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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?? © 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. 46 Thank You Presenter Details: Yashodhan Dilip Pradhan Senior Manager – Transfer Pricing B S R & Co. LLP [email protected] 9820888009