India: Functional comparability of taxpayer’s business segments

India: Functional comparability of business segments

The Delhi Bench of the Income-tax Appellate Tribunal—on finding it essential to conduct a detailed functional analysis for purposes of determining comparability—rejected as inappropriate a functional comparability based on broad parameters that failed to explore the actual substance of the taxpayer’s business functions.

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Accordingly, the tribunal referred the case back to the Transfer Pricing Officer with directions to use the services of technical experts before reaching a conclusion on the functional comparability. The case is: Carrier Airconditioning & Refrigeration Ltd. v. ACIT [ITA No. 5123/Del/2010)


The taxpayer, a wholly owned subsidiary of a U.S. entity, engaged in the business of manufacturing, assembling, and transport and sales of air-conditioning and commercial refrigeration equipment. The taxpayer “segmented” its operations into various functions (one segment dealt with refrigeration and cooling of all movable systems, another with industrial refrigeration systems, another with commercial refrigeration systems, and so forth). 

For the year at issue, the taxpayer had international transactions consisting of imports of raw materials, components and finished goods, and exports of finished goods, the payment of royalty, the provision of marketing services, and cost recharges with its U.S. related party. In its transfer pricing study, the taxpayer determined the arm’s length price of the international transactions related to:

  • Imports under the Transactional Net Margin Method (TNMM) considering the operating-profit to operating-ratio as the profit level indicator
  • Exports of finished goods by applying TNMM considering operating-profit to operating-cost ratio as the profit level indicator

The taxpayer benchmarked the various segments with the aid of internal TNMM. The Transfer Pricing Office accepted one business segment to be at arm’s length price, but rejected the comparability of other segments, concluding that there were no internal comparables available for these segments. The Transfer Pricing Officer therefore conducted a “fresh” benchmarking analysis and based on this, proposed a transfer pricing adjustment. This determination was upheld by the Dispute Resolution Panel as was the final order of the Assessing Office.

The tribunal found that the tax authorities had not conducted a detailed functional analysis to determine the comparability of the two business segments at issue and observed that the functions performed by these two segments required an evaluation of the nature of the technical services. The case was referred back to the Transfer Pricing Officer with directions to use the services of technical experts before arriving at a conclusion on the functional comparability.


Read a February 2016 report [PDF 338 KB] prepared by the KPMG member firm in India: The transfer pricing officer and the taxpayer are directed to avail services of a technical expert to opine on the nature of functions carried out by the taxpayer

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