Comparables selection issue in transfer pricing - Dying a slow death?


Comparability analysis is one of critical aspects of TP benchmarking exercise and therefore it comes as no surprise that selection of comparables is one of the most highly litigated issues before Indian Tribunals / Courts. Recently, in a landmark judgment, Karnataka HC in case of Softbrands India P Ltd [TS-475-HC-2018(KAR)-TP] held that the issue of comparables selection, application of filters, etc. cannot give rise to a substantial question of law to maintain an appeal before HC unless some ex-facie perversity is demonstrated in the Tribunal order. Following Softbrands ruling, Karnataka HC has dismissed more than 300 TP-appeals (most of which were filed by Revenue) on grounds not only restricted to comparable selection issue but also on other issues like treatment of foreign exchange gains/losses as an operating or non-operating item, selection of the most appropriate method, grant of working capital and risk adjustment, etc. Delhi & Bombay HCs have also taken a similar approach, deriding Revenue for filing appeals on comparables issue in a ‘ritualistic manner’, notable cases being WSP Consultants India [TS-861-HC-2017(DEL)-TP], Barclays Technology Centre India [TS-787-HC-2018(BOM)-TP] , TIBCO Software [TS-1077-HC-2018(BOM)-TP] etc

What would be the impact of this stand on future TP-litigation? Would this lead to a “course correction” for transfer pricing litigation in India? Does this landmark Karnataka HC ruling signal the end of disputes on comparables issue, considering that similar approach is being followed by other Courts?  Is there any change in Revenue's approach on comparable selection issue?

T. P. Ostwal
Partner, T. P. Ostwal & Associates LLP

In my opinion, comparables are very relevant for the purpose of Transfer Pricing (TP) and HCs have taken a correct view that when an order is made based on comparables, it is a pure question of fact and there is no question of law involved. This has been my view consistently since 2002 but unfortunately, as usual, the Department routinely carries all matters decided by Tribunals to the HC. Bad facts will lead to bad decision from Department's perspective. First of all, TP is an art based on economics and there should not be any question of law arising in most cases. Karnataka HC was absolutely candid while deciding the matter in case of Softbrands and all other HCs have followed Karnataka HC decision, rejecting such appeals on the ground that there is no substantial question of law involved. Honestly, in my view, in absence of any legal issue, the Department ought not to have filed an appeal in such cases. For example - How do you negotiate a price - can it be governed by law? That is the reason it is always said that TP is not an exact science but is an art!

Rahul Mitra
Partner, Dhruva Advisors LLP

Ever since the formal transfer pricing (TP) regulations were introduced in India in 2001, the maximum amount of dispute and litigation in the field of TP have revolved around the issue of comparability or economic analysis, namely selection/ rejection of comparables. There was an underlying reason or logic for the genesis of such controversy, which can be classified under two baskets, namely – 

  1. tendency of both taxpayers and Revenue Officers, particularly in the nascent years of TP, where unfortunately the period of infancy ranged more than a decade, to jump into one sided testing of the results of the taxpayers, without investing time and effort on carrying out proper functional, asset and risk (FAR) analyses to determine the characterisations of the taxpayers; and thereafter selecting the correct tested parties and also the proper method under TP; and 
  2. the unique TP regulations of India, as prevalent until 2015, of adopting arithmetic mean as the measure of central tendency; and single year’s data, as opposed to the universally accepted better practices of adopting the concepts of interquartile range and multiple years’ data, as professed by the OECD and UN as well.  

To the extent, both taxpayers and Revenue Officers significantly mature and move up...

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Vishweshwar Mudigonda
Partner and Transfer Pricing Leader, Deloitte India

The crux of arm’s length price determination is comparability analysis, where a controlled transaction or price is compared with the independent uncontrolled comprables. Given this, comparability, including selection of appropriate comparable is at the heart of transfer pricing analysis, and death of comparability could well mean the death of transfer pricing. With formulary apportionment of profits not being recognized as an arm’s length distribution of profits, the comparability analysis and transfer price is here to stay. 

Transfer pricing is a fact intensive subject with limited arguments on law and therefore it is a welcome move by the Hon’ble High Courts to reject the appeals that involve question on comparables, which is a pure question of fact. And, hopefully, this will bring in necessary hygiene required in filing an appeal before the High Courts and the Supreme Court, as when have seen in the number of appeals filed mechanically before the courts thereby increasing the burden and stress on the courts’ time and resources.

The High Court rulings make it imperative on the parts of both the taxpayers and tax administration to exercise more diligence in selection of comparables and ensure that the transfer pricing documentation or transfer pricing orders are robust enough...

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Rajendra Nayak
Partner, International Tax Services, Ernst & Young LLP

A common concern of developing economies in the implementation of transfer pricing regimes relates to difficulties in accessing information on “comparables”: data on transactions between independent parties used in the application of the arm’s length principle. The Toolkit for Addressing Difficulties in Accessing Comparable Data for Transfer Pricing Analyses published by the Platform for Collaboration on Tax in June 2017 identifies the lack of appropriate data on comparables as one of the of key challenges in conducting comparability analyses by tax administrations. Developing countries in particular face problems of a lack of data or low quality of data, and the need for imprecise and subjective comparability adjustments. This is a key flaw in the use of any method that utilizes comparables as the basis to allocate profits to an associated enterprise. The problem is not just a lack of data; rather it is because true comparables generally do not exist. This is due to the real competitive advantages enjoyed by MNEs resulting from their economies of scale and their operational integration and the synergies that result therefrom. 

The toolkit sets out a number of policy options that developing economies could consider, together with some additional initiatives that could be taken on...

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Manoj Pardasani
Partner & Head - Transfer Pricing (North), BSR & Co LLP

Indian TP regulations have outlined the manner of selection of the comparables and the factors for judging the comparability. Section 92C (1) of the Income-tax Act, 1961 (‘the Act’) contains provisions in relation to six transfer pricing methods of calculation of arm’s length price (‘ALP’), read with Rule 10B of the Income Tax Rules, 1962 (‘the Rules’) which provides for determination of ALP. Rule 10B(2) of the Rules describes the grounds such as (a) contractual terms, (b) functions performed, assets used and risks assumed, (c) characteristics of the property transferred / services provided, (d) economic circumstances of the parties and market, (e) business strategies etc., on which the comparability of an international transaction with an uncontrolled transaction should be based on. 

While applying the principles of selection of comparables as laid down in Section 92C(1) of the Act and Rule 10B of the Rules, challenge emerges due to lack of quality comparable data in public domain leaving room for subjectivity in any transfer pricing analysis. Comparability, short listing of comparables, application of appropriate filters etc. are common transfer pricing issues which are being litigated at several levels of the judiciary in numerous cases. Karnataka High Court in the case of...

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Arun Chhabra
Chartered Accountant

Transfer pricing (“TP”) issues have been subject matter of litigation in India for a long-time. Over the years, the Indian judiciary has provided clarity on various significant TP issues such as AMP, imputed interest on outstanding receivables, issues pertaining to legal interpretation of Indian TP Regulations, etc. However, a vast majority of the TP rulings in India are focused on factual issues , particularly comparability analysis, application of filters, etc. Even today, after several round of arguments and discussions, the taxpayer and tax authorities continue to be at loggerheads on such comparability issues. This is a huge draw on resources and time of all concerned. One would think that Tribunal’s finding on comparability, which is a fact intensive exercise, would bring closure to the appeal but that is not the case and more often than not department or/ and the assesse knock at High Court’s (“HC’s”) door, thereby prolonging the dispute resolution time.

However, the recent stance of the HC of Karnataka of refusing admission of appeals in the cases pertaining to selection/rejection of comparable and application of certain filters, on ground of  absence of any substantial question of law for HC’s consideration is a trend setting precedent. Post this ruling,...

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Girish Vanvari
Founder, Transaction Square

The decision of the Karnataka HC in the case of Softbrands India Pvt Ltd reinstates the principle that the existence of a substantial question of law is sine qua non for maintaining an appeal before the High Court.

Since the introduction of TP provisions in 2001, there have been plethora of cases on the ‘comparable’ issues such as application of quantitative & qualitative filters, selection / rejection of comparables, etc. 

Different stand have been taken by various tribunal across the Country on similar comparable issues. Considering that TP exercise itself is subjective, the views on a issue differ from Tribunal to Tribunal, leading to appeal before HC. Unless the unanimous positions on the issues (such turnover filter, 25% RPT filter, treatment of forex, etc.,) are addressed by way of Rules/circular litigation on comparables issues is inevitable.

However, the aforesaid ruling by the Karnataka HC would go a long way in ensuring that frivolous appeals are not escalated to the High Court unless there is an apparent question of law.

Further any Transfer Pricing adjustments arising due to the interpretation of treaties or emerging issues on account of adoption of BEPS principles could still find their way to the High Court.


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Maulik Doshi
Partner and Senior Executive Director - Transfer Pricing and Transaction Advisory Services, SKP Business Consulting LLP

While the tax administration in India has been proactive in its attempts at minimising tax litigations, transfer pricing remains a major source of dispute yet.  TP litigation congests the appellate channels and takes significant time to achieve a resolution. In fact, we have seen cases consuming more than 10-12 years to reach a conclusion in many instances!  

TP disputes therefore need a targeted approach in order to reduce the burdensome litigations, which would also impact the ease of doing business in India.  Considering this, the recent rulings of High Courts in the cases of Softbrands India, Watson Pharma, Tibco Software, etc deserve special importance. The High Courts have repeatedly adjudicated that only cases where there is a perversity in the fact finding of the Tribunal, it would warrant an appeal to the higher authority. Only ‘substantial question of law’ which involves a debatable legal issue, would be appealable before the High Court. 

In the case of Softbrands India, the Karnataka High Court also invoked section 100 and 103 of the code of civil procedure that reiterates the principles of Section 260A, and opined that: 

While dealing with these appeals…, we cannot disturb those findings of fact…, unless such findings are ex-facie perverse and...

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Rakesh Nangia
Managing Partner, Nangia Advisors LLP

Transfer Pricing (TP), which is a fairly new law as compared to other laws when it comes litigation and has been held to be not an exact science. Thus, vexed TP issues pertains to methodology, computation aspects, selection of comparables, choice of prescribed methods, applicability of methods, allowability of range, adoption of adjustments, etc. for computation of the arm’s length price (ALP) become so intertwined that the line between Question of Law and Question of Fact, itself became a contentious issue. However, many appeals in TP are filed not based on technical merits/ demerits but based on the monetary threshold limits, thus creating a backlog and protracted litigation, which can be easily curtailed in many cases. The judgement actually clarifies the right perspective into litigation, ensuring forums are judicially utilised and the machinery is used for the purpose it was created.

The appeals before the Courts in income-tax matters represent the third round of consideration, wherein both the facts and law would have already been deep dived by the lower authorities. Thus, the representation of full facts before the lower authorities/ ITAT (the last fact finding authority), is of utmost importance to allow them to frame their decisions in judicious manner.


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Vijay Iyer
Partner and National Leader, Transfer Pricing, EY India

Query 1: What would be the impact of this stand on future TP-litigation?

The impact of the said ruling of the Hon’ble (Kar.) High Court in the case of M/s Softbrands India Private Limited has been visible - as a large chunk of appeals on TP issues (involving comparability) have been dismissed following this landmark ruling. Going forward courts will apply more scrutiny to appeals involving TP matters in order to ensure that appeals involve a substantial question of law or the questions are appropriately re-framed to address only substantial questions of law. Thus, the widespread impact on appeals by both - the taxpayer or the Tax Authority against an order of the Tribunal could therefore ultimately reduce the time involved for reaching finality on a TP controversy where the issues in dispute largely involve factual matters.

Query 2: Would this lead to a “course correction” for transfer pricing litigation in India?

Certainly, the eventual outcome of the Hon’ble High Court’s decision is going to streamline TP litigation in India. In this ruling, the Hon’ble court has reiterated a fundamental point that it [the Hon’ble High Court] cannot be expected to undertake an exercise of comparability which is essentially a fact-finding exercise and...

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