Turnover as a transfer pricing comparability factor can justify excluding high-scale software service comparables and remitting others for review.
Turnover is a material transfer pricing comparability factor because scale can affect profitability, market position, bargaining power, asset base, risk profile and functional comparability. In software development benchmarking, comparables with disproportionately high turnover may be excluded when the tested party is a captive service provider operating at a much lower scale, and an appropriate upper turnover filter should be applied. Inclusion of comparables such as I2T2 India Limited and Cigniti Technologies Limited cannot be directed without fresh verification of the relevant year's financials, functional profile, segmental data and other quantitative filters. The turnover-filter issue was resolved in favour of the assessee, while the other comparable-selection issue required fresh examination.
Issues: (i) Whether comparables having disproportionately high turnover vis-a -vis the assessee could be excluded while determining the arm's-length price under the software development segment; (ii) whether the inclusion of I2T2 India Limited and Cigniti Technologies Limited could be directed without fresh factual verification.
Issue (i): Whether comparables having disproportionately high turnover vis-a -vis the assessee could be excluded while determining the arm's-length price under the software development segment.
Analysis: Turnover was held to be a relevant comparability factor because scale affects profitability through economies of scale, market position, bargaining power, asset base, risk profile and functional comparability. Companies with substantially higher turnover cannot be mechanically compared with a captive service provider operating at a much lower scale. The order also relied on binding jurisdictional precedent and the need to apply an appropriate upper turnover filter in transfer pricing analysis.
Conclusion: The exclusion of comparables with disproportionately high turnover was upheld and this issue was decided in favour of the assessee.
Issue (ii): Whether the inclusion of I2T2 India Limited and Cigniti Technologies Limited could be directed without fresh factual verification.
Analysis: Inclusion of a comparable cannot rest only on reliance upon another case. The relevant filters, contemporaneous financials, functional profile, segmental data and other quantitative criteria for the year under consideration must be verified before directing inclusion.
Conclusion: The issue was restored to the Assessing Officer/TPO for fresh examination and was not finally decided on merits.
Final Conclusion: The transfer pricing adjustment dispute was substantially resolved in favour of the assessee on the turnover-filter issue, while one comparable-selection question was remitted for fresh consideration.
Ratio Decidendi: In transfer pricing comparability, turnover is a material criterion because materially different scale can affect FAR profile and profitability, and a comparable may be excluded or re-examined where its turnover or factual profile is not sufficiently comparable to the tested party.
TaxTMI 
AI Drafter ✕
TaxTMI 
