Functional dissimilarity defeats transfer pricing comparability where a diversified business lacks segmental data and adjustment falls away.

A diversified enterprise engaged in content solutions, publishing solutions and platform-based operations, with in-house development, research and acquisitions and no reliable segmental data, was held not to be functionally comparable to an assessee providing content development and editing services on a limited-risk, cost-plus basis. On the functional and annual report record, the entities were found to follow materially different business models, so the comparable was excluded from transfer pricing benchmarking. Once excluded, the assessee's margin fell within the arm's length range and the proposed transfer pricing adjustment did not survive.

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Issues: Whether MPS Ltd. was functionally comparable to the assessee for benchmarking the international transaction of provision of ITES services, and whether its exclusion would eliminate the transfer pricing adjustment.

Analysis: The assessee was engaged in content development and editing services on a limited-risk, cost-plus basis, while MPS Ltd. carried on diversified activities, including content solutions, publishing solutions and platform-based businesses, with in-house development, research and development, acquisitions, and no reliable segmental data. On the record of the annual report and the functional analysis, the two entities were found to operate on materially different business models and not to be comparable for transfer pricing purposes. Once MPS Ltd. was excluded from the final set of comparables, the assessee's margin fell within the arm's length range and the proposed adjustment did not survive.

Conclusion: MPS Ltd. was directed to be excluded from the comparables and the transfer pricing adjustment was deleted in favour of the assessee.

Final Conclusion: The appeal succeeded because the exclusion of the functionally dissimilar comparable brought the assessee's transaction within the arm's length standard, rendering the other grounds academic.

Ratio Decidendi: A company engaged in a materially different and diversified business model, without segmental data to isolate comparable activities, cannot be used as a reliable comparable in transfer pricing benchmarking.

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