TNMM comparable selection and royalty adjustments turn on functional similarity, current year data, and reliable uncontrolled comparables.

Under TNMM, comparable selection must rest on broad functional similarity, so a company cannot be excluded merely because it also deals in other products if its functions are broadly similar. A company failing the current year data filter is not a valid comparable. Working capital adjustment is a permissible transfer pricing adjustment and may not be denied only because it was not specifically claimed in the original study, provided supporting details are furnished. Royalty, technical know-how and technical assistance fees may not be adjusted under CUP where the agreement and contemporaneous material show receipt of technical support and business benefit, and reliable uncontrolled comparables are absent.

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Issues: (i) Whether the transfer pricing adjustment on the manufacturing segment was sustainable with respect to comparable selection, including exclusion of a functionally similar comparable, exclusion of a company for want of current year data, and grant of working capital adjustment; (ii) whether the adjustment on account of royalty, technical know-how and technical assistance fees was rightly deleted.

Issue (i): Whether the transfer pricing adjustment on the manufacturing segment was sustainable with respect to comparable selection, including exclusion of a functionally similar comparable, exclusion of a company for want of current year data, and grant of working capital adjustment.

Analysis: Under the Transactional Net Margin Method, broad functional comparability is relevant, and a comparable cannot be excluded merely because it also deals in other products if its functions are broadly similar. A company failing the current year data filter cannot be retained as a valid comparable. A claim for working capital adjustment is a valid transfer pricing adjustment and cannot be denied merely because it was not specifically claimed in the original study, though supporting details must be furnished.

Conclusion: The comparable broadly similar to the assessee was directed to be included, the company lacking current year data was directed to be excluded, and working capital adjustment was directed to be allowed. The issue was partly in favour of the assessee.

Issue (ii): Whether the adjustment on account of royalty, technical know-how and technical assistance fees was rightly deleted.

Analysis: The payment was found to be linked with the assessee's manufacturing business and supported by the agreement, supplementary agreements, and contemporaneous material showing receipt of technical support, drawings, designs, and assistance. The transfer pricing authority had not produced robust comparable uncontrolled transactions to justify application of the Comparable Uncontrolled Price Method, and the benefit test was satisfied from the recipient's perspective. The past and subsequent assessments also supported consistency.

Conclusion: The deletion of the transfer pricing adjustment on royalty, technical know-how and technical assistance fees was upheld in favour of the assessee.

Final Conclusion: The assessee succeeded on the comparables and working capital issues in part, and the Revenue failed on the royalty and technical fee adjustment, resulting in a partial relief to the assessee and dismissal of the Revenue's challenge.

Ratio Decidendi: In transfer pricing under TNMM, comparables must be selected on broad functional similarity with adherence to material filters such as current year data, and a royalty or technical fee adjustment cannot be sustained under CUP without reliable uncontrolled comparables where the agreement and surrounding evidence establish business benefit.

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