Transfer pricing comparability requires functional and economic similarity; Excel Infoways Ltd. failed key filters and was excluded.

Transfer pricing comparability under Chapter X requires uncontrolled transactions to be materially similar, and Rule 10B(2) comparability criteria remain applicable even when TNMM is used. A proposed comparable must satisfy the relevant functional and economic filters; on the facts, Excel Infoways Ltd. failed the 75% service revenue filter applied by the TPO and also did not meet the diminishing revenue filter reflected in its financial data. The company was therefore treated as not comparable for arm's length price determination, and no substantial question of law arose.

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Issues: Whether the exclusion of Excel Infoways Ltd. as a comparable in the transfer pricing analysis for determination of arm's length price was justified.

Analysis: The object of Chapter X of the Income-tax Act, 1961 is to determine the arm's length price of international transactions by comparing controlled transactions with uncontrolled transactions that are similar in material aspects. Comparability analysis under Rule 10B(2) of the Income-tax Rules, 1962 cannot be diluted merely because transfer pricing is undertaken under the TNMM method. The selected comparable must satisfy the relevant functional and economic comparability factors. On the facts, Excel Infoways Ltd. did not satisfy the service revenue filter of 75% applied by the TPO and also failed the diminishing revenue filter reflected in the financial data.

Conclusion: The exclusion of Excel Infoways Ltd. as a comparable was upheld and no substantial question of law arose.

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