Exclusion of a functionally dissimilar comparable is a factual finding absent demonstrated perversity.

The Revenue appealed under Section 260A of the Income-tax Act, 1961, against the ITAT Bengaluru’s order for Assessment Year 2007–08.

The Tribunal had directed the exclusion of Accurate Data Converters Ltd. as a comparable in determining the arm’s length price (ALP), and directed the use of the internal Transactional Net Margin Method (TNMM).

The Revenue challenged, among other things, the exclusion of certain comparables and the direction to apply internal TNMM.

The High Court admitted the appeal on substantial questions of law concerning those directions.

Whether the Tribunal’s direction to exclude comparables on grounds of functional dissimilarity was perverse, despite the TPO’s FAR analysis and application of Rule 10B.

Whether the Tribunal was justified in directing the exclusion of Eclerx Services and Mold-Tek Technologies on grounds of functional dissimilarity and the onsite-revenue filter.

Whether the Tribunal was justified in excluding Accurate Data Converters Ltd. for failing the employee-cost filter and directing the application of internal TNMM.

Section 260A of the Income-tax Act provides for appeals to the High Court on substantial questions of law.

Chapter X of the Act governs transfer pricing, including the determination of ALP; under Section 92C(3), the TPO may intervene in the taxpayer’s ALP determination only when the statutory conditions are met.

Rule 10B requires comparability to be assessed by reference to relevant factors, including functions performed, assets employed and risks assumed.

Relying on Sap Labs India Private Limited v. Income Tax Officer (ITA No. 10/2011 and connected appeals), the Court stated that selection or exclusion of comparables is a factual, data-driven exercise, and that the TPO’s inclusion or exclusion of comparables must comply with Rule 10B.

The Tribunal found that the assessee had outsourced a major portion of its work and, on that basis, concluded that Accurate Data was not functionally comparable.

The High Court accepted that finding, noting that the Revenue had produced no material to establish that the assessee had not outsourced the major part of its work.

The Court also found no demonstrated perversity, reliance on irrelevant material, or exclusion of relevant material in the Tribunal’s factual determination.

Although the admitted questions also referred to Eclerx Services, Mold-Tek Technologies and internal TNMM, the Court’s stated analysis focused on the exclusion of Accurate Data.

The appeal was dismissed.