Functional comparability in transfer pricing requires proper analysis before arm's length adjustment can be sustained

Transfer pricing adjustment requires a proper functional comparability analysis before arm's length price can be affirmed. The record showed a disputed basic profile of the assessee, with one view treating it as a trader in iron ore and coal and another as engaged in production of ferrous products, while the selected comparables were said to have a manufacturing profile. Because the earlier finding on comparability was cryptic and lacked adequate functional and statistical examination, the matter was set aside for fresh consideration by the Dispute Resolution Panel on the assessee's product profile, business activities, and correct selection of comparables.

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Issues: Whether the transfer pricing adjustment could be sustained on the basis of comparables whose functional profile was disputed, and whether the matter required reconsideration because the assessee's trading activity and the comparables' manufacturing activity were not adequately examined.

Analysis: The adjustment turned on comparability of the assessee with the selected companies. The record showed a conflict on the basic functional profile of the assessee, with one view treating it as a trader in iron ore and coal and the other treating it as engaged in production of ferrous products. The finding of comparability in the lower proceedings was found to be too cryptic and unsupported by adequate statistical or functional analysis. Since arm's length price determination depends on comparing functionally similar entities, a proper examination of the product profile and business activities of the assessee and the selected comparables was necessary before the adjustment could be affirmed.

Conclusion: The existing transfer pricing adjustment was not finally sustained. The matter was set aside for fresh examination by the Dispute Resolution Panel on the question of functional comparability and correct selection of comparables, in favour of the assessee.

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