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of <h1>Tribunal overturns transfer pricing adjustment, emphasizes functional similarity in comparability analysis</h1> <h3>Optiva India Technologies Private Limited, (Formerly known as Redknee (India) Technologies Private Limited), C/o Awfis Space Solutions Pvt. Ltd. Versus DCIT, Circle-3, Pune</h3> The Tribunal allowed the appeal regarding a transfer pricing adjustment of Rs.13,48,02,885 for the assessment year 2014-15 under the Income-tax Act, 1961. ... TP addition - determining the ALP of the international transaction of Provision of software support services - Comparable selection - HELD THAT:- Companies functionally dissimilar with that of assessee need to be deselected. Issues:Transfer pricing adjustment of Rs.13,48,02,885.Analysis:The appeal pertains to the final assessment order for the assessment year 2014-15 under section 143(3) r.w.s.144C(13) of the Income-tax Act, 1961, focusing on the transfer pricing addition of Rs.13,48,02,885. The assessee, engaged in software support services, applied the Transactional Net Margin Method (TNMM) to demonstrate the international transaction's Arm's Length Price (ALP). The TPO made alterations to the PLI, leading to the recommended transfer pricing adjustment. The dispute revolves around the inclusion of certain companies in the final set of comparables, challenging their comparability with the assessee's business activities.The Tribunal clarified that there is no dispute on the application of TNMM or the TPO's alterations to the PLI. The nature of the assessee's activity, providing contract research and development services to its Associated Enterprise (AE) for software products and solutions, was crucial in assessing comparability. The Tribunal addressed the challenges against specific comparables, such as Persistent Systems Ltd., Thirdware Solutions Ltd., and R.S. Software Ltd., highlighting functional dissimilarities and extraordinary financial events affecting comparability.Persistent Systems Ltd. was excluded due to an extraordinary financial event involving the acquisition of another company, aligning with judicial precedents that extraordinary events like mergers render companies noncomparable. Thirdware Solutions Ltd. was found to be engaged in software product sales, not services like the assessee, warranting its exclusion. R.S. Software Ltd.'s diverse services in payments, dispute management, and analytics differed significantly from the assessee's R&D services, leading to its exclusion.The Tribunal emphasized the importance of functional similarity in determining comparability and directed the exclusion of the challenged companies from the list of comparables. The impugned order was set aside, remitting the matter to the AO/TPO for fresh determination of the ALP, ensuring the assessee's right to a reasonable opportunity of hearing. The appeal was allowed for statistical purposes, with the order pronounced on 23rd September 2021.
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