Download Prowess

Finding and Selection of Comparables
BCAS‟s Fifth Intensive Study Course on Transfer Pricing
Yashodhan D. Pradhan
21 February 2015
© 2012 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
1
Presentation overview
•
Importance of Search Process
•
Overview of Documentation
•
Selection of Comparables – Under prescribed Methods
•
Case Studies
• Search for ITES companies
• Search for comparables engaged in manufacture of medical
equipments
•
Way forward – qualitative screening
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority
to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
2
Importance of Search Process
•
Mandatory requirement as per Rule 10D
• Necessitates maintenance of record of analysis performed to evaluate
comparability of uncontrolled transactions
•
Provides room for Economic Adjustments
•
Forms part of the transfer pricing documentation which is the first line of
defense for the taxpayer
Robust and scientific search process goes a long way
in defending the taxpayer‟s International Transactions
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority
to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
3
Overview of Documentation – Steps involved
•
Shareholding structure
•
Understanding the Business Model
•
Description of International Transaction(s)
•
Functional analysis
•
Selection and application of methodology
•
Search & Assessment of comparables
•
Benchmarking
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority
to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
4
Selection of Comparables – Under prescribed Methods
•
CUP Method
o Internal & External
o Examples
•
Resale Price Method: Comparable companies
•
Cost Plus Method: Internal & external
•
Profit Split Method
•
Transactional Net Margin Method – Internal & external
•
Method prescribed under Rule 10AB
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority
to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
5
Case Study 1 – Search For ITES comparables
- Prowess
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority
to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
6
Background
Criteria
Analysis
Result / Comments
Company
Profile
• Provides IT enabled services to US Associated
Enterprise („AE‟)
Arm‟s length nature of revenue
to be tested
• T/O during FY 2013-14 INR 50 crore
• Earns cost plus 13%
FAR
Analysis
• Taxpayer is a captive service provider
• Risk mitigated entity
Selection of • CUP: Unavailability of internal /external CUP data
Methodology
• RPM: Taxpayer is not a reseller of services
Taxpayer is simpler and
comparable data is available
and hence, selected as the
tested party
TNMM selected as the most
appropriate method
• CPM: Unavailability of comparable data at gross
level
• PSM: Routine service provider hence not applicable
• TNMM: Relatively less stringent comparability
standards
• Other Method: Unavailability of relevant information
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority
to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
7
Prowess - ITES
Step 1 : Select the Query by Main Products/ Services Group of Company
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority
to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
8
Prowess - ITES
Step 2 : Further on selecting the Main Product tab, we identify the Search Strings under industry classification, which would be most
relevant/ similar to the economic activity of our tested party, after which we will execute the Send to New OSC button.
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority
to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
9
Prowess - ITES
Step 3 : On execution of the New OSC Command the list of companies which fulfills the search strings selected on the basis of
economic activity are displayed on the screen, to go back to the Query Mode, select on the Query Window tab on the top left hand of
the screen
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority
to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
10
Prowess - ITES
Step 4: Once we have selected all the relevant search strings, we further select the Query by Annual Financial Statements and chose
the relevant expressions which would be required to further filter the selected companies and execute the Send to New OSC command
while selecting the Domain as Companies in Current OSC.
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority
to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
11
Prowess - ITES
Step 5 : On Execution of the Add to New OSC Command all the selected entities along with relevant information are displayed on the
screen, which may be copied to an excel sheet for further application of the relevant filters.
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority
to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
12
Prowess - ITES
Step 6 : Save the file as Save as User Set
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority
to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
13
Prowess - ITES
Step 7 : To ascertain the segmental companies we select Query by Business Segment-wise information and further choose the
Segment wise Information tab and identify all the relevant search strings consistent to the ones earlier chosen and select the relevant
segment data needed for our analysis keeping the domain as Companies in current OSC and Output Destination as WS and execute
the command Send to New WS
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority
to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
14
Prowess - ITES
Step 8 : On execution of the Send to New WS command the screen will display all the entities having Segmental data.
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority
to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
15
Prowess - ITES
Step 9 : Save the file as Save as User Set
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority
to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
16
Quantitative Screening
Companies are further screened and rejected as per the following filters:
•
Year criteria: Companies for which financial data was either not available or available
only up to March 2011
•
Turnover Criteria: Companies having zero sales or sales less than Rs. One crore in the
latest year for which the financial data was available
•
Companies disclosing segmental data but whose service segments appeared to be
unrelated / different from that of the taxpayer and companies excluded for other reasons
•
Manufacturing revenue criteria: Companies whose manufacturing sales were equal to
or greater than 50% of their total sales in the latest year for which the financial data was
available
•
Trading revenue criteria: Companies whose trading sales were equal to or greater
than 50% of their total sales in the latest year for which the financial data was available
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority
to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
17
Qualitative Screening
Companies are further analyzed on qualitative grounds, such qualitative analysis
performed is as follows:
•
Verifying financials
•
Verifying websites
•
Verifying whether it is functionally comparable to the taxpayer
•
Verifying the percentage of related party transactions to total sales / costs
•
Verifying whether it is chronically loss making company or abnormal profit making
company
•
Verifying any other information which may have a significant impact on business
activities
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority
to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
18
ITES Prowess Search Result
Set of companies extracted from the PROWESS database
3,190
1,386
Less
Companies rejected due to year criteria
Less
Companies rejected due to turnover criteria
778
Less
Companies disclosing segmental data but whose service
segments appeared to be unrelated / different from that of the
taxpayer
272
Less
Companies rejected due to manufacturing revenue criteria
140
Less
Companies rejected due to trading revenue criteria
Less
Companies whose services appeared to be different from the
taxpayer
59
549
Broadly comparable independent companies
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority
to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
3,184
6
19
Case Study 1 – Search For ITES comparables
– Capitaline Plus
20
20
Capitaline - ITES
Step 1 : The first step is entering the screener page which helps to select the companies based on various search strings.
screener
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority
to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
21
Capitaline - ITES
Step 2 – Select the category „Industry‟ from the various categories available such as companies, Banker, Location, Peerset, etc. Type
the appropriate key word to be searched in the space available.
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority
to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
22
Capitaline - ITES
Step 3 – From the initial search, we got three relevant search strings - Computers – Software – Converts; Computers – Software –
Large and Computers – Software – Medium / Small.
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority
to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
23
Capitaline - ITES
Step 4 – Further we used the words InfoTech / Database and IT enabled services; that gave us two more search strings
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority
to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
24
Capitaline - ITES
Step 5 – We saved the final set of companies as „ITES Companies Peerset‟.
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority
to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
25
Capitaline - ITES
Step 6 – We use the FILTER option, which helps to define various financial & non-financial parameters for single or multiple years of
all type of companies.
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority
to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
26
Capitaline - ITES
Step 7 – The next step is to exclude those Companies for which financial data was either not available or available in the database
only up to March 2011. So we selected those companies whose financial data was available for the years between March 2011 – 2014
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority
to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
27
Capitaline - ITES
Step 8 – The second criteria we used is to exclude those Companies having „zero‟ sales or sales less than Rs. One crore in the
Latest year for which the financial data is available in the database
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority
to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
28
Capitaline - ITES
Step 9 – We used the „Run Query‟ to see the final output.
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority
to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
29
Quantitative Screening
Companies are further screened and rejected as per the following filters:
 Year criteria: Companies for which financial data was either not available or available
only up to March 2011
 Turnover Criteria: Companies having zero sales or sales less than Rs. One crore in the
latest year for which the financial data was available
 Companies disclosing segmental data but whose service segments appeared to be
unrelated / different from that of the taxpayer and companies excluded for other reasons
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority
to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
30
ITES Capitaline Plus Search Result
Set of companies extracted from the CAPITALINE Plus database
1,046
Less
Companies rejected due to year criteria
507
Less
Companies rejected due to turnover criteria
124
Less
Companies already dealt with in the search in the PROWESS
Database
223
Less
Companies disclosing segmental data but whose service
segments appeared to be unrelated / different from that of the
taxpayer
5
Less
Companies whose services appeared to be different from the
taxpayer
184
Broadly comparable independent companies
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority
to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
1,043
3
31
Final Search Result
Arithmetic Mean of Comparables (NCP)
15%
NCP margin of the taxpayer
13%
Need to apply +/- 3 percent variation?
Yes
Steps to compute 3 percent variation:
I. Difference between value of international transaction and the arm‟s length price
(115-113)
2
II. Variation allowable (3 percent of value of international transaction) i.e. 113* 3%
3.39
III. Whether difference worked out in Step I exceeds 3 percent variation?
No
Accordingly, taxpayer‟s international transactions are found to be at arm‟s length
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority
to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
32
Case Study 2 – Search For Manufacturing of Medical
Equipment comparables – Prowess
Background
Criteria
Analysis
Result / Comments
Company
Profile
• Manufacturer of medical equipment and sells to AEs Arm‟s length nature of revenue
to be tested
• T/O during FY 2013-14: INR 50 cr.
• Earns NCP 5%
FAR
Analysis
• Taxpayer is a manufacturer and holds routine
intangibles
Selection of • CUP: Unavailability of internal /external CUP data
Methodology
• RPM: Taxpayer is not a reseller
Taxpayer is simpler and
comparable data is available
and hence, selected as the
tested party
TNMM selected as the most
appropriate method
• CPM: Unavailability of comparable data at gross
level
• PSM: not involved in intangibles development
• TNMM: Relatively less stringent comparability
standards
• Other Method: Unavailability of relevant information
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority
to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
34
Prowess – Manufacture of Medical Equipment
Step 1 : Select the Query by Main Products/ Services Group of Company we identify the Search Strings under industry classification
and also the NIC classification, which would be most relevant/ similar to the economic activity of our tested party, after which we will
execute the Send to New OSC button.
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority
to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
35
Prowess – Manufacture of Medical Equipment
Step 2 : Further we searched the companies by query by Name of Products Produced/Traded and executed the Add to current OSC
command
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority
to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
36
Prowess – Manufacture of Medical Equipment
Step 3 : On executing the Add to current OSC command, the list of companies which fulfills the search strings selected on the basis of
economic activity are displayed on the screen, to go back to the Query Mode, select on the Query Window tab on the top left hand of
the screen
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority
to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
37
Prowess – Manufacture of Medical Equipment
Step 4 : Once we have selected all the relevant search strings, we further select the Query by Annual Financial Statements and chose
the relevant expressions which would be required to further filter the selected companies and execute the Send to New OSC command
while selecting the Domain as Companies in Current OSC.
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority
to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
38
Prowess – Manufacture of Medical Equipment
Step 5 : On Execution of the Add to New OSC Command all the selected entities along with relevant information are displayed on the
screen, which may be copied to an excel sheet for further application of the relevant filters.
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority
to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
39
Prowess – Manufacture of Medical Equipment
Step 6 : To ascertain the segmental companies we select Query by Business Segment-wise information and further choose the
Segment wise Information tab and identify all the relevant search strings consistent to the ones earlier chosen and select the relevant
segment data needed for our analysis keeping the domain as Companies in current OSC and Output Destination as WS as and
execute the command Send to New WS
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority
to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
40
Prowess – Manufacture of Medical Equipment
Step 7 : Save the file as Save as User Set
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority
to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
41
Prowess – Manufacture of Medical Equipment
Step 8 : On execution of the Send to New WS command the screen will display all the entities having Segmental data
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority
to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
42
Prowess – Manufacture of Medical Equipment
Step 9: Save the file as Save as User Set
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority
to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
43
Quantitative Screening
Companies are further screened and rejected as per the following filters:
 Year criteria: Companies for which financial data was either not available or available
only up to March 2011
 Turnover Criteria: Companies having zero sales or sales less than Rs. One crore in the
latest year for which the financial data was available
 Companies disclosing segmental data but whose service segments appeared to be
unrelated / different from that of taxpayer and companies excluded for other reasons
 Manufacturing revenue criteria: Companies whose manufacturing sales were less
than 75% of their total sales in the latest year for which the financial data was available
 R&D expenses criteria: Companies whose Research & Development expenses were
greater than 3% of their total income in the latest year for which the financial data was
available
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority
to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
44
Manufacture of Medical Equipments Prowess Search Result
Set of companies extracted from the PROWESS database
398
236
Less
Companies rejected due to year criteria
Less
Companies rejected due to turnover criteria
19
Less
Companies disclosing segmental data but whose service
segments appeared to be unrelated / different from that of the
taxpayer
45
Less
Companies rejected due to manufacturing revenue criteria
9
Less
Companies rejected due to R&D expenses criteria
2
Less
Companies whose services appeared to be different from the
taxpayer
81
Broadly comparable independent companies
© 2012 KPMG International Cooperative (“KPMG International”), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority
to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.
392
6
45
Final Search Result
Arithmetic Mean of Comparables (NCP)
14%
NCP margin of the taxpayer
5%
Need to apply +/- 3 percent variation?
Yes
Steps to compute 3 percent variation:
I. Difference between value of international transaction and the arm‟s
length price (114-105)
9
II. Variation allowable (3 percent of value of international transaction) i.e.
105* 3%
3.15
III. Whether difference worked out in Step I exceeds 3 percent variation?
Yes
Accordingly, taxpayer’s international transactions are not at arm’s length
Way Forward??
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Presenter Details:
Yashodhan Dilip Pradhan
Senior Manager – Transfer Pricing
B S R & Co. LLP
[email protected]
9820888009