How to use Transfer Pricing Database for Benchmarking Analysis – Step-by-Step Guide | Best Practices

Blog|Transfer Pricing|
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By Taxmann
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Last Updated on 16 July, 2024

Transfer Pricing Database

A Transfer Pricing Database for Benchmarking Analysis is a comprehensive collection of financial and economic data used to determine arm's length prices for transactions between related entities within a multinational corporation. This database aids in transfer pricing compliance by providing benchmarks for evaluating whether the terms and conditions of intercompany transactions align with market conditions and regulatory standards.

CA. Mithilesh Reddy – Founder & CEO | Steadfast Business Consulting LLP (SBC)

Table of Contents

Indian Transfer Pricing Landscape
Transaction vs Profit – Based ALP Determination
Benchmarking Analysis
Preferred Transfer Pricing Database for Each Transaction Category
Quantitative & Qualitative Criteria for Filters
Prowess IQ Search Process
Prowess IQ: Case Study
Benchmarking 45 – Intragroup Loan
Benchmarking – Intangibles

1. Indian Transfer Pricing Landscape

1.1 Why Transfer Pricing Regulations & the Objective of the Session

The main objective of this session is to provide guidance on databases, as databases have not been specified by the OECD Manual or by Income Tax Authorities.
In this session, we will discuss the preferred databases used in benchmarking analysis, considering those utilized by transfer pricing authorities, consultants, and Big Four firms, along with their sources and limitations.

Why Transfer Pricing Regulations?

Preventing Tax Avoidance and Profit Shifting
Aligning Taxation with Value Creation
Protecting Tax Revenues of Jurisdictions
Levelling the Playing Field for Businesses
Enhancing Transparency and Compliance
Ensuring Arm’s Length Transactions via Single Entity Approach for MNEs

1.2 Evolution of Transfer Pricing in India

The Income-tax Act was introduced in 1961 adopting the erstwhile Act of 1922 wherein the laws of taxation of MNEs became significantly important soon after the globalization of the Indian Economy. India has never become part of the OECD; however, UN Model has already adopted the OECD Model of Transfer Pricing back in the 1980s.
Following the UN Model in line with the OECD Model Transfer Pricing was introduced in India with effect from April 2001 under Sections 92 to 92F of the Income Tax Act, 1961 (“the Act”) which covers intra-group cross-border transactions.
The sections became applicable from 1st April 2001 for cross border transactions and from 1st April 2012 for Specified Domestic transactions.

2001

Transfer Pricing was introduced in India with effect from April 2001 under Sections 92 to 92F of the Income Tax Act, 1961 (“Act’)

2012

Domestic Transfer Pricing Regime (Specified Domestic Transactions)
Advance Pricing Agreement Regime
International Transaction has been expanded

2013

Safe Harbour Rules

2016

Framework for use of multiple year data and range concept in benchmarking analysis, three tier TP documentation structure as per BEPS (Base Erosion and Profit Shifting) Action Plan 13

2017

Secondary adjustment provisions and limiting interest deduction for thinly capitalized companies

1.3 Evolution of Transfer Pricing in UAE

Past

Customs (Assessable Value/Market Valuation)
VAT 2017 (Market Value for Related Party Transactions)
ESR 2019 (Substance Test for Relevant Activities – Holding Cos, HQ, IP, Distribution & Service Centres, Banking, Insurance, Investment Fund Management & Shipping)
Country-by-Country Report (BEPS Action Plan 13) 2019

1. BEPS Action Plans (AP) Implementation
2. AP 5 (Counter harmful tax practices)
3. AP 6 (Preventing treaty abuse)
4. AP 13 (TP documents, including CbCR)
5. AP 14 (Make dispute resolution mechanisms more effective)
6. AP 15 (Develop a multilateral instrument)

Present (2023-25)

Corporate Tax & Transfer Pricing
ALP test for Related Party & Connected Persons Payments
Year-end TP compliances (Disclosure Form, Local File & Master File)
Primary & Corresponding adjustments
BEPS Action Plans Implementation
- AP 4 (Thin cap/interest deductions)
- AP 7 (Prevent artificial avoidance of PE)

1. 1. AP 8 (Align TP with value creation – Intangibles)
  2. AP 9 (Align TP with value creation – Risk and Capital)
  3. AP 10 (Align TP with value creation – high risk transactions)

Future

UAE Transfer Pricing Rules
APA/MAP framework
Possible safe harbour rules
TP audit/litigation mechanism
Possible secondary adjustment provisions
Transfer Pricing Technology – Tools & AI
BEPS Pillar 2 (Global Minimum Tax Rules)
BEPS Pillar 1 (Market/users Jurisdictions)

1.4 Associated Enterprise (AE) & Deemed AE – Sec 92A

Associated Enterprise as per Section 92A (1) of Income Tax Act, 1961

For the purposes of this section and sections 92, 92B, 92C, 92D, 92E and 92F, “associated enterprise”, in relation to another enterprise, means an enterprise—

which participates, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise; or
in respect of which one or more persons who participate, directly or indirectly, or through one or more intermediaries, in its management or control or capital, are the same persons who participate, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise.

Deemed Associated Enterprise as per Section 92A (2) of Income Tax Act, 1961

Capital

1. >= 26% direct/indirect holding by enterprise
OR
2. By same person in each enterprise
3. Loan >= 51% of Total Assets
4. Guarantees > = 10% of debt
5. > 10% interest in Firm/AOP/BOI

Management

6. Appointment > 50% of Directors/one or more Executive Director by an enterprise
OR
7. Appointment by same person in each enterprise

Control

8. 100% dependence on use of intangibles for manufacture/processing/business
9. Direct/indirect supply of > = 90% Raw Materials under influenced prices and conditions
10. Sale under influenced prices and conditions
11. One enterprise controlled by an individual and the other by himself or his relative or jointly
12. One enterprise controlled by HUF and the other by

a member of HUF
his relative or
Jointly by member and relative

1.5 International Transaction – Sec 92B

Transactions between two or more AEs, either or both of whom are non-residents

	Tangible Property	Intangible Property	Financing	Services	Business Restructuring
Transactions Covered	Purchase/Sales of: Raw Materials Finished Goods Capital Goods/Assets	Both Licensing & Transfers of IP: Product Intangibles (Know- how etc.) Marketing Intangibles (Brand, Trademarks, Logos etc.)	Debt financing Intra-group loans Guarantees Outstanding dues Capital transactions Share issues & transfers	IT/ITeS Marketing Support Services Intra-group Services Legal/Accounting/HR services etc.	Change in Supply Chain/Characterizations/Group shareholding Structure/Business Transfers & Combinations
Method	Trading: RPM Manufacturing: CPM, TNMM	Royalty Payments: CUP, Highly Integrated and Unique Intangible Transactions: PSM	Financial Transactions: CUP Capital Transactions: Other Method	Services: TNMM	Business Restructuring: Depends on facts
Database	India: Prowessiq, Capitaline, Ace TP UAE: TP Catalyst, S&P Capital IQ	Royaltyrange, Royaltystat	Loan Connector	India: Prowessiq, Capitaline, Ace TP UAE: TP Catalyst, S&P Capital IQ	Internal/Management/Industry data

1.6 Arm’s Length Price – Sec 92C

Arm’s Length Price – Sec 92C

1.7 Transfer Pricing Methods – Rule 10B, Sec 92C

Transfer Pricing Methods – Rule 10B, Sec 92C

1.8 Illustrative Applicability of Different Methods

Some common nature of transactions and the most applicable methods is specified below:

Nature of transactions	CUP Method	RPM	CPM	PSM	TNMM	Other Method
Manufacturing	✔		✔		✔
Distribution of goods		✔			✔
Provision of services (IT, ITeS)					✔
Financial transaction (interest on loan, corporate guarantee)	✔					✔
Royalty Payment	✔				✔
Highly Integrated and Unique Intangible transactions				✔
Sale/purchase of commodities, shares, fixed assets (where value can be substantiated with valuation report, quotation etc.)						✔
Specified Domestic Transaction – Inter-Unit Transfers	✔				✔

1.9 Profit Level indicator (PLI)

Profit Level Indicators (PLIs) are financial ratios that measure the relationship between profits and costs incurred or resources employed.
The use of an appropriate PLI ensures better accuracy in the determination of the arm’s length price of a related party transaction.
The Resale Price Method (RPM), Cost Plus Method (CPM) and Transactional Net Margin Method (TNMM) are the transfer pricing methods that use PLI to determine whether the related party transaction involved is carried out at arm’s length.

Factors to consider include but are not limited to in determining the PLI:

characterization of business;
availability of comparable data; and
the extent to which the PLI is likely to produce a reliable measure of arm’s length profit.

Generally used PLIs

TP Method	PLI	Formula
RPM	Gross margin	GP/Sales
CPM	Gross cost-plus margin	GP/ direct & indirect cost of production
TNMM	Cost plus Markup	Operating Profit/Operating Cost
TNMM	Net profit margin	Operating Profit/Operating Revenue
TNMM	Berry ratio	Operating Profit/Value Addition
TNMM	Cash PLI	Operating profit/PBDIT

1.10 Operating Items vs Non – Operating Items

For the purpose of transfer pricing margin computation, it is important to only consider those items of income/expense which are directly related to core operations of the company
Operating items: Those relating to the day-to-day operations of the enterprise, being incurred in the normal course of business and related to the principle revenue generating activities.
Non-operating items: Includes investing and financing activities which are not related to principle revenue generating activities.

Operating Items

Foreign Exchange Gains/Losses
Sale of scrap
Provisions/liabilities/balances no longer required written back
Commission received
Interest from customers on delayed payment
Miscellaneous Income
Deferred/Amortised Expenditure
Bank Charges
Business development expense
Commission paid
Rent paid

Non-operating items

Payment or receipt of Interest/Dividend
Rent Received
Write-back of provision for diminution in the value of investments/impairment of assets
Profit or Loss on sale of Assets/Investments/Assets written-off
Finance charges
Prior period expense
Donations/CSR expenses
Loss on fire/natural calamities/thefts etc.
Preliminary and pre-operating cost
Provision for doubtful debts or other contingent provisions
Extra-ordinary incomes or expenses

1.11 Range Concept and Multiple year Data – Rule 10CA, Notification No. 83/2015

Evolution over years

Data

Before 2014 – Single year Data
After 2014 – Multiple year data up to preceding 2 years

Tolerance

Finance Act 2011: +/- 5% on Transfer Price
Finance Act 2012: +/- 1% for wholesalers +/- 3% for others On TransferPrice

Range Transactions before 01-04-2014

Arithmetic Mean with benefit of Tolerance Range
Arithmetic Mean: If the *conditions are not satisfied

Range Transactions after 01-04-2014

35th & 65th Percentile: if Transaction price is within the range if 6 or more comparables are present
TP Adjustment to be calculated on Median: If transaction price falls outside the range

Applicability to Methods

Method	Multiple year Data	Range
TNMM	✔	✔
CUP	✘	✔
RPM	✔	✔
PSM	✘	✘
CPM	✔	✔
Other Method	✘	✘

International Practices

Range – Inter-Quartile range: 25th & 75th Percentiles
All methods are applicable for Range and Multiple Year data concept
No minimum comparables required for Range Concept

Applicability of Range concept

As per Rule 10CA, the ‘range concept’ shall be applicable when:

the MAM is either CUP, RPM, CPM, or TNMM; and
there are at least 6 comparables.

1.12 Arms Length Price – Range Sec 92 (C2)

“Range” concept followed internationally; also propounded by OECD
Use of inter-quartile range is amongst the globally accepted best practice and also closer to economic realities wherein prices, and or margins, are compared to those within a range and not at to a particular point.
India has adopted percentile concept instead of inter-quartile range
Arithmetic mean concept is also used where number of comparable is inadequate

Method	Multiple year Data	Range
TNMM	✔	✔
CUP	✘	✔
RPM	✔	✔
PSM	✘	✘
CPM	✔	✔
Other Method	✘	✘

2. Transaction vs Profit – Based ALP Determination

2.1 Transaction v/s Profit based Arm’s Length Price determination

Relevant Aspect of TP	Evaluation Criteria
Relevant Aspect of TP	Transaction-Based	Profit-Based
Methods	CUP Method, Resale Price Method, Cost Plus Method	TNMM, Profit Split Method
Profit Measure	Gross Profits (CUP uses Sales, Purchases)	Net Profits
Functional Comparability	PSM, RSM – High CUP – very high	Medium
Product Comparability	High	PSM – High TNMM – More tolerant
Application	PSM, RSM – Difficult to apply as high degree of comparability required CUP – Very difficult to apply as very high degree of comparability required	PSM – Complex method, sparingly used TNMM – Most commonly used method

3. Benchmarking Analysis

3.1 Contents of Local File – Sec 92D, Rule 10D

Local File
Master File
CountryCountry (CbC) Report

Structure of TP Documentation

Executive Summary
Group Overview
Industry Overview
Functional Analysis
Selection of tested party
Selection of most appropriate method
Economic analysis
Conclusion

3.2 Overview of TP Benchmarking Analysis

Transaction Analysis

Activity – Services/Manufacturing/Trading
Scope of Activities
Transaction Flow – Domestic/International
Entities Involved
Segment/Industry
Remuneration Mechanism/TP Model
Existing Price/Margin

FAR with Supply Chain Analysis

Functions Performed
Assets Employed
Risks Borne

Characterisation of Entities

Full-fledged or Contract Manufacturer
Full-fledged or Limited Risk Distributor
High-End or Low-End Services Provider

Economic Analysis

Selection of TP Method (CUP/RPM/CPM/PSM/TNMM/Other Method)
Selection of Tested Party (Indian Taxpayer or Foreign AE)
Selection of Profit Level Indicator (PLI)
Selection of TP database
Comparability Analysis
Arm’s Length Range

3.3 Why Benchmarking?

Tax Compliance Requirement: Companies are obligated to comply with the relevant TP regulations in the country (Ex: In India Sec 92 and Rule 10, in UAE Article 34) which necessitates that transactions with Related Parties meet the arm’s length standard for determining taxable income.
Arm’s Length Standard: This standard implies that transactions should produce results consistent with what unrelated parties would achieve in similar circumstances/same industry in open market.
Transfer Pricing Methods: To determine arm’s length prices, companies utilize various transfer pricing methods, such as CUP, RPM, CPM, TNMM, and PSM.
External Comparable Data: Methods such as CUP, RPM, CPM, and TNMM rely on external data to establish comparable pricing. Even in cases where internal comparable data is present, tax authorities may consider it unreliable or tailored specifically for transfer pricing compliance. Thus, it is imperative to conduct an external industry benchmark for transfer pricing planning and compliance.
Data Sources: To find potential comparables, companies explore various sources, including TP databases, internal data, and other publicly available information.
TP Databases: TP databases (TP Catalyst, S&P Capital IQ, RoyaltyStat & Loan Connector) compile publicly available company data in an accessible format, making them a practical and cost effective source of external comparables.
Geographic Expansion: Normally, the relevant jurisdiction will be considered based on the Service provider, Place of supply or Service Recipient. Depending on the tested party the jurisdiction of search would be relevant. For example, in cases where financial data in a particular region, such as the UAE, is limited, companies may need to broaden their search to regions like Middle East, Africa and Eastern Europe. Multi-jurisdictional data has to be used in case regional companies are not available
Lack of Authorized Databases: It is worth noting that there is no government database containing such financial information. Based on our experience, none of the mature transfer pricing jurisdictions publish similar financial information for transfer pricing in the public domain.
The only realistic option available to the taxpayer for finding comparables is to rely on a financial database to obtain financial information for companies operating in the Middle East, Africa, and Eastern Europe across a spectrum of industries.

3.4 Step wise approach for TP Benchmarking

1. Select most appropriate TP method: There are two Types of Methods:

Traditional Transaction Methods:

1. Comparable Uncontrolled Price (CUP)
2. Resale Price Method (RPM)
3. Cost Plus Method (CPM)

Transactional Profit Methods:

1. Profit Split Method (PSM)
2. Transactional Net Margin Method (TNMM)

2. Select Tested Party: The entity to be selected as the “tested party” should be the least complex and not necessarily unique.

3. Select Profit Level Indicator: Selecting the right PLI depends on the transaction’s specifics, including:

business type;
comparable data; and
PLI reliability in measuring arm’s length profit.

4. Select publicly available database: Databases such as CapitaLine, AceTP, Prowess, Capital IQ, Bloomberg, Tracxn, RoyaltyStat, RoyaltyRange, etc can be utilized to access relevant data.

5. Industry classification and key words: Select industry classification and key words pertaining to the entity under consideration.

6. Quantitative Analysis: Apply filters/screens such as:

data availability,
Sales>1 Cr,
Positive net worth,
Core services income > 75%,
Export earnings > 75%,
RPT transactions < 25% etc.

7. Qualitative analysis: Download the annual report and review business description, service or product profile, segmental info, extraordinary events, IP holdings etc.

8. Final Set of Comparable Companies: Finalize the set of comparable companies. If there are more than 6, compute the 3-year weighted average mark-up and use the 35th to 65th percentile range. Otherwise, use the average mark-up.

9. Economic Adjustments: If there are any differences in comparables and test party, adjust those differences undertaking economic adjustments

4. Preferred Transfer Pricing Database for Each Transaction Category

4.1 Indian & Global TP databases – Transaction & Region wise

There are no specific public databases recommended for identifying comparable companies as per the United Nations Transfer Pricing (UN TP) guide, the Organisation for Economic Co-operation and Development (OECD) Guidelines, and the Income Tax Act. Following are the preferred databases:

Transaction	Database	Provider	Content	Region
Manufacturing, Trading, Services	Capitaline TP	Capital Market Publishers India	Company financial information (Private & Listed Companies)	India
	Prowess	Centre for Monitoring Indian Economy
	Ace TP	Accord Fintech
	TP Catalyst	Bureau Van Dijk		Global
	Capital IQ – Financials	S&P		Global
Interest transactions	Bloomberg	Bloomberg Reference Data Services	Financial markets data	Global
Interest transactions	Dealscan/Loan Connector	Reffinitiv//Thomson Reuters (Worldwide)	Financial transactions data (loans)	Global
Royalty, Intangible assets	RoyaltyStat	License Agreement Database	Intangibles License Agreements (Sourced from US SEC)	Global
	Royaltysource	RoyaltySource
	Royaltyrange	Royaltyrange

4.2 TP Database – Source

Public Company Financials

Data Extracted from Annual Reports
Information from mandatory filings like 10-K and 20-F, for listed companies.

Inter-Company Agreements

Intercompany agreements serve as a valuable source of TP data, detailing the terms and conditions of transactions between related entities.
These agreements provide essential information for establishing arm’s length nature of transaction, they also outline roles, responsibilities, risks and rewards for accurate analysis

Industry Reports

Reports from industry analysts and market research firms provide valuable insights.
Industry-specific studies provide comparative data on margins, royalties, and other pricing metrics.

Private Company Financials

Using private company financials as a source offers more accurate and relevant comparables for benchmarking analysis, as private companies often operate in specific markets or industries similar to the tested party.
However, limited access to reliable and comprehensive financial data for private companies can challenge thorough and accurate analysis compared to public companies.

4.3 Database – Limitations

Data Quality:

Financial data from public sources can vary in detail and accuracy
Databases may not be updated in real-time

Timing Issues:

Financial data is often available only after a significant delay
Using historical financials may not reflect current market conditions

Veracity of Information:

Public companies are required to disclose more detailed information compared to private companies, leading to potential biases in available data
Errors in data collection, reporting, or entry can affect the reliability of the databases

Geographical Coverage:

Some databases have better coverage in specific regions, which may not be representative of the global market
Differences in tax laws and accounting standards across jurisdictions can complicate the comparability of data

Industry Representation

Certain industries may be underrepresented in databases, making it challenging to find comparable data
Companies with unique or innovative business models may not find adequate comparables in existing databases

5. Quantitative & Qualitative Criteria for Filters

5.1 Quantitative Analysis

Application of quantitative filter

Commonly used quantitative filters are:

Availability of financial data
Different FY Ending
Turnover filter
Net worth filter
Consistently loss-making companies
Export filter
Employee Cost filter
Related party transactions filter

Application of Specific filters

Commonly used qualitative filters are:

Employee cost filter
Service income/operating income filter
Manufacturing income Filter

5.2 Quantitative and Qualitative Analysis

Directors Report
Notes to Accounts
Auditor’s Reports
Management Discussion
Annual Reports

Available in:

Capitaline
ISI Emerging Markets
ACE Equity
MCA Website
ProwessIQ

Application of qualitative filters

Commonly used qualitative filters are:

Product/Service Profile
Segments
Presence of IP/Brand
R&D functions
Fluctuating/Abnormal Profits
Extra-ordinary events/circumstances
Government Companies
Exceptional year of operations

6. Prowess IQ Search Process

6.1 Prowess – Summary of Search Steps

Steps	Particulars
1.	Selection of Comparables Companies
2.	Adding Company Address and Identity Indicators to the Companies in current OSC
3.	Adding Financial Information to the Companies in current OSC
4.	Extraction of Related Party Transactions
5.	Accept Reject Matrix – Applying all Quantitative and Qualitative filters to arrive at the final list of comparables.
6.	Summary of final list of comparables

Prowess – 1. Selection of Comparable Companies

Step 1

Login to Prowess with User ID and Password.
From the left dialog box select “Business segment and products” tab.

Prowess - 1. Selection of Comparable Companies

Step 2: After selecting main product/service group, relevant keywords may be selected by entering the relevant words in the search box. The Keywords selected will then be reflected in the dialog box below as Selected Product/Services.

Prowess - 1. Selection of Comparable Companies

Step 3: Once all the relevant keywords are selected,

Under “Select domain”: select “All companies”
Under “execute” in the bottom right corner, click “send to new OSC”

Prowess - 1. Selection of Comparable Companies

Note: In case keywords are being selected from tabs “Products & raw materials, Structured search on products & raw materials” after selecting from “main products/services group”, the same shall be “added to current OSC” rather than “sending it to new OSC”.

Step 4: After the Companies get triggered we will be able to see a tab “NEW OUTPUTS” blinking in blue colour on the top right corner. Click on the same and a new dialogue box appears. Press “Continue” and the relevant companies will be listed in the output view

Prowess - 1. Selection of Comparable Companies

You will be automatically taken to the “Output View” containing the list of companies triggered with the search criteria selected previously.

Prowess - 1. Selection of Comparable Companies

Prowess – 2. Company Address and Identity Indicators

Step 1: Select “Company Address and Identity Indicators” tab from the left dialog box

Step 2: Select NIC Code, NIC name, Industry Type, Main Product/ Service Group and any other fields from the right adjacent dialog box

Prowess – 2. Company Address and Identity Indicators

Step 3: After selecting the required data choose “Companies in current OSC” for extracting the selected identity indicators for the companies previously triggered.

Prowess – 2. Company Address and Identity Indicators

Step 4: Send the data to current OSC from the dialog box at the right corner. The identity indicators would be added to the companies existing in the output view.

Prowess – 2. Company Address and Identity Indicators

Change of currency: Before extracting the financial information for the companies in output sheet, change the currency from “Rs. Million” to “Rs. Crore”.

Prowess – 2. Company Address and Identity Indicators

Prowess – 3. Financial Information

Step 1: Select “Financial Statements” tab from the left dialog box
Step 2: Select “Annual Financial Statements” from the drop down available below

Prowess – 3. Financial Information

Step 3: Select the required Annual Information for applying filters from the adjacent dialog box using search box such as :

Year
Months
Total Income
Sales
Industrial sales
Income from non-financial services
Trading Income
Rent/Operating lease rent income
Total Expenses
Provisions
Prior period and extra-ordinary expenses
Provision for direct tax
Donations
Penalties on direct taxes

Prowess – 3. Financial Information

Step 4: Select Query on date for the period for which the data is required for the triggered companies in the format YYYYMM – YYYYMM

Prowess – 3. Financial Information

Step 5: Click “companies in current OSC” to extract financial data for the relevant period for the companies already triggered in the output sheet
Step 6: Add data to OSC and continue

Prowess – 3. Financial Information

Step 7: Open “Output view” Tab and select “Save as Excel” from the left corner tab to save and extract the output as Excel.

Prowess – 3. Financial Information

Prowess – 4. Related Party Transactions

Step 8: Under “Ownership and Governance Indicators tab” from the left dialog box select “Related Party Transactions” from the drop down available below