Transfer pricing comparables and reimbursement charges: unsuitable functional mismatch and cost-to-cost IT payments were excluded from disallowance.

CTR Manufacturing Industries Ltd. was held not to be a valid transfer pricing comparable because its functional profile differed from the assessee's capacitor and resistor manufacturing segment and no comparable segmental data was available. The Tribunal therefore directed its exclusion from the comparables set. Payments for leased line and related IT infrastructure charges were treated as cost-to-cost reimbursements without markup and, following the assessee's earlier year, were held not to be royalty or any other sum chargeable to tax. As a result, no tax deduction was required under section 195 and the corresponding disallowance under section 40(a)(i) was deleted.

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Issues: (i) Whether CTR Manufacturing Industries Ltd. was a valid comparable for the assessee's manufacturing segment. (ii) Whether the payment made towards leased line and related IT infrastructure charges was liable to disallowance under section 40(a)(i) for non-deduction of tax at source.

Issue (i): Whether CTR Manufacturing Industries Ltd. was a valid comparable for the assessee's manufacturing segment.

Analysis: The assessee manufactured capacitors and resistors, while the proposed comparable was shown to be primarily engaged in transformer ancillary products and other lines of manufacture. Its annual report did not disclose segmental information relating to capacitors comparable to the assessee's business. Since the functional profile and segmental data were not on par, the earlier view taken in the assessee's own case was followed.

Conclusion: CTR Manufacturing Industries Ltd. was not a valid comparable and was directed to be excluded from the final list of comparables.

Issue (ii): Whether the payment made towards leased line and related IT infrastructure charges was liable to disallowance under section 40(a)(i) for non-deduction of tax at source.

Analysis: The payment was on a cost-to-cost basis without any mark-up and was treated in the assessee's own earlier year as reimbursement for leased line and related services, not as royalty. The Tribunal followed its earlier decision and held that the amounts did not fall within royalty or other sums chargeable to tax so as to attract withholding under section 195.

Conclusion: The disallowance under section 40(a)(i) was deleted and the issue was decided in favour of the assessee.

Final Conclusion: The transfer pricing adjustment was reduced by exclusion of an unsuitable comparable, and the withholding tax disallowance was deleted, while the penalty challenge was not entertained at this stage.

Ratio Decidendi: A company cannot be treated as a reliable transfer pricing comparable unless its functional profile and segmental financial data are broadly comparable, and reimbursement of cost-to-cost leased line charges without mark-up does not constitute royalty attracting withholding tax.

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