TNMM functional comparability rejected for dissimilar service businesses; disputed comparables excluded from arm's length analysis.

Under TNMM, a comparable must satisfy broad but real functional similarity for arm's length benchmarking. The Tribunal held that Adecco Peopleone India Pvt. Ltd. and Alliance Comnet Ltd. were not comparable to the assessee's logistics and business support services because their functions involved HR staffing, recruitment, ITES and document management; both were excluded. It also held that Killick Agencies & Marketing Ltd. was not comparable to the assessee's captive support services because it operated in a different marine-industry commission and after-sales business; it was excluded. The assessee therefore succeeded on the transfer-pricing comparability disputes in both matters.

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Issues: (i) Whether the two additional comparables, Adecco Peopleone India Pvt. Ltd. and Alliance Comnet Ltd., could be retained for determining the arm's length price for assessment year 2006-07; (ii) Whether Killick Agencies & Marketing Ltd. was a valid comparable for assessment year 2008-09.

Issue (i): Whether the two additional comparables, Adecco Peopleone India Pvt. Ltd. and Alliance Comnet Ltd., could be retained for determining the arm's length price for assessment year 2006-07.

Analysis: The dispute turned on functional comparability under TNMM. The Tribunal found that the earlier remand did not result in a sufficiently reasoned functional analysis from the lower authorities and that the record did not justify treating the assessee's logistics and business support services as comparable to the HR staffing and recruitment functions of Adecco or the ITES and document-management functions of Alliance. The comparable set had to reflect genuine broad functional similarity, and the assessee's challenge to these two additions was found to be sustainable.

Conclusion: The two comparables were directed to be excluded in favour of the assessee.

Issue (ii): Whether Killick Agencies & Marketing Ltd. was a valid comparable for assessment year 2008-09.

Analysis: The Tribunal compared the nature of the assessee's captive support services with the marine-industry linked commission and after-sales functions of the comparable and held that the two operated in completely different industries. On that footing, the comparable failed the test of functional similarity required under TNMM.

Conclusion: Killick Agencies & Marketing Ltd. was directed to be excluded in favour of the assessee.

Final Conclusion: The assessee succeeded on the transfer-pricing comparability disputes in both appeals, resulting in exclusion of the disputed comparables and relief in determining the arm's length price.

Ratio Decidendi: Under TNMM, a comparable must satisfy functional comparability on a broad but real basis; entities operating in materially different business functions or industries cannot be used for benchmarking.

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