Functional comparability in transfer pricing requires similar activities and reliable segmental data for mixed-business companies.

Transfer pricing comparability must be tested on functional similarity and, where a company has multiple lines of business, reliable segmental results are necessary to isolate the relevant activity. Venus Diagnostics Ltd. was excluded because it operated as a diagnostic centre rather than rendering research services, making it functionally different from the assessee's contract research services. Syngene International Limited was also excluded because it carried on contract research as well as sale of compounds, and no segmental details were available to separate the research margin from the other business. The exclusion of both companies from the comparable set was therefore justified, and the Revenue's challenge failed.

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Issues: Whether Venus Diagnostics Ltd. and Syngene International Limited were rightly excluded from the set of comparables for determining the arm's length price of the assessee's contract research services.

Analysis: The comparability exercise had to be undertaken on the basis of functional similarity. Venus Diagnostics Ltd. was found to be operating as a diagnostic centre and not rendering research services, making it functionally different from the assessee. Syngene International Limited was engaged in contract research as well as sale of compounds, and no segmental details were available to isolate the margin from the relevant research activity. In the absence of such segmental information and in view of the different functional profile, the exclusion of both companies from the comparable set was justified.

Conclusion: The exclusion of Venus Diagnostics Ltd. and Syngene International Limited as comparables was upheld, and the Revenue's challenge failed.

Ratio Decidendi: For transfer pricing purposes, a company cannot be treated as a comparable unless its functions are materially similar to those of the tested party and reliable segmental results are available where the company has multiple lines of business.

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