Proper FAR analysis governs transfer pricing comparables; disputed marketing and software services comparables were remanded for fresh review.
Transfer pricing comparables under Chapter X must be tested on a proper FAR analysis, with TNMM applied on a sound factual basis. In the marketing support and customer support segment, disputed comparables were sent back for fresh adjudication because the assessee had not placed enough material to show they were functionally dissimilar. In the software research and development segment, the inclusion and exclusion of comparables, including issues of turnover, related party transactions, and segmental data, also required fresh examination. The matter was therefore restored to the AO/TPO for reconsideration of comparability and verification of the relevant filters.
Issues: (i) Whether the comparables selected for the marketing support and customer support services segment were to be excluded or retained on a proper FAR analysis; (ii) whether the comparables disputed in the software research and development services segment were to be excluded, included, or re-examined on fresh comparability analysis.
Issue (i): Whether the comparables selected for the marketing support and customer support services segment were to be excluded or retained on a proper FAR analysis.
Analysis: The dispute concerned transfer pricing adjustment under Chapter X of the Income-tax Act, 1961, with TNMM accepted as the most appropriate method. The assessee disputed certain comparables selected by the TPO for the marketing support services segment. The record showed that the TPO had undertaken a fresh search, applied functional filters, and selected comparables on the basis of current year data and perceived functional similarity. However, the assessee did not place sufficient material before the Tribunal to demonstrate, with reference to financials and functional profile, that the disputed companies were not comparable on FAR parameters.
Conclusion: The disputed comparables for the marketing support services segment were remanded to the AO/TPO for fresh adjudication on FAR basis. The issue was thus decided partly in favour of the assessee.
Issue (ii): Whether the comparables disputed in the software research and development services segment were to be excluded, included, or re-examined on fresh comparability analysis.
Analysis: In the software research and development services segment, the assessee challenged inclusion of certain large companies and also sought inclusion of some companies rejected by the TPO. The Tribunal noted objections regarding turnover, functional similarity, related party transaction filters, and absence of proper segmental examination. It held that the inclusion and exclusion of these comparables required a fresh look with proper FAR analysis and verification of the related party transaction criterion, particularly where the annual reports had not been adequately examined below.
Conclusion: The comparables in the software research and development services segment were restored to the AO/TPO for fresh consideration and verification. The issue was decided partly in favour of the assessee.
Final Conclusion: The transfer pricing adjustment was set aside for fresh examination in both disputed segments, and the appeal succeeded to the extent of remand with the resulting relief being only for statistical purposes.
Ratio Decidendi: Comparables in transfer pricing must be tested on a proper FAR analysis, and where the factual basis for inclusion or exclusion is not adequately established, the matter should be remanded for fresh comparability examination.
TaxTMI 
AI Drafter ✕
TaxTMI 
