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India: Factors to be used in selecting comparables

India: Factors to be used in selecting comparables

The Bangalore Bench of the Income-tax Appellate Tribunal examined what factors—such as functional comparability—that are to be used and described related-party transaction filters that are to be considered in the selection of comparable companies. The tribunal also applied the benefit of the +/- 5% allowance in the subject case.


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The case is: ACIT v. McAfee Software (India) Pvt Ltd, [IT(TP)A No. 1388/Bang/2011 and IT(TP)A No. 04/Bang/2012]


The taxpayer provided software development services to its related party in Ireland. The remuneration was made on a “cost + 15%” basis. 

During the financial year (FY) 2004-05, the taxpayer earned a 15% margin on total operating cost. The taxpayer selected the Transactional Net Margin Method (TNMM) as the most appropriate method in its transfer pricing study, and selected nine comparable companies to justify the arm’s length price.

The Transfer Pricing Officer rejected the transfer pricing study, and using variable filters, selected 17 comparables with an unadjusted arithmetic mean of 26.59% and adjusted the arithmetic mean of 23.74% (working capital adjustment). A transfer pricing adjustment was made. 

The taxpayer administratively appealed, and the Commissioner of Income-tax (Appeals) partly found for the taxpayer and excluded 10 comparables as selected by the Transfer Pricing Officer, by applying a 0% related-party transaction filter. Also, a “standard deduction” of +/- 5% was applied, pursuant to a provision under Indian tax law.

On appeal, the Bangalore tribunal looked to functional comparability as a factor for the selection of comparable companies. The tribunal held that various filters are required in selecting comparable companies and that a turnover filter is to be adopted to avoid the selection of “high-end companies” (big companies) to compare to “minnows” in a similar line of business. Accordingly, a factor to be considered is the turnover / receipts of the taxpayer and the range of the upper limit at 10 times as well as the lower limit at 10 times (i.e., one-tenth with a margin of variation). 

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