Transfer pricing comparables for captive software services must exclude product-heavy, intangibles-rich companies and include profit-making peers.

For benchmarking a captive software development service provider, comparables with product revenue, substantial intangibles, brand advantage, materially different functions, related-party linked transactions, or no reliable segmental data are not reliable. Infosys Ltd., Wipro Technology Services Ltd., e-Infochips Ltd., Sasken Communication Technologies Ltd., Persistent Systems Ltd. and Zylog Systems Ltd. were therefore excluded. CG-VAK Software & Exports Ltd. was included because it was not shown to be a persistent loss-maker and had profits in the relevant year; a company cannot be rejected merely on that ground. The transfer pricing set of comparables was accordingly revised and the arm's length price recomputed.

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Issues: Whether the transfer pricing adjustment was to be recomputed by including CG-VAK Software & Exports Ltd. and excluding Infosys Ltd., Wipro Technology Services Ltd., e-Infochips Ltd., Sasken Communication Technologies Ltd., Persistent Systems Ltd. and Zylog Systems Ltd. from the final set of comparables.

Analysis: The assessee was a captive software development service provider. The dispute centered on the functional comparability of the selected companies under the transfer pricing framework. CG-VAK Software & Exports Ltd. was accepted as comparable because it was not shown to be a consistent loss-making concern and had profit in the relevant year. Infosys Ltd. was excluded because it had significant brand value, owned software products, substantial intangibles and a scale of operations far removed from the assessee. Wipro Technology Services Ltd. was excluded because its revenue arose under a master service arrangement linked to a prior agreement involving an associated enterprise, making the transaction not a proper comparable uncontrolled transaction. e-Infochips Ltd. was excluded because it had product-related revenue and no reliable segmental data. Sasken Communication Technologies Ltd. was excluded because it was engaged in software products and entity-level figures were used. Persistent Systems Ltd. was excluded because of intangibles, product revenue and absence of clear segmental data. Zylog Systems Ltd. was excluded because it had diversified operations, intangibles and functional differences.

Conclusion: The transfer pricing set of comparables had to be revised by including CG-VAK Software & Exports Ltd. and excluding Infosys Ltd., Wipro Technology Services Ltd., e-Infochips Ltd., Sasken Communication Technologies Ltd., Persistent Systems Ltd. and Zylog Systems Ltd., with the arm's length price to be recomputed accordingly.

Ratio Decidendi: For benchmarking a captive software service provider, companies having product revenue, substantial intangibles, brand advantage, materially different functions, related-party linked transactions, or absent segmental data are not reliable comparables; a company showing profit in the relevant year cannot be rejected merely as a loss-making concern.

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