Transfer pricing comparability must reflect functional similarity, reliable segmental data, and actual working capital adjustment.

In transfer pricing analysis for a captive software development service provider, a comparable chosen in the assessee's study may still be excluded where it is not truly comparable, because there is no estoppel against law and arm's length price must rest on correct comparables. Functional dissimilarity, diversified operations, lack of reliable segmental data, software product revenue, and failure of filters justified exclusion of Acropetal Technologies Ltd., E-Infochips Ltd., ICRA Techno Analytics Ltd. and Persistent Systems & Solutions Ltd., while E-Zest Solutions Ltd. required fresh verification. Earlier remand approaches were followed for Akshay Software Technologies Ltd., LGS Global Ltd. and Thinksoft Global Services Ltd., and working capital adjustment was to be recomputed on actual basis to neutralise economic differences.

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Issues: (i) whether additional ground seeking exclusion of a comparable selected by the assessee was admissible; (ii) whether Acropetal Technologies Ltd., E-Zest Solutions Ltd., E-Infochips Ltd. and ICRA Techno Analytics Ltd. were comparable to a captive software development service provider; (iii) whether Persistent Systems & Solutions Ltd. was comparable; (iv) whether inclusion of certain comparables claimed by the assessee required fresh consideration; and (v) whether working capital adjustment had to be recomputed on actual basis.

Issue (i): whether additional ground seeking exclusion of a comparable selected by the assessee was admissible.

Analysis: A comparable chosen by the assessee in its transfer pricing study can still be challenged if it is not legally comparable, since there is no estoppel against law and the objective remains determination of the arm's length price on correct comparables.

Conclusion: The additional ground was admitted in favour of the assessee.

Issue (ii): whether Acropetal Technologies Ltd., E-Zest Solutions Ltd., E-Infochips Ltd. and ICRA Techno Analytics Ltd. were comparable to a captive software development service provider.

Analysis: Acropetal Technologies Ltd. was found to be functionally different and lacking reliable segmental data. E-Zest Solutions Ltd. required fresh verification because the objections raised before the DRP had not been properly adjudicated. E-Infochips Ltd. failed the software service income filter and had diverse operations with no reliable segmental segregation. ICRA Techno Analytics Ltd. was engaged in diversified activities and lacked segmental clarity, making it functionally incomparable.

Conclusion: Acropetal Technologies Ltd., E-Infochips Ltd. and ICRA Techno Analytics Ltd. were directed to be excluded, while the comparability of E-Zest Solutions Ltd. was remanded for fresh examination.

Issue (iii): whether Persistent Systems & Solutions Ltd. was comparable.

Analysis: The company earned composite revenue from software services and products without separate segmental details, and the same functional profile had already been held incomparable in earlier decisions involving similar facts.

Conclusion: Persistent Systems & Solutions Ltd. was directed to be excluded in favour of the assessee.

Issue (iv): whether inclusion of Akshay Software Technologies Ltd., LGS Global Ltd. and Thinksoft Global Services Ltd. required fresh consideration.

Analysis: The question of inclusion of these comparables had been remanded in earlier coordinate bench decisions on similar facts, and the same approach was followed for the present year.

Conclusion: The exclusion of these comparables was set aside and the issue was remanded to the Assessing Officer or Transfer Pricing Officer for fresh consideration.

Issue (v): whether working capital adjustment had to be recomputed on actual basis.

Analysis: Working capital adjustment is intended to neutralise economic differences between the tested party and comparables, and restricting the adjustment without a proper basis was not justified.

Conclusion: The working capital adjustment was directed to be recomputed on actual basis in favour of the assessee.

Final Conclusion: The transfer pricing dispute was decided partly in favour of the assessee, with several comparables excluded, one comparable remanded for fresh examination, certain comparables remanded for inclusion analysis, and the working capital adjustment directed to be recomputed.

Ratio Decidendi: A company selected in transfer pricing study may still be rejected if it is not truly comparable, and comparability must be tested on functional similarity, availability of reliable segmental data, and correct economic adjustments.

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