Transfer Pricing

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Querist : Anonymous

Querist : Anonymous (Querist)

12 January 2011 -How Many comparables can be use to determine ALP. I am using 21 comparables , It is justifiable or not.
-TP calculation is art to present that there are no any Tax evasion then why a TPO can arise objection against my ALP calculation.
-Which companies data can be used to determine ALP.
_I am using weighted averege method is justifiable.

Vivek Raju P

Vivek Raju P (Expert)
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12 January 2011 Yes normally the TPO takes any where between 15-20 comparables.

Again depends on the companies you use, must be of similar turnover, same industry segment, cost structure, operate in same geographical markets, same risk profile and such other things. What ever you take as a comparable needs to have adequate justification as to why it is a comparable and you need to demonstrate that.

Other opinions welcome

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Querist : Anonymous

Querist : Anonymous (Querist)

12 January 2011 thanks and I appreciate your opinion but Why company(comparables) will disclose to other his turnover, risk profile and such other things.

it may be possible that a company is using 15 Comparables and ALP may different if Company uses 20 Comparables then company will choose where ALP is in favour of company. are there any restriction
?

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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02 August 2025 Great set of questions — you're touching on **core practical aspects of transfer pricing benchmarking**, especially around **selection and use of comparables**, **weighted average**, and the **TPO’s authority to challenge your ALP**.

Let’s address each part step-by-step.

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## ✅ 1. **How many comparables can be used? Is using 21 justifiable?**

Yes, **using 21 comparables is justifiable**, as **there is no legal limit or minimum/maximum number**.

> What matters is **quality**, not just quantity.

But your set must meet the **comparability criteria** as per **Rule 10B(2)**:

* **Functions performed**
* **Assets employed**
* **Risks assumed** (FAR analysis)
* **Geographic market**
* **Turnover range**
* **Industry segment**
* **Accounting consistency**

**TPOs often use 6 to 15 comparables**, but if you can justify all 21 based on sound analysis, it’s absolutely valid.

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## ✅ 2. **Can I choose only those comparables that give a favorable ALP?**

No — **cherry-picking comparables** is **not acceptable** under Indian TP regulations.

📌 You're required to:

* Conduct an **objective search** using consistent filters and criteria.
* Include **both favorable and unfavorable** comparables (e.g., even if a company’s margin is high).
* Apply a **consistent methodology**, often from public databases like **Prowess**, **Capitaline**, or **ACE TP**.

> Selective filtering to favor your ALP will be viewed as manipulation and can be rejected by the **Transfer Pricing Officer (TPO)**.

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## ✅ 3. **Why can the TPO object even if there’s no tax evasion?**

Because **Transfer Pricing is not about proving tax evasion**, but about ensuring the **correct income is attributed** based on the **arm's length principle**.

* TPO’s role is to **validate the methodology, assumptions, and data used**.
* If your benchmarking lacks:

* Proper FAR analysis
* Reliable data sources
* Robust search strategy
...then the TPO can reject your analysis and conduct a **fresh search**.

💡 TPO doesn’t need to prove "intention to evade tax" — just **inaccuracy in ALP determination** is sufficient to make adjustments.

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## ✅ 4. **Whose data can be used to determine ALP?**

You can use data of **comparable companies** that meet the following:

| Criteria | Description |
| ------------------------------ | --------------------------------------------------------------------------------------- |
| **Publicly available** | Data should be from reliable sources (e.g., annual reports, Prowess, Capitaline). |
| **Same/similar industry** | Ideally same NACE/NAICS codes or business segment. |
| **Similar functional profile** | Similar nature of work, e.g., software development, KPO, BPO, etc. |
| **Indian companies** | Typically preferred for Indian benchmarking unless foreign comparables are justified. |
| **Latest financial year** | Use the **same FY** as your tested party; multiple-year data only in exceptional cases. |

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## ✅ 5. **Is using weighted average method justifiable?**

Yes — the **Weighted Average** of operating margins (e.g., OP/OC, OP/OR) across multiple years or multiple comparables is:

* **Commonly accepted**
* Used especially where comparables show **some year-on-year volatility**
* Often better than a simple average if you're dealing with varying revenue scales

📌 However, note:

* The CBDT prefers **current year data**, unless historical data gives a more reliable picture.
* TPOs usually use **current year margins** only, unless you can justify otherwise.

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## 🚫 Restrictions to Watch Out For:

* You **cannot selectively exclude comparables** just because they worsen your ALP.
* You **must document your search strategy**, filters, and reasons for selection/rejection of each comparable.
* **Data of foreign comparables** is rarely accepted unless justified and accompanied by supporting info.

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### ✅ In Summary:

| **Question** | **Answer** |
| --------------------------------------- | ----------------------------------------------------------- |
| Can I use 21 comparables? | Yes, if justified with robust filters and FAR. |
| Can I select only favorable ones? | No — must include all valid comparables. |
| Why TPO objects despite no tax evasion? | Because TP is about correct income attribution, not intent. |
| What data is used? | Publicly available, reliable, industry-relevant, same FY. |
| Is weighted average okay? | Yes, if consistent and justifiable. |

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Would you like a sample **search strategy flow** or **comparable selection template** to support your TP file?

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