Bangalore ITAT Mandates Exclusion of Five Software Transfer Pricing Comparables Due to Functional Disparities

The Income Tax Appellate Tribunal (ITAT) Bangalore ordered the exclusion of five software transfer pricing comparables after noting significant functional disparities. The ruling protects taxpayers from unfair adjustments arising from mismatched benchmark datasets. Transfer pricing regulations mandate that benchmarking analyses compare transactions between entities sharing similar functions, assets, and risks.

Comparing captive service providers with full-fledged product companies or firms with dissimilar business operations distorts the arm's length margin calculation, making judicial exclusion necessary. Tax professionals and chartered accountants handling software sector transfer pricing audits should evaluate comparability analyses meticulously.

Documenting functional divergences helps secure appropriate exclusions during appellate proceedings. Bottom line: Verify functional comparability rigorously to protect clients from unjust transfer pricing additions.