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.

Related content

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). 


Read an April 2016 report [PDF 377 KB] prepared by the KPMG member firm in India: Turnover filter considered at 10 times; Comparables with RPTs up to 15 percent accepted; standard deduction of +/- 5 percent benefit under the erstwhile provisions of Income-tax Act confirmed

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