Transfer pricing comparability turns on FAR analysis, including functional similarity and materially comparable scale of operations.

Transfer pricing comparability requires a full FAR analysis, including functional similarity and scale of operations. Cepha Imaging Pvt. Ltd. could not be assessed only on the export filter; its alleged e-publishing activity and the scope of IT-enabled services also required examination for functional comparability. CG Vak Software & Exports Ltd. was discussed as an unsuitable comparable where an extreme turnover gap materially affected margins and the economic profile, showing that size disparity can defeat comparability when it is substantial enough. The note emphasises that both functional differences and materially different operating scale may justify exclusion from the comparable set.

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Issues: (i) Whether Cepha Imaging Pvt. Ltd. could be included as a comparable on the basis of export filter without examining its functional similarity with the assessee; (ii) Whether CG Vak Software & Exports Ltd. could be included as a comparable despite the extreme turnover disparity with the assessee.

Issue (i): Whether Cepha Imaging Pvt. Ltd. could be included as a comparable on the basis of export filter without examining its functional similarity with the assessee.

Analysis: The exclusion by the transfer pricing authorities rested on the export-earning filter and the appellate tribunal had directed reconsideration on that aspect. However, the record also showed an objection based on functional dissimilarity, as Cepha Imaging Pvt. Ltd. was stated to be engaged in e-publishing activity and the CBDT notification relied upon did not include e-publishing within the specified IT-enabled services. Functional comparability is a necessary part of the FAR exercise and could not be bypassed merely by testing the export filter. The matter therefore required examination of both export eligibility and functional similarity.

Conclusion: The issue is decided in favour of the Revenue and against the assessee; the comparable had to be re-examined on functional similarity as well.

Issue (ii): Whether CG Vak Software & Exports Ltd. could be included as a comparable despite the extreme turnover disparity with the assessee.

Analysis: The assessee's ITeS segment turnover was vastly higher than that of CG Vak Software & Exports Ltd., with the scale difference being around one hundred times. In transfer pricing, size and scale materially affect margins and comparability, and a company cannot ordinarily be treated as comparable where the turnover disparity is so extreme that it affects the operating structure and economic profile. The tribunal's view that low turnover alone would not defeat comparability was not accepted on these facts, because the mismatch in scale was substantial enough to undermine comparability.

Conclusion: The issue is decided in favour of the Revenue and against the assessee; CG Vak Software & Exports Ltd. was not a proper comparable.

Final Conclusion: The appeal succeeds on the two admitted questions, and the tribunal's inclusion directions on the contested comparables do not stand.

Ratio Decidendi: In transfer pricing comparability, the FAR analysis must include functional similarity and materially comparable scale of operations, and a company may be excluded where either functional differences or extreme turnover disparity materially affects comparability.

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