Transfer pricing comparables cannot be rejected for marginal turnover differences or past losses if otherwise functionally comparable.

In contract R&D support services transfer pricing, the Tribunal held that comparables should not be excluded merely because they had losses in two of three years if they were otherwise functionally comparable, and a minimal breach of the turnover filter could not justify rejection where the variance was marginal. Applying the rival benchmark sets, the assessee's margin of 11.81% was found to remain within arm's length parameters, so the transfer pricing adjustment was deleted.

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Issues: Whether the transfer pricing adjustment made in respect of provision of contract R&D support services was sustainable, particularly in relation to the turnover filter and the exclusion of persistent loss-making comparables.

Analysis: The assessee's margin under the transaction was 11.81%. The disputed comparables were tested against the filters applied by the Transfer Pricing Officer, including a turnover range of one-tenth to ten times the assessee's turnover and the rejection of companies treated as persistent loss-makers. The Tribunal held that companies which had incurred losses in two out of three years were not to be excluded merely on that basis where they were otherwise functionally comparable, and also held that a marginal breach of the turnover threshold could not justify exclusion where the difference was minimal. On either of the rival benchmark sets, the assessee's margin remained within arm's length parameters.

Conclusion: The transfer pricing adjustment was deleted and the issue was decided in favour of the assessee.

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