The Punjab and Haryana High Court affirmed a judgment of a tax appellate tribunal that certain companies could be appropriate comparable companies, regardless of the percentage of their use of a key raw material, provided that the companies selected are functionally comparable; they need not be identical.
The case is: CIT-I v. DSM Anti Infectives India Ltd. ITA No. 116 of 2014
The taxpayer entered into various international transactions with related parties. The taxpayer adopted the transactional net margin method (TNMM) as the most appropriate method for determining the arm’s length price, and selected six companies as comparables for its transfer pricing study.
On examination, the Transfer Pricing Officer rejected the comparables selected by the taxpayer on various grounds, including a claim that the proportion of a main ingredient (Penicillin-G) used as a raw material by one comparable was negligible. Instead, the Transfer Pricing Officer selected three companies using as a criterion, only companies using Penicillin-G as a raw material (but not specifying the extent of these companies’ use of the raw material).
The tribunal held that certain companies were appropriate comparables, even if they were using only a small percentage of Penicillin-G as a raw material.
The High Court affirmed and upheld the tribunal’s determination, finding that in using a margin-based method (especially TMMM), as long as there is functional similarity with the comparable companies, they need not be identical.
Read a June 2015 report [PDF 427 KB] prepared by the KPMG member firm in India: The Punjab and Haryana High Court holds that companies selected should be functionally comparable and not identical
The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.