India: Factors for including, excluding comparables

India: Factors for including, excluding comparables

The Delhi High Court affirmed a decision of the Delhi Bench of Income-tax Appellate Tribunal that if a company has high or extremely high profits and losses, these factors alone do not automatically result in its exclusion as a comparable company for purposes of determining the arm’s length price. Rather, in determining comparable companies, there must be a detailed analysis of services provided, assets employed, risks assumed, and other factors to determine the comparability. Also, there must be an analysis as to whether any material difference between a comparable and the taxpayer can be eliminated, and if not, then the company is not to be included as a comparable.


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The case is: ChrysCapital Investment Advisors (India) Pvt. Ltd. v. DCIT ITA No. 417 of 2014 (27 April 2015))


The taxpayer company performed investment advisory services for related entities, and was reimbursed on a cost-plus mark-up basis. The taxpayer used the Transactional Net Margin Method (TNMM) and identified four entities that were engaged broadly in the same economic activities. The taxpayer computed the arithmetic mean of the margins of the comparables using multiple year data (because of fluctuation in these margins, the taxpayer used multiple year data to remove the effect of year-specific aberrations).

The Transfer Pricing Officer, however, computed the operating margins of the four comparables using single year data; asserted that multiple year data could not be used; and selected two new comparables with abnormal business profits.

The tribunal upheld these findings, and concluded that current year data were to be used—absent abnormal or exceptional facts and circumstances that could affect the results and the transfer prices for the year under consideration.

The High Court remitted the case to the Dispute Resolution Panel for an analysis of whether there was functional similarity between the taxpayer and a comparable and further, if there were material differences arising from their exceptionally high profits (differences that cannot be eliminated), then the company could not be included as a comparable.


Read an April 2015 report [PDF 404 KB] prepared by the KPMG member firm in India: Delhi High Court rules that higher or abnormal profits / losses cannot be a factor for exclusion of a comparable

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