Transfer pricing comparability under TNMM: turnover filter, functional dissimilarity, and limited comparables can still support benchmarking.

Turnover was treated as a relevant comparability filter in software development transfer pricing, and a ten-times range on either side of the assessee's turnover was accepted. The exclusion of Thirdware Solutions Ltd., Kals Information Systems Ltd., Cigniti Technologies Ltd., R S Software (India) Ltd., Inteq Software Pvt. Ltd., Infobeans Technologies Ltd., Rheal Software Pvt. Ltd. and CG-VAK Software & Exports Ltd. was upheld on functional dissimilarity and related comparability grounds, while Evoke Technologies Ltd. was retained because its audited financials permitted computation of the profit level indicator from Indian operations. It was also stated that benchmarking under TNMM does not require more than one comparable, so a limited set may be used if functionally comparable and otherwise filter-compliant.

---

---

Issues: (i) whether turnover is a relevant filter for selecting comparable companies in transfer pricing analysis; (ii) whether the exclusion of Thirdware Solutions Ltd., Kals Information Systems Ltd., Cigniti Technologies Ltd., R S Software (India) Ltd., Inteq Software Pvt. Ltd., Infobeans Technologies Ltd., Rheal Software Pvt. Ltd. and CG-VAK Software & Exports Ltd., and the inclusion of Evoke Technologies Ltd., were justified; and (iii) whether the comparables remaining after such selection exercise could still be used for benchmarking under the transactional net margin method.

Issue (i): whether turnover is a relevant filter for selecting comparable companies in transfer pricing analysis.

Analysis: Turnover was treated as a relevant comparability criterion in software development transfer pricing cases. A turnover range of ten times on both sides of the assessee's turnover was accepted as a judicially recognized filter, and the earlier direction to adopt that range was followed.

Conclusion: The turnover filter directed by the Commissioner (Appeals) was upheld and the Revenue's challenge failed.

Issue (ii): whether the exclusion of Thirdware Solutions Ltd., Kals Information Systems Ltd., Cigniti Technologies Ltd., R S Software (India) Ltd., Inteq Software Pvt. Ltd., Infobeans Technologies Ltd., Rheal Software Pvt. Ltd. and CG-VAK Software & Exports Ltd., and the inclusion of Evoke Technologies Ltd., were justified.

Analysis: Thirdware Solutions Ltd. was found to be functionally dissimilar to a routine software development service provider and was also noticed as failing the related party transactions filter; on that footing, its exclusion was sustained without the need to decide the computational dispute on the RPT filter. Kals Information Systems Ltd. was excluded because it was engaged in software and software product development, giving it a different functional, asset and risk profile. Cigniti Technologies Ltd., R S Software (India) Ltd., Inteq Software Pvt. Ltd. and Infobeans Technologies Ltd. were upheld as exclusions on the ground of functional dissimilarity and absence of contrary material. Rheal Software Pvt. Ltd. and CG-VAK Software & Exports Ltd. were also excluded on the basis of the Commissioner (Appeals)' comparability analysis, which the Revenue failed to rebut. Evoke Technologies Ltd. was retained because the audited financials enabled computation of profit level indicator from the Indian operations alone.

Conclusion: The exclusions and inclusion made by the Commissioner (Appeals) were upheld.

Issue (iii): whether the comparables remaining after such selection exercise could still be used for benchmarking under the transactional net margin method.

Analysis: It was held that the law does not require more than one comparable as a matter of mandate. Even a small set, or a single comparable, can be used if it is functionally comparable and otherwise satisfies the statutory filters for comparability under the transfer pricing provisions.

Conclusion: The Revenue's objection that the remaining set of comparables was too small to sustain benchmarking was rejected.

Final Conclusion: The transfer pricing adjustments made by the lower authorities were not interfered with in the Revenue's favour, and the order of the Commissioner (Appeals) was sustained in substance, leaving no basis to disturb the assessee-favourable outcome.

Ratio Decidendi: In transfer pricing under the transactional net margin method, turnover is a relevant comparability filter, functional dissimilarity justifies exclusion of a comparable, and benchmarking may lawfully be done even on a limited set of comparables if the retained entities are functionally comparable and satisfy the applied filters.

---