Functional comparability in transfer pricing requires exclusion of KPO and manufacturing entities from marketing support service benchmarking.

In transfer pricing for marketing support services, comparables must be functionally similar to the tested party. Agrima Consultants International Ltd. was treated as a suitable comparable because it matched the service profile, while IDC India Ltd. was excluded for being engaged in knowledge process outsourcing and Empire Industries Ltd. was excluded for deriving income from manufacturing, trading and indenting activities. The comparable set was therefore to be reworked and the arm's length price recomputed. The transfer pricing adjustment would not survive if the revised mean operating margin placed the assessee within the permissible arm's length range.

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Issues: Whether the comparables selected for determining the arm's length price of marketing support services were correctly included or excluded, and whether the transfer pricing adjustment survived after reworking the comparable set.

Analysis: The dispute centred on the inclusion of IDC India Ltd. and Empire Industries Ltd. and the exclusion of Agrima Consultants International Ltd. The Tribunal followed its earlier year decision in the assessee's own case, holding that Agrima Consultants International Ltd. was functionally comparable to market support services, while IDC India Ltd. was engaged in knowledge process outsourcing and Empire Industries Ltd. derived income from manufacturing, trading and indenting activities, making both unsuitable comparables for the assessee's service profile. Once the comparable set was corrected, the mean operating margin was to be recomputed, and the adjustment would fall away if the assessee's margin remained within the permissible arm's length range.

Conclusion: The comparables were directed to be reworked by including Agrima Consultants International Ltd. and excluding IDC India Ltd. and Empire Industries Ltd., with consequential recomputation of the arm's length price; the adjustment was not to survive if the revised margin fell within the permissible range.

Ratio Decidendi: In transfer pricing, comparables must be functionally similar to the tested party, and entities engaged in materially different activities such as KPO or manufacturing and trading cannot be used for benchmarking market support services.

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