Q: ​We see such limited application of PSM in practice, is it because of the subjectivity involved in the analysis?

Kunj Vaidya (Partner and Leader, Transfer Pricing, PwC India)
It is true that the PSM has been applied in limited cases and has been restricted to certain industries such as logistics, financial services, etc. There are situations when the PSM is applied for policy setting but for compliance and testing purpose, the TNMM or other one-sided methods are selected as the most appropriate method.

The limited usage of the PSM would be attributed to following reasons:

i) Application of the PSM involves multiple variables which could be subjective. It could also time consuming and resource intensive.

ii) The PSM looks at both sides of the transaction. Even if the Tax authorities of one transacting party challenges a variable used in the analysis, it would lead to double taxation.

iii) There has been very limited practical guidance on the application of the PSM till the recent guidance issued by the OECD on the application of PSM.

In spite of the above limitations, the complexity involved in the application of the PSM could be overcome with usage of tools such as Preference Theory, RASCI, etc. A comprehensive and well documented PSM analysis could be defended during audits.
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