Transfer pricing comparables for export service business-functional mismatch and 75% export turnover filter upheld; appeal dismissed.

The dominant issue was whether the impugned comparables could be retained for TP adjustment despite functional dissimilarity and failing the export turnover filter. The HC held that the DRP correctly applied the functional comparability test, finding the selected companies engaged in activities beyond the assessee's export service business, and also correctly applied the 75% export turnover criterion, noting one comparable had only 49% export income against the tested party's 100% export profile; the ITAT's acceptance of these findings raised no substantial question of law as they were pure findings of fact. The appeal was dismissed on merits.

---

---

ISSUES PRESENTED AND CONSIDERED

1) Whether the Tribunal erred in affirming exclusion of certain proposed comparables for transfer pricing determination on the ground of functional dissimilarity and differences in risk/capital profile vis-à-vis the tested party providing non-binding investment advisory services under a cost-plus arrangement.

2) Whether the Tribunal erred in accepting exclusion of certain comparables by applying a 75% export turnover filter where the tested party's revenue was entirely from export of services.

3) Whether the appeal should be dismissed due to unexplained delay in refiling, independent of merits.

ISSUE-WISE DETAILED ANALYSIS

Issue 1: Exclusion of comparables on functional dissimilarity / risk and capital profile

Legal framework (as discussed): The Court considered that the comparability exercise undertaken by the revenue authorities and reviewed by the Tribunal turned on factual application of the functional test and related comparability factors (including activities undertaken, risks assumed, and capital employed), as reflected in the findings accepted by the Tribunal.

Interpretation and reasoning: The Court noted that the tested party rendered non-binding investment advisory services as a back office to its associated enterprise under a cost-plus arrangement, with the associated enterprise bearing multiple risks (market/business risk, credit and collection risk, capacity utilisation risk, service liability risk, human resource management risk, and foreign exchange fluctuation risk). In contrast, the excluded companies were found (by the adjudicating authority whose findings were upheld) to be engaged in materially different activities (such as stock market/DP operations, securities trading, debt resolution and syndication, merchant banking, NBFC activities, equity capital markets/M&A/private equity syndication/structured debt), often involving fund-based or capital-driven income, higher debtor levels, and substantially higher capital employed. The Court accepted that these findings established failure of the functional test and were not effectively contradicted before the Tribunal.

Conclusions: The Court held that the reasons recorded for exclusion on functional grounds were sufficient, and that the findings accepted by the Tribunal constituted pure questions of fact, not warranting interference in the appeal.

Issue 2: Application of 75% export turnover filter to exclude comparables

Legal framework (as discussed): The Court examined the applied export turnover filter as part of the recorded comparability findings which the Tribunal accepted.

Interpretation and reasoning: The Court observed that the tested party had 100% revenue from export of services and no domestic revenue, whereas the excluded companies were found to have nil or substantially lower export income (including figures below 75% of turnover). The Court treated the export filter reasoning as an integral part of the detailed reasons supporting exclusion, and found that the adjudicating authority had meaningfully explained why those entities were not comparable on that basis in addition to functional differences.

Conclusions: The Court upheld acceptance of the 75% export turnover test as a factual ground supporting exclusion of the identified comparables and declined to interfere with the Tribunal's decision.

Issue 3: Effect of delay in refiling the appeal

Legal framework (as discussed): The Court considered the sufficiency of explanation for delay in refiling.

Interpretation and reasoning: The Court found a refiling delay of 1285 days and recorded that there was no justifiable explanation for it.

Conclusions: The Court dismissed the appeal on both grounds: (i) on merits, as the Tribunal's acceptance of exclusion was based on factual findings; and (ii) independently, due to the unexplained delay in refiling.

---