Tested party selection as the least complex participant under functional analysis; subsequent consistent TPO acceptance can corroborate that choice.

Selection of the tested party for transfer pricing must identify the least complex participant by functional analysis of assets, risks and functions; where one division performs routine procurement and sales with modest assets and another performs complex manufacturing, the routine division qualifies as the tested party and may be used to benchmark domestic purchases. Consistent functional matrices across years allow reliance on a subsequent year's Transfer Pricing Officer acceptance as corroborative evidence to support the same tested-party selection for an earlier year, sustaining rejection of revenue's challenge to the selection and adjustment.

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Issues: (i) Whether the diamond (DTA) division is the least complex and therefore the appropriate tested party for determining arm's length price of specified domestic transactions; (ii) Whether reliance on the Transfer Pricing Officer's acceptance of the same tested party in assessment year 2022-23 is permissible and supports the selection of the tested party for AY 2017-18.

Issue (i): Whether the diamond division is the least complex entity and thus the appropriate tested party for benchmarking purchases of cut and polished diamonds by the jewellery (SEZ) manufacturing division.

Analysis: The relevant functional profile comparison shows the diamond division engages primarily in procurement, assortment and sales with modest assets and routine functions, whereas the jewellery SEZ manufacturing division performs complex manufacturing driven by design, technology and specialised assets. Transfer pricing principles require selection of the tested party as the participant whose assets, risks and functions are most easily identifiable and standard (the least complex entity). Prior transfer pricing practice and accepted comparability in subsequent assessment year treated the diamond division as tested party.

Conclusion: In favour of Assessee. The diamond division is the least complex entity and is the appropriate tested party for benchmarking the specified domestic transaction.

Issue (ii): Whether the TPO's acceptance of the diamond division as tested party in AY 2022-23 can be relied upon in AY 2017-18 proceedings to support selection of the tested party.

Analysis: The factual and functional matrix across the years remained substantially identical and the TPO in the subsequent year accepted the diamond division as tested party. Transfer pricing jurisprudence permits reliance on consistent functional analysis and comparable selections where functions, assets and risks are materially similar across years; such subsequent acceptance is relevant corroborative material for selecting the least complex tested party.

Conclusion: In favour of Assessee. Reliance on the TPO's acceptance in AY 2022-23 is permissible and supports treating the diamond division as tested party for AY 2017-18.

Final Conclusion: The revenue's grounds challenging the selection of the tested party and related transfer pricing adjustment are dismissed, rendering the assessee's cross-objection academic.

Ratio Decidendi: The tested party for transfer pricing must be the least complex participant determined by functional analysis (assets, risks, functions); where the functional profile is demonstrably simpler and consistent across years, selection of that party as tested party is justified and can be supported by consistent TPO treatment in a subsequent year.

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