India: Comparables rejected; no add-back of transfer pricing adjustment

India: Comparables rejected; transfer pricing

The Delhi bench of the Income Tax Appellate Tribunal agreed with the taxpayer that certain comparable companies selected by the Transfer Pricing Officer were to be excluded from the analysis, and further held that the Assessing Officer erred in adding back a transfer pricing adjustment to book profits under section 115JB of the Income-tax Act, 1961.

Related content

The case is: Cash Edge India Private Ltd v. ITO [ITA No. 64/Del/2015]


The taxpayer provided software development and business support to its related U.S. entity, and was compensated for this service on a cost-plus basis under the terms of the professional services agreement between the taxpayer and the U.S. entity. 

The arm’s length price of the international transaction (software development services) was determined by applying the transactional net margin method (TNMM) and by taking operating-profit-to-total-cost ratio as the profit level indicator. The taxpayer’s profit level indicator was determined at 11.16%—whereas the average profit level indicator for 14 comparable companies selected by the taxpayer was 6.9%.

The Transfer Pricing Officer rejected the taxpayer’s transfer pricing study and, in conducting a “fresh” benchmarking analysis, selected 10 comparables and proposed a transfer pricing adjustment based on a computation of the mean profit level indicator at 23.68% (instead of 11.16% as reported by the taxpayer).

The taxpayer contested the transfer pricing adjustment, disputing the selection of certain comparable companies and also claiming that book profits cannot be adjusted except per Explanation 1 of Section 115JB—and that a transfer pricing adjustment is not listed under this explanation.

The tribunal agreed that certain contested comparables were to be excluded from the set selected by the Transfer Pricing Officer; that foreign exchange gain or loss is to be treated as an operating loss; and that the transfer pricing adjustment could not be added back to book profits of the taxpayer.


Read an October 2015 report [PDF 441 KB] prepared by the KPMG member firm in India: Assessing Officer erred in adding back transfer pricing adjustment to book profits under Section 115JB of the Income-tax Act

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.

Connect with us


Request for proposal



KPMG's new digital platform

KPMG's new digital platform