Transfer pricing comparability: Persistent Systems Ltd. excluded as functionally dissimilar due to product-led business and no reliable segmental breakup

Persistent Systems Ltd. was found functionally dissimilar for transfer pricing benchmarking under the transactional net margin method because it was engaged in software products, software services and technology innovation, with material emphasis on product development and no reliable segmental bifurcation of product and service revenues. Broader functional similarity was treated as insufficient where material differences in business model remained. The earlier exclusion of the same company in the assessee's own case, as upheld by the jurisdictional High Court, supported exclusion, and the recalled earlier order had no continuing effect for this comparable. Persistent Systems Ltd. was therefore directed to be excluded from the final list of comparables.

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Issues: Whether Persistent Systems Ltd. was a functionally comparable company and liable to be included in the final list of comparables for the assessee's transfer pricing analysis.

Analysis: The company was engaged in software products, software services and technology innovation, with material emphasis on product development and no reliable segmental bifurcation showing separate revenues from services and products. In transfer pricing benchmarking under the transactional net margin method, broader functional similarity does not override material functional differences where the comparable is into software product development and lacks segmental clarity. The earlier exclusion of the same company in the assessee's own case was upheld by the jurisdictional High Court, and the recalled earlier order had no continuing efficacy for this comparable.

Conclusion: Persistent Systems Ltd. was held to be functionally dissimilar and was directed to be excluded from the final list of comparables, in favour of the assessee.

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