Transfer pricing comparables turn on functional similarity, filter compliance, and verification of related party transactions.

Transfer pricing comparability under the transactional net margin method depends on functional similarity and filter compliance. One company was correctly retained as functionally comparable, while another was not excluded merely because of share capital infusion, since that did not by itself establish an extraordinary event; its margin computation was however directed to be verified. A company engaged in trading medical equipment and diagnostic kits was also held comparable and its exclusion was declined. For another company, related party transaction filter compliance and margin computation were left for verification by the Assessing Officer, and the requested inclusion of an additional company was likewise directed to be examined for filter compliance.

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Issues: Whether the transfer pricing adjustment required interference on the comparability of selected companies, the inclusion or exclusion of particular comparables, and verification of related party transaction and margin computations.

Analysis: The dispute centred on the selection of comparables under the transactional net margin method. One comparable was found to be functionally comparable and was correctly included. Another comparable was not excluded on the plea of extraordinary event, as mere infusion of share capital did not by itself establish such an event, though the margin computation was directed to be verified. A further comparable engaged in trading of medical equipment and diagnostic kits was held to be comparable and its exclusion was declined. For one comparable, the question whether it satisfied the related party transactions filter was left to verification by the Assessing Officer, and the margin computation was also directed to be checked. The requested inclusion of another comparable was similarly directed to be examined by the Assessing Officer for filter compliance and inclusion if found suitable.

Conclusion: The transfer pricing challenge succeeded only to the limited extent of verification directions and possible adjustment of comparables and margins, and the assessee obtained partial relief.

Ratio Decidendi: In transfer pricing analysis, a comparable may be retained or excluded only on a reasoned examination of functional similarity and filter compliance, and factual issues such as related party transactions or margin computation may warrant verification before final adjustment.

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