Transfer-pricing comparability in software services requires turnover filtering, functional similarity, and foreign-currency benchmarking for receivables.

Transfer-pricing comparability for captive software development services must exclude entities with materially higher turnover where scale, brand value, market position, and risk profile distort comparability, and it must also exclude functionally dissimilar businesses engaged in diversified or specialised non-comparable activities. For foreign currency trade receivables from associated enterprises, domestic lending rates such as SBI PLR are not appropriate; the benchmark should reflect a foreign-currency rate, with LIBOR plus basis points applied after the normal credit period. The resulting adjustment is to be recomputed on that basis.

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Issues: (i) Whether companies with substantially higher turnover could be retained as comparables in the software development segment. (ii) Whether functionally dissimilar companies could be included in the software development segment comparables. (iii) Whether notional interest on delayed trade receivables from associated enterprises should be benchmarked at SBI PLR or LIBOR plus basis points.

Issue (i): Whether companies with substantially higher turnover could be retained as comparables in the software development segment.

Analysis: The assessee had a relatively small software development turnover, while several selected comparables had extraordinarily high turnovers running into hundreds and thousands of crores. Such disparity was held to materially affect scale, brand value, market position, and risk profile, thereby distorting comparability. The upper turnover filter had been consistently applied in captive software service provider cases to exclude giant companies from the comparable set.

Conclusion: The high-turnover companies were directed to be excluded from the comparables set, in favour of the assessee.

Issue (ii): Whether functionally dissimilar companies could be included in the software development segment comparables.

Analysis: One company was engaged in diversified activities such as infrastructure management, cloud computing, testing, quality assurance, and related services, while another was engaged in specialised software algorithms and signal-processing solutions. These activities were materially different from captive software development services. Functionally dissimilar entities cannot be treated as comparable for transfer-pricing benchmarking.

Conclusion: The two functionally dissimilar companies were directed to be excluded, in favour of the assessee.

Issue (iii): Whether notional interest on delayed trade receivables from associated enterprises should be benchmarked at SBI PLR or LIBOR plus basis points.

Analysis: SBI PLR was held to be unsuitable for foreign currency receivables because it reflects domestic lending conditions. For foreign currency denominated receivables or advances, the appropriate benchmark is a foreign currency rate, and the accepted approach was LIBOR plus 200 basis points after allowing the normal credit period. The receivables issue was treated as requiring recomputation on that basis.

Conclusion: The adjustment was to be recomputed using LIBOR plus basis points, in favour of the assessee.

Final Conclusion: The transfer-pricing adjustments were substantially reduced by exclusion of high-turnover and functionally dissimilar comparables and by directing recomputation of the receivables adjustment on the correct foreign-currency benchmark.

Ratio Decidendi: In transfer-pricing for captive software service providers, comparability must account for material turnover disparity and functional similarity, and interest on foreign currency receivables cannot be benchmarked by domestic lending rates but must be tested against an appropriate foreign-currency benchmark.

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