Transfer pricing comparability and IT support services: trading businesses are not comparable to manufacturers, and consistent prior acceptance supported the service claim.

In transfer pricing analysis, a predominantly trading healthcare segment could not be compared with predominantly manufacturing companies where the functional, asset and risk profiles materially differed, so Poly Medicure Ltd. and Opto Circuits (I) Ltd. were rightly excluded as comparables. By contrast, IT support service payments were accepted because the same arrangement had been allowed in an earlier year on identical facts, only maintenance charges for existing infrastructure were paid, and the services were found to have been rendered; the arm's length value could not be treated as nil. The first appellate relief on both points was sustained.

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Issues: (i) Whether the exclusion of Poly Medicure Ltd. and Opto Circuits (I) Ltd. from the comparables set in the transfer pricing analysis of the healthcare segment was justified on the ground that those companies were predominantly manufacturing concerns, and (ii) whether the deletion of the transfer pricing adjustment relating to IT support services was justified.

Issue (i): Whether the exclusion of Poly Medicure Ltd. and Opto Circuits (I) Ltd. from the comparables set in the transfer pricing analysis of the healthcare segment was justified on the ground that those companies were predominantly manufacturing concerns.

Analysis: The assessee's healthcare segment was found to be predominantly trading in nature, while Poly Medicure Ltd. and Opto Circuits (I) Ltd. were recorded as predominantly manufacturing companies. The functional profile, asset base and risk profile of a trader were held not to be comparable with those of a manufacturer. The Tribunal also noted that the assessee's and the transfer pricing officer's approaches did not justify retaining manufacturers as comparables for a predominantly trading segment.

Conclusion: The exclusion of Poly Medicure Ltd. and Opto Circuits (I) Ltd. was upheld and the issue was decided against the assessee.

Issue (ii): Whether the deletion of the transfer pricing adjustment relating to IT support services was justified.

Analysis: The IT support arrangement had been accepted in an earlier assessment year on identical facts, and in the relevant year only maintenance-related charges for the existing IT infrastructure were paid. The Tribunal accepted the finding that the services had been rendered and that, in view of prior acceptance and consistency, the arm's length value could not be treated as nil.

Conclusion: The deletion of the adjustment relating to IT support services was upheld and the issue was decided against the Revenue.

Final Conclusion: Both grounds raised by the Revenue failed, and the composite transfer pricing relief granted by the first appellate authority was sustained.

Ratio Decidendi: For transfer pricing comparability, a company predominantly engaged in trading cannot be compared with predominantly manufacturing companies where the functional, asset and risk profiles materially differ; prior acceptance of identical service expenditure on consistent facts also supports acceptance in subsequent years.

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