Software transfer pricing comparability turns on functional similarity, foreign tax credit verification and working capital adjustment before allowance.

A captive software development service provider should not be benchmarked against an IP-driven product development entity where the latter lacks reliable segmental data separating software services from entrepreneurial and licensing activities. On the comparability analysis, Persistent Systems Ltd. was treated as functionally different and excluded, while Akshay Software Technologies Ltd., Cigniti Technologies Ltd. and Evoke Technologies Pvt. Ltd. were accepted as comparables because their revenues and functions were aligned with software services. Foreign tax credit was stated to depend on verification of foreign tax payment, corresponding Indian taxation and the prescribed declaration, so the claim required examination by the Assessing Officer. Working capital adjustment was also to be allowed after necessary verification.

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Issues: (i) Whether Persistent Systems Ltd. was a valid comparable and whether Akshay Software Technologies Ltd., Cigniti Technologies Ltd. and Evoke Technologies Pvt. Ltd. were required to be included as comparables; (ii) Whether the claim for foreign tax credit required verification by the Assessing Officer; (iii) Whether working capital adjustment was to be granted.

Issue (i): Whether Persistent Systems Ltd. was a valid comparable and whether Akshay Software Technologies Ltd., Cigniti Technologies Ltd. and Evoke Technologies Pvt. Ltd. were required to be included as comparables.

Analysis: Persistent Systems Ltd. was found to operate as an entrepreneurial, IP-driven product development entity engaged in outsourced product development, technology innovation, licensing and royalty-based activities, with no reliable segmental break-up isolating pure software development services. This functional profile, risk structure and absence of segmental data made it incomparable with a captive software development service provider under TNMM. Akshay Software Technologies Ltd. was held comparable because its revenue was overwhelmingly from software services, it satisfied the relevant filters, and its activities were substantially in software development and related services. Cigniti Technologies Ltd. was held comparable because software testing forms part of the software development life cycle and the company's revenue was entirely from software-related services. Evoke Technologies Pvt. Ltd. was also held comparable because reliable financial data was available and it was engaged exclusively in software development services.

Conclusion: Persistent Systems Ltd. was directed to be excluded and Akshay Software Technologies Ltd., Cigniti Technologies Ltd. and Evoke Technologies Pvt. Ltd. were directed to be included; the assessee succeeded on this issue.

Issue (ii): Whether the claim for foreign tax credit required verification by the Assessing Officer.

Analysis: The entitlement to foreign tax credit depended on verification of supporting evidence, including proof of foreign tax payment, corresponding income offered to tax in India and the prescribed declaration. The matter therefore required factual examination by the Assessing Officer before credit could be granted.

Conclusion: The issue was remitted for verification and the assessee obtained relief subject to such verification.

Issue (iii): Whether working capital adjustment was to be granted.

Analysis: The record showed that the adjustment had been accepted in principle and no objection was raised to its grant after verification. The adjustment was therefore required to be carried out in accordance with law.

Conclusion: Working capital adjustment was directed to be allowed after necessary verification; the assessee succeeded on this issue.

Final Conclusion: The appeals were disposed of by granting partial relief to the assessee, principally on comparables, foreign tax credit verification and working capital adjustment, while other grounds were either withdrawn, not pressed or not adjudicated.

Ratio Decidendi: A captive software development service provider cannot be benchmarked against an IP-driven product development company without segmental data, and adjustments such as foreign tax credit and working capital require factual verification before final allowance.

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