Consistent acceptance of functionally comparable companies supports their inclusion in transfer pricing benchmarking absent material distinction

Transfer pricing benchmarking under the Transactional Net Margin Method concerned whether Universal Petro-Chemicals Ltd. and Iftex Oil and Chemicals Ltd. should be included as comparables for a manufacturing segment involving raw-material purchases. The commentary notes that the entities had previously been accepted by the revenue as functionally comparable for the same segment, while no material distinction was identified for the relevant assessment year. Objections based on alleged cherry-picking, low margins, turnover differences and persistent losses were therefore insufficient to justify their exclusion. Their inclusion brought the assessee's margin within the comparable range and supported determination of the arm's length price using the expanded comparable set.

---

---

Issues: Whether two additional comparable companies, Universal Petro-Chemicals Ltd. and Iftex Oil and Chemicals Ltd., were liable to be included in the final set of comparables for determining the arm's length price of the international transaction relating to purchase of raw material.

Analysis: The transfer pricing dispute arose from benchmarking of the assessee's manufacturing segment under TNMM and the consequent adjustment made under the Income-tax Act, 1961. The assessee sought inclusion of two additional comparables which had been rejected by the DRP on grounds including alleged cherry-picking, low margins, turnover disparity and persistent losses. The record showed that in earlier assessment years the department itself had accepted Universal Petro-Chemicals Ltd. and Iftex Oil and Chemicals Ltd. in the final set of comparables for the same manufacturing segment, and their functional comparability had not been disputed. In the absence of any justifiable distinguishing reason for the year under consideration, exclusion of those entities from the comparable set was not warranted. Their inclusion also brought the assessee's margin within the comparable range.

Conclusion: The two additional comparable companies were directed to be included in the final set of comparables for determining the arm's length price; the transfer pricing ground was decided in favour of the assessee.

Ratio Decidendi: Where a comparable has been accepted by the revenue as functionally comparable for the same segment in other assessment years and no material distinction is shown for the year in question, its exclusion from the comparable set is unjustified in transfer pricing benchmarking.

---