) of the Income-tax Rules, 1962 and the principle that comparables must stand on the same platform as the tested party, entities operating under government support, policy-driven control and materially different functions were held to be unsuitable comparables for a captive service provider rendering low-risk business support services on a cost-plus basis. The selected government-owned entities were found to be functionally dissimilar and operating in a different commercial environment.

Conclusion: The government companies and public sector undertakings in dispute were rightly excluded from the final set of comparables, and the transfer pricing adjustment based on them could not be sustained.

Ratio Decidendi: For transfer pricing under TNMM, a comparable must be similar not only in function but also in business model, risk profile and operating environment; entities with materially different government-backed operations are not reliable comparables.

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