Market research is not ITES for transfer pricing; ITES comparables fail where functions and value drivers differ.

For transfer pricing purposes, market research services are not functionally comparable to information technology enabled services because their activities, processes and value drivers differ materially; mere use of computers or data processing does not convert market research into ITES, so ITES comparables are inappropriate for benchmarking. Where the assessee is not comparable to the tested set, the transfer pricing adjustment based on those comparables cannot be sustained and arm's length price must be examined on a consistent basis. The notional interest addition on work-in-progress was deleted in line with the assessee's earlier years, while the section 80G claim was restored for verification against the donation evidence and consequential relief.

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Issues: (i) Whether market research services rendered by the assessee could be characterised as information technology enabled services for transfer pricing benchmarking; (ii) whether the transfer pricing adjustment based on ITES comparables could be sustained; (iii) whether the disallowance on account of notional interest in work-in-progress and the claim for deduction under section 80G required interference.

Issue (i): Whether market research services rendered by the assessee could be characterised as information technology enabled services for transfer pricing benchmarking

Analysis: The functions of a market research service provider and an IT-enabled service provider are materially different. Market research involves collection, collation and analysis of information and data for a particular subject, whereas IT-enabled services are predominantly technology-driven outsourced processes. The mere use of computers or data processing does not convert market research into ITES. Functional comparability must be tested on the real nature of activities and the services must be broadly comparable before benchmarking.

Conclusion: The assessee's activity was correctly characterised as market research services and not IT-enabled services.

Issue (ii): Whether the transfer pricing adjustment based on ITES comparables could be sustained

Analysis: Since the assessee was not functionally comparable to ITES providers, the comparables adopted by the Transfer Pricing Officer were not appropriate for benchmarking the international transactions. The internal benchmarking adopted by the assessee was accepted by the Dispute Resolution Panel for one year, and for the other year the matter was restored for verification so that arm's length price could be examined consistently on the same approach.

Conclusion: The transfer pricing adjustment based on ITES comparables was not sustained, and the matter was remanded for verification of arm's length price.

Issue (iii): Whether the disallowance on account of notional interest in work-in-progress and the claim for deduction under section 80G required interference

Analysis: The addition for notional interest on work-in-progress was contrary to the earlier consistent view in the assessee's own case and was deleted. The claim under section 80G was to be verified and allowed on the basis of the donation evidence produced, and the associated ground concerning the revised transaction value was also to be examined in the remanded proceedings.

Conclusion: The notional interest addition was deleted, and the section 80G claim was restored for verification and consequential relief.

Final Conclusion: The Revenue's appeal was dismissed, while the assessee's appeal was partly allowed with one transfer pricing issue restored for verification and the notional interest addition deleted.

Ratio Decidendi: For transfer pricing purposes, a market research service provider cannot be benchmarked against IT-enabled service providers where the underlying functions, processes and value drivers are materially different.

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