Functional comparability in software development transfer pricing led to exclusion of product-based and KPO comparables

Functional comparability under the transfer pricing regime was decisive for an assessee engaged in software development services. Cybermate Infotek Ltd. and Cybercom Datamatics Information Solutions Ltd. were excluded because they had mixed software product and service activities without separate segmental data. Infobeans Systems Pvt. Ltd. was also excluded due to mixed activities, lack of segmental details, and an extraordinary demerger event. Thirdware Solutions Ltd. was rejected as a comparable because it derived revenue from licences, subscriptions and software services, owned intangibles, and lacked segmental clarity. E-Zest Solutions Ltd. was excluded because it carried on KPO services, which were not comparable to software development services. The transfer pricing adjustment therefore did not survive.

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Issues: Whether the transfer pricing adjustment in respect of the assessee's software development services was sustainable, particularly with regard to the inclusion of Cybermate Infotek Ltd., Cybercom Datamatics Information Solutions Ltd., Infobeans Systems Pvt. Ltd., Thirdware Solutions Ltd. and E-Zest Solutions Ltd. as comparables.

Analysis: The assessee was engaged in software development services and the controversy turned on functional comparability under the transfer pricing framework. Companies engaged in both software services and sale of software products, or in KPO / product-based activities, were held not comparable where segmental results were unavailable. Cybermate Infotek Ltd. and Cybercom Datamatics Information Solutions Ltd. were excluded because they were involved in both software products and software services without separate segmental data. Infobeans Systems Pvt. Ltd. was excluded due to mixed activities, absence of segmental details, and an extraordinary demerger event. Thirdware Solutions Ltd. was excluded because it earned revenue from licences, subscriptions and software services, owned intangibles, and lacked segmental clarity. E-Zest Solutions Ltd. was excluded as it was engaged in KPO services, which could not be compared with software development services.

Conclusion: The identified companies were not functionally comparable and were directed to be excluded from the final set of comparables, with the result that the transfer pricing adjustment did not survive.

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