India: Loss-making companies as comparables | KPMG | BE

India: Loss-making companies as comparables

India: Loss-making companies as comparables

The Ahmedabad Tribunal held that consistent loss-making companies cannot be rejected as comparables unless the functional profile is different, and various comparability adjustments including capacity adjustment, volume adjustment and warranty cost adjustment are to be allowed.

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The case is: Erhardt+Leimer (India) Private Ltd.

The tribunal explained that comparable entities cannot be rejected outright merely on the basis of consistent loss-making status, and that a comprehensive functional analysis is vital for reliable results. Further, the tribunal held that in instances of a substantial investment in fixed assets, incremental depreciation is to be excluded in computing the profit level indicator. However, if the taxpayer's profit level indicator has undergone a "substantial hit" due to capacity underuse, the difference must be adjusted with respect to comparable entities (instead of the tested party) for effective comparability.

 

Read a January 2017 report [PDF 310 KB] prepared by the KPMG member firm in India

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