Benchmarking is a crucial process in transfer pricing that involves comparing business processes and performance metrics with industry best practices. It serves as the foundation for determining the arm’s length price of transactions between international related parties. To conduct an effective benchmarking analysis, a search process is initiated to identify potential comparable companies, which are then filtered using quantitative and qualitative criteria. The application of these filters aims to optimize the search process, ensuring that the right comparables are selected for a reliable economic analysis that supports a taxpayer’s position in front of tax authorities.

“In practice, both quantitative and qualitative criteria/filters are used to include or reject potential comparables for benchmarking international transactions.”

In order to understand this line, we need to understand the entire process outlined below:

What is Benchmarking?

In general, benchmarking refers to comparing business processes and performance metrics with industry best practices, which is also the case when it comes to transfer pricing.

Benchmarking analysis is the core of the transfer pricing documentation. It provides reliable economic data supporting the taxpayer’s positions outlined in the transfer pricing documentation, by comparing the related party transaction that is being tested with the transactions entered between third parties in same or similar circumstances.

To put it simply, benchmarking analysis is an economic analysis used to support the prices set in transactions between international related parties by employing a methodology (also known as transfer pricing method).

In order to avoid a transfer pricing adjustment, it is important to do the benchmarking analysis correctly since the data that emerges from it will serve as the basis for defending a taxpayer’s position before the Tax Authorities.

Search Process

The process of Benchmarking starts with a search process for identifying potential comparable companies i.e., database screening/primary screening.

In accordance with general accepted principles and regulatory guidance, search is carried out for the comparable companies that perform same or similar functions, assumes same or similar risks and utilizes same or similar assets. To identify broadly independent comparable companies for arriving at the arm’s length price of the international transaction entered between associated enterprises, any web-based comparables search tool/database can be used.

Comparable potential companies are further filtered using quantitative and qualitative filters to find the right comparable companies.

Application of Filters

“Find the right comparable companies and achieve a higher level of efficiency.”


– Quantitative filters

– Qualitative filters

Quantitative Filters

“Secondary screening, verification and selection of comparable.”

Quantitative filters are applied for getting a set of final comparable companies out of the potential ones and achieving a higher level of efficiency in benchmarking process. Filtering for comparable companies based on different parameters greatly reduces the time required to review them.

The application of quantitative filters is a time-efficient way to complete comparables searches/benchmarking process.

The most commonly observed quantitative criteria are:

  • Size criteria in terms of Sales, Assets or Number of Employees: The size of the transaction in absolute value or in proportion to the activities of the parties might affect the relative competitive positions of the buyer and seller and therefore comparability.
  • Availability of Data: It is obvious that it cannot be compared if the financial results of the potential comparables are unavailable for the last three years including the current year.
  • Criteria related to the sector in which the company operates such as ratios of Trading sales/Net sales or manufacturing sales/Net sales: It would never be appropriate to compare a trading company with a manufacturing company.
  • Criteria related to Related party transaction: They are used to exclude the companies which are already affected by the controlled transactions.
  • Intangible-related criteria such as ratio of Net Value of Intangibles/Total Net Assets Value, or ratio of Research and Development (R&D)/Sales where available: They may be used for instance to exclude companies with valuable intangibles or significant R&D activities when the tested party does not use valuable intangible assets nor participate in significant R&D activities.
  • Criteria related to the importance of export sales (Foreign Sales/Total Sales), where relevant.
  • Criteria related to inventories in absolute or relative value, where relevant.
  • Other criteria to exclude third parties that are in particular special situations such as start-up companies, bankrupted companies, etc. (net worth is eroded; net sales less than zero) when such peculiar situations are obviously not appropriate comparisons.

The choice and application of selection criteria depends on the facts and circumstances of each particular case and the above list is neither limitative nor prescriptive.

Qualitative Filters

It is known as a tertiary screening in benchmarking process. These filters are applied on the basis of facts and circumstances in which the transaction takes place. Examples of qualitative criteria are found in product portfolios and business strategies.

A final comparable will be accepted if it relates significantly to the transaction and business of the tested party.


In transfer pricing disputes, comparability analysis and use of appropriate filters has been one of the most prevalent issues. There are many judgments where the transfer pricing officer (“TPO”) has made adjustments to the income of the taxpayers by rejecting the filters applied by the taxpayer. However, such adjustments may be challenged and overturned by the higher tax authorities.

Complete elimination of subjective judgments from the selection of comparables would not be feasible, but much can be done to increase objectivity and ensure transparency in the application of subjective judgments. The outcome of such cases often depends on the specific facts and circumstances of each case.

The reading of various judgments shows that the TPO and the assessee are regularly adhering to such measures to arrive at arm’s length price. Therefore, it is necessary to examine the relevant regulations and guidelines provided. Overall, transfer pricing is a complex and subjective area of taxation, and there is a need for ongoing efforts to increase objectivity and transparency in the application of transfer pricing rules.

Some of the controversies/disputes on filters along with rulings are listed herein below:

The comparables selected by taxpayers are often rejected by tax authorities, especially in cases involving loss-making companies:

It is common for the tax authorities to reject comparables selected by taxpayers based on quantitative filters, which raises concerns such as: –

  • In the filter, what turnover limit should be selected?
  • What is the percentage of related party transactions that can be considered uncontrolled?
  • Whether a company with persistent losses should be considered comparable?
  • Whether an employee cost filter should be applied or not?
  • A company showing abnormal profit or having erratic growth margins, could be accepted as a valid comparable? ….

and many more ….

Determining comparability for transfer pricing purposes is a complex and fact-specific exercise, and there is no one-size-fits-all answer to your questions. Relevant judicial precedents that can be referred to get a better idea of the subjective questions are as follows: –

Further, especially in the case of companies incurring persistent losses are generally not accepted as comparables by the tax authorities. Although the term “persistent losses” is not defined under the act or the rules framed thereunder, but has evolved its meaning through various judicial rulings. “Persistent Loss” is defined as losses in three consecutive financial years, including the financial year corresponding to the assessment year under dispute and immediately preceding two financial years. The thumb rule of excluding persistent loss-making companies has been accepted in various judicial precedents over the period of time.

Cases where loss-making companies are not considered as comparable –

  • Steria India Ltd (Earlier known as Xansa (India) Ltd) vs. DCIT (Delhi High Court) [TS-229-HC-2018(DEL)-TP] – Where Hon’ble High Court upholds exclusion of Quintegra Solutions, opines that “Persistent losses coupled with declining turnover over the period indicated abnormal functional circumstances, which rendered it noncomparable and justified the exclusion of such a company from the list of comparables”
  • Magma Design Automation India Pvt.Ltd. vs. DCIT (ITAT Bangalore) [TS-463-ITAT-2014(Bang)-TP] – Where ITAT accepts TPO’s exclusion of ‘Genesys’ having persistent losses as not & nbsp and aving diminishing revenues indicating abnormal circumstances.

Cases where loss-making companies are accepted as comparable –

  • Assistant Commissioner of Income Tax, Circle 10(2)(2) vs MOL Maritime (India) (P.) Ltd. (Mumbai ITAT) [2020] 120 245 (Mumbai – Trib.) – Where it was held that the company which has suffered losses in only one year and other companies have incurred losses in two financial years, none of said companies fall within ambit of persistent loss-making companies. 
  • PrCIT vs Nokia Siemens Network India P Ltd (Delhi High Court) [TS-733-HC-2019(DEL)-TP] – Where Hon’ble High Court upholds ITAT’s inclusion of ‘loss-making’ comparables considering industry trend of declining revenues.

Overall, it is important to approach transfer pricing comparability analysis on a case-by-case basis, taking into account all relevant factors and ensuring that the chosen comparables are truly comparable to the controlled transactions being analyzed.

High-margin comparables are cherry-picked and applied by the Transfer pricing officer:

The are many judgments that re-affirms the view that the arm’s length price must be determined by a systematic approach and cherry-picking of comparables is not acceptable. Further, the judgments uphold that in case the TPO makes any changes to the set of comparable companies identified by the taxpayer, he must provide cogent reasons for the same. Relevant judgments are stated below: –

  • Federal Mogul Anand Bearing India Ltd (Formerly Known as Federal Mogul Bearings India Ltd) vs DCIT (ITAT Mumbai) [TS-580-ITAT-2020(Mum)-TP]
  • Ingersoll Rand (India) Ltd vs. ACIT (ITAT Bangalore) [TS-236-ITAT-2020(Bang)-TP]
  • LM Wind Power Blades (India) Pvt Ltd [erstwhile LM Wind Power Technologies (India) Pvt Ltd] vs. ACIT (ITAT Bangalore) [TS-1178-ITAT-2019(Bang)-TP]
  • XL India Business Services Pvt. Ltd vs Addl. CIT (ITAT Delhi) [TS-1335-ITAT-2018(DEL)-TP]


The entire exercise of quantitative analysis or making transfer pricing adjustments by the tax authorities on the basis of comparables is nothing but a matter of estimate of broad and fair guesswork of authorities based on records and materials with them.

The process should be transparent, systematic, and verifiable, with the choice of selection criteria reflecting the most meaningful economic characteristics of the transactions being compared. It is important to be able to disclose the criteria used to select potential comparables and provide clear explanations for any comparables that are excluded from consideration. This helps to ensure transparency and increase objectivity in the process. Increasing objectivity and ensuring transparency of the process may also depend on the extent to which the person reviewing the process (whether taxpayer or tax administration) has access to information regarding the process followed and to the same sources of data.

To sum up, getting the right comparables means minimizing the risk of a transfer pricing adjustment as the data contained in the benchmarking analysis will be the basis to defend a taxpayer’s position in front of Tax Authorities.

Author Bio

Name: Nidhi
Qualification: Student - CA/CS/CMA
Company: N/A
Location: Gurgaon, Haryana, India
Member Since: 24 May 2023 | Total Posts: 1

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