This is the second case in which the Bangalore tribunal has recently addressed the comparability aspects of companies selected by the Transfer Pricing Officer in relation to software development and market-support services. Read TaxNewsFlash-Transfer Pricing: India - Comparability of software development services, market-support services
This decision of the tribunal, which rejected certain companies as comparables because of a turnover filter, shows the importance of parity between the functions, assets, and risk profile of the taxpayer to those of the comparable companies.
The taxpayer engaged in international transactions with related parties, in providing software R&D and pre-sales and marketing-support services.
In conducting its transfer pricing study, the taxpayer identified comparable companies engaged in providing services for each of its international transactions, and concluded that its international transactions were at arm’s length.
During the course of the tax audit, the Transfer Pricing Officer proposed adjustments with respect to the taxpayer’s international transactions.
- Concerning software R&D services - The Transfer Pricing Officer conducted a “fresh” benchmarking analysis to determine an arm’s length margin of 22.89% (whereas the taxpayer had determined a margin 15.08%)
- Concerning pre-sales market-support services - The Transfer Pricing Officer rejected the taxpayer’s comparability analysis and, based on a fresh search, determined an arm’s length margin of 32.77% (compared to the taxpayer’s determination of a margin of 15%).
The Dispute Resolution Panel upheld these transfer pricing adjustments
The tribunal acknowledged that the size of a comparable company is an important factor in comparability analysis, and thus applied an “upper turnover filter” in rejecting certain companies as not being comparable to the taxpayer. It also found that companies engaged in non-binding pre- sales and marketing-support services could not be compared to companies engaged in rendering binding commission agency services.
The tribunal concluded that once a taxpayer’s international transactions have been accepted as being at arm’s length price by the Transfer Pricing Officer for a given assessment year, then that is to be applied consistently for other assessment years of the taxpayer, provided that the facts and circumstances are consistent for the later years.
Read a June 2013 report [PDF 212 KB] prepared by the KPMG member firm in India: Bangalore tribunal adjudicates on principles of comparability analysis in respect of software research & development and pre-sales & marketing support services while determining arm’s length price in an international transaction
Contact a tax professional with KPMG's Global Transfer Pricing Services.