“FAR analysis”
The decision most relied on for FAR analysis is UCB India (P) Limited v. ACIT (121 ITD 131), cited in 70 judgments on BharatTax.
Leading authorities on FAR analysis
For transfer pricing purposes, distinct international transactions, such as royalty payments and manufacturing, should be benchmarked separately rather than aggregated. The selection of comparables must be based on a thorough Functions, Assets, and Risks (FAR) analysis, and loss-making entities are not automatically excluded if they satisfy other comparability criteria.
Companies with significantly different turnovers (e.g., one above Rs. 200 crores and another below) cannot be considered comparable in transfer pricing analysis. Turnover is a relevant factor in assessing comparability.
For transfer pricing purposes, companies engaged in functionally different activities, such as payroll processing versus software development, are not comparable and must be excluded from the list of comparables.
For computing profits of a dependent agency permanent establishment (DAPE), the 'two taxpayer approach' is upheld. A hypothetical DAPE is visualized based on the General Enterprise's functions performed, assets used, and risks assumed, given the absence of a physical establishment.
Ad-hoc transfer pricing adjustments are not justified if the Transfer Pricing Officer fails to apply one of the prescribed methods under Section 92C. The arm's length nature of international transactions, including intra-group services and management fees, should be determined through a detailed FAR analysis and benchmarking study.
A company that is otherwise comparable on a functional and comparability analysis (FAR analysis) cannot be excluded solely based on high turnover; the effect of such high turnover on the margin must be considered.
Working capital adjustment is an accepted adjustment provided for better comparability in transfer pricing. The Tribunal has held that working capital adjustment is necessary for better comparability.
