Transfer pricing comparables for captive ITeS must match functional profile, segment data and business model before inclusion.

In transfer pricing analysis for a captive ITeS business, several proposed comparables were excluded because they were functionally dissimilar, including entities engaged in KPO services, outsourcing or sub-contracting models, or activities beyond routine ITeS functions. Exclusion was also supported where companies failed revenue or turnover filters, lacked reliable segmental data, or showed abnormal margin fluctuations indicating peculiar business circumstances. One entity serving mainly a large group client base was likewise treated as not comparable on functional parameters. The Tribunal accepted the DRP's directions to remove these entities and found no distinguishing feature in the Revenue's challenge.

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Issues: Whether the Transfer Pricing Officer and Assessing Officer were justified in retaining the disputed companies as comparables for determining the arm's length price of the assessee's international transactions.

Analysis: The exclusion of several entities was upheld because they were functionally dissimilar to the assessee's captive ITeS profile. Certain comparables were engaged in KPO services, had materially different business models involving outsourcing or sub-contracting, failed the relevant revenue or turnover filters, lacked reliable segmental information, or showed abnormal margin fluctuations indicating peculiar business circumstances. One comparable was found to cater mainly to a large group client base and to undertake functions beyond routine ITeS services, making it not comparable on functional parameters. The Tribunal found no distinguishing feature in the Revenue's challenge and accepted the DRP's directions excluding those entities.

Conclusion: The comparables directed to be excluded were rightly removed, and the Revenue's challenge failed.

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