Introduction
Benchmarking is the backbone of any credible transfer pricing analysis. In India, where the Income Tax Act, 1961 and associated rules closely mirror OECD guidelines, benchmarking is crucial for validating that international transactions are at arm’s length.
Benchmarking in the Indian Context
Regulatory framework: Section 92C and Rule 10B of the Income Tax Rules
Requirement to use Indian database (e.g., Prowess, Capitaline) for local comparables
Preference for current year data and filters mandated by Indian TP audit practices
Concept of “tested party” and “most appropriate method”
Step-by-Step Process
Functional and risk profile analysis (FAR)
Selection of tested party and method
Use of database for comparable search
Applying quantitative filters (e.g., turnover, employee cost, export filter)
Computation of average margins and arm’s length range
Indian Tax Authority’s Expectations
Justification of each filter used
Use of multiple year data only if current year data is unavailable
Challenges with cherry-picking comparables or rejecting loss-making companies
Conclusion
In India, benchmarking must be technically sound and meticulously documented. The local tax authority takes a strict view on selection of comparables and expects robust economic reasoning.
