Key Metrics in Transfer Pricing: The Role of Comparability

Comparability Analysis

Why is Comparability Analysis required in Transfer Pricing?

Comparability analysis is crucial for ensuring the transactions between associated enterprises (controlled transactions) are priced fairly.

• Foundation of arm’s length principle – Comparability analysis helps determine whether the pricing of a controlled transaction aligns with what would be charged in an uncontrolled transaction/scenario.
• Understanding the characteristics of a transaction – This provides an insight into the actual nature of transaction and the circumstances under which the transactions are entered into
• Identifying Reliable Comparables – The understanding helps in selection of comparable companies/transactions that are similar to the controlled transaction.
• Substantiate Transfer pricing positions and minimize tax risks – A well-documented comparability analysis strengthens the taxpayer’s position during audits and helps mitigate tax risks.

When is a transaction considered as comparable?

• Transactions/Companies are considered comparable if any differences between them does not materially affect the margin/price that is being examined
• Reliable adjustments can be made to eliminate differences if the comparability is affected by such differences
• Comparability analysis is conducted using any one of the prescribed 6 methods

Core Comparability Factors

What is required to be considered while undertaking comparability analysis?

To determine whether a controlled transaction is comparable to an uncontrolled one, the following factors must be evaluated:

Economic Adjustments

Factors to be considering while undertaking comparability analysis

• The Income Tax Rules provide that reasonably accurate adjustments can be made to eliminate the differences, if such factors have an impact on the profitability or price of the transactions that is being compared.
• While the law generally favors applying economic adjustments to the comparables, several judicial pronouncements have validated adjustments made to the tested party. Accordingly, based on the specific facts and circumstances of each case, economic adjustments may be undertaken either on the tested party or on the comparables.
• When all companies in the industry operate under similar conditions, specific economic adjustments may not be necessary.
• Since the tax regulations do not prescribe a specific method for computing economic adjustments, it is essential to understand the underlying business objectives of each pricing strategy before determining the appropriate approach to such adjustments.
• In certain cases, the absence of reliable comparable data may hinder the ability to perform meaningful economic adjustments. Therefore, it is crucial to utilize publicly available data to the extent possible, in order to support the analysis and mitigate potential litigation risks.
• Wherever feasible, economic adjustments should be quantified during preparation of TP documentation, as this positions the company more favorably during transfer pricing audits.

Situations that warrant economic adjustments

How VSTN can help?

• Experience of preparing documentation for more than 17 countries across the globe
• Access to all major global databases like Moody’s Orbis- TP catalyst, Moody’s -EDFX, ktMINE, Thomson Reuters Onesource, Royaltyrange, Prowess
• Highly experienced professionals with culminative TP experience of 100+ years
• The core team has expertise in dealing with TP audits on various issues before multiple forums up to the level of High Court who can hand-hold to prepare a fool-proof transfer pricing document.
• Awarded as the Best Newcomer in Asia Pacific – 2024 by International Tax Review (ITR)
• Recognized as one of the finest performing transfer pricing firms by ITR