Transfer pricing comparables must match functional profile, scale and intangibles; Acropetal Technology and Infosys BPO were excluded.

For transfer pricing comparability, a company must be functionally similar to the tested captive service provider. Acropetal Technology Ltd. was excluded because it operated in engineering design and other services with substantial on-site activity and a materially different operating model, so it was not a reliable comparable. Infosys BPO was also excluded because its very high turnover, brand value and other intangibles could distort margins and make it unsuitable for a captive service provider of a different scale and profile. The Revenue's challenge failed, and the arm's length price was to be recomputed without those companies.

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Issues: (i) whether Acropetal Technology Ltd. was rightly excluded from the final set of comparables for transfer pricing purposes; (ii) whether Infosys BPO was rightly directed to be excluded from the final set of comparables.

Issue (i): whether Acropetal Technology Ltd. was rightly excluded from the final set of comparables for transfer pricing purposes

Analysis: The assessee was a captive service provider to its associated enterprises. Acropetal Technology Ltd. was found to be engaged in engineering design and other services with a different operating model, including substantial on-site activity. The Tribunal also noted the reasoning adopted in comparable cases that such a company lacks functional similarity with an offshore captive service provider. On that basis, the exclusion of the company from comparables was upheld.

Conclusion: Acropetal Technology Ltd. was correctly excluded from the set of comparables, and the Revenue's challenge failed.

Issue (ii): whether Infosys BPO was rightly directed to be excluded from the final set of comparables

Analysis: Infosys BPO was objected to on the ground of very high turnover and significant intangibles, including brand value, which could materially affect pricing and margins. Applying the turnover disparity and brand/intangible considerations, the Tribunal accepted that the company was not a proper comparable for the assessee's scale and profile.

Conclusion: Infosys BPO was directed to be excluded from the final set of comparables.

Final Conclusion: The Revenue's appeal failed, while the assessee's cross-objection succeeded only to the extent that Infosys BPO was directed out of the comparable set, resulting in a fresh recomputation of arm's length price.

Ratio Decidendi: A company lacking functional similarity, or whose margin is materially distorted by scale, brand value, intangibles, or materially different operating characteristics, cannot be retained as a reliable transfer pricing comparable for a captive service provider.

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