Transfer pricing comparables must be functionally similar, and fringe benefit tax treatment must be applied consistently in margin computation.

In transfer pricing benchmarking, functionally dissimilar companies with no segmental accounts and materially different asset and employee profiles were rejected as comparables. Container Corporation of India Ltd. was found incomparable because it was a large logistics business unlike the assessee's service function, and Sanco Trans Ltd. was also rejected because most of its revenue came from warehousing, equipment hire and related activities. On margin computation, fringe benefit tax had to be treated consistently for both the tested party and the comparables. The profit level indicator was therefore directed to be recomputed by applying the same operating treatment to the assessee as used for the comparables.

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Issues: (i) whether Container Corporation of India Ltd. and Sanco Trans Ltd. were valid comparables for benchmarking the assessee's international transactions under transfer pricing law; (ii) whether fringe benefit tax had to be treated consistently while computing the profit level indicator of the tested party and the comparables.

Issue (i): whether Container Corporation of India Ltd. and Sanco Trans Ltd. were valid comparables for benchmarking the assessee's international transactions under transfer pricing law.

Analysis: The assessee was found to be mainly engaged in passengers and baggage handling services and not in the specialized airport services attributed to it by the Transfer Pricing Officer. On that functional profile, Container Corporation of India Ltd. was held to be incomparable because it was a giant logistics company with no segmental accounts, a vastly different asset base, a very low employee-cost ratio, and business characteristics not akin to a service-oriented entity. Sanco Trans Ltd. was also held incomparable because its revenues were substantially derived from warehousing, equipment hire, and related activities, it lacked segmental data, and its employee-cost profile showed it was not comparable to the assessee's service business.

Conclusion: The selection of both companies as comparables was rejected in favour of the assessee.

Issue (ii): whether fringe benefit tax had to be treated consistently while computing the profit level indicator of the tested party and the comparables.

Analysis: The Transfer Pricing Officer had excluded fringe benefit tax while computing the margins of the comparables, but the assessee had computed its own margin treating that item as operating. The Tribunal found that a uniform method had to be adopted for both sides and that the same treatment applied to the comparables must also be given to the tested party.

Conclusion: The Transfer Pricing Officer was directed to recompute the assessee's profit level indicator after excluding fringe benefit tax, in line with the treatment adopted for the comparables.

Final Conclusion: The appeal succeeded on the comparability and margin-computation issues, and the transfer pricing adjustment was reduced accordingly by excluding the impugned comparables and directing recomputation of the tested party's margin.

Ratio Decidendi: In transfer pricing analysis, functionally dissimilar companies lacking comparable segmental data or having materially different asset and employee profiles cannot be used as comparables, and the same operating treatment must be applied consistently to both the tested party and the comparables while computing margins.

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