Chennai ITAT Orders Exclusion of Four Software Development Comparables Due to Functional Dissimilarities

The Income Tax Appellate Tribunal (ITAT) Chennai directed the exclusion of four software development comparables from the benchmarking set, citing distinct functional dissimilarities. The decision provides relief to taxpayers facing transfer pricing adjustments on software development services. In transfer pricing audits, the arm's length price of international transactions must be determined using companies with matching functional profiles, risks, and assets.

When selected comparables possess dissimilar business models, proprietary products, or differing risk profiles, judicial precedents require their removal to ensure fair benchmarking. Transfer pricing practitioners and chartered accountants representing IT service providers must examine functional profiles of comparable companies closely during audits. Ensure robust documentation highlights operational differences to defend against inappropriate inclusion by tax authorities.

Bottom line: Challenge comparable selections vigorously when functional profiles do not match your client's operations.