India: Comparables must be functional similar, not identical

India: Comparables functional similar, not identical

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.


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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.

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