Transfer Pricing Comparables: Keep a Rejection-Reason Log
A practical guide to transfer pricing comparables, with a worked example, evidence checklist, common mistakes and steps to prepare a defensible working.
AI Summary
A search finds ten companies, but several have different functions or incomplete data. The useful result is a working that explains the facts, the calculation or classification, and the evidence behind the conclusion. This guide shows how to prepare that working and where a reviewer should investigate before accepting the result.
Scope and applicable period
Indian transfer-pricing documentation for FY 2025–26 / AY 2026–27, with legacy provision references. For Tax Year 2026–27, use the Income-tax Act, 2025 and Income-tax Rules, 2026; OECD guidance does not override Indian law.
Verification date: 11 October 2026. Figures and rates identified as assumptions are teaching examples; apply the stated conditions and the actual facts to a real assignment.
The key principle
A comparable-selection file should let another reviewer reproduce the search and understand each acceptance or rejection. Preserve the search date, database version, filters and company-specific reasoning. Mechanical turnover or loss filters cannot replace analysis of functional comparability and current rules on data. A rejection log is especially useful when a company looks similar by industry name but earns revenue from materially different activities.
Worked example
| Item | Value or fact | What it means |
|---|---|---|
| Candidate A | Routine services | Review detailed functions |
| Candidate B | Product IP owner | Potential functional difference |
| Candidate C | Mixed activities | Segment data unavailable |
| Candidate D | Information incomplete | Document search and missing evidence |
Rejecting Candidate B may be appropriate if its valuable intellectual property and entrepreneurial risks make the comparison unreliable, but the reason needs evidence from public records. Candidate C should not be included solely to enlarge the set when the relevant segment cannot be isolated reliably. Maintain the original result population as well as the final set, with consistent treatment of comparable years and events. Do not edit reasons after seeing a favourable margin without documenting a legitimate factual correction.
A practical sequence
Preserve the original search population, criteria and database date. Inspect each candidate’s actual activities and available financial data.
Apply filters consistently and record company-specific acceptance or rejection reasons. Retain the annual reports and relevant extracts supporting the final set.
When later information changes a decision, record the new fact and version rather than rewriting the original search history as though the information had always been available.
Separate the factual file from the pricing conclusion
Transfer pricing depends on reliable transaction facts and comparability. Contracts, actual conduct, segment accounts and external evidence should tell a consistent story. A margin calculation is only one part of the analysis: the method, tested party, profit indicator, comparable data and adjustments all need reasons. Keep assumptions visible, preserve original data and reconcile the study with reported transactions. OECD materials help analyse issues, but the applicable Indian provisions and rules govern the Indian compliance conclusion. Do not treat a sample percentage, a contractual charge or a favourable comparable as an automatic arm’s-length result.
Evidence checklist
Keep the following records linked to the same entity, period and working version. Identify missing items explicitly; a checked box should mean the document was examined and supports the stated conclusion.
- Search strategy and filters
- Database extraction date
- Annual reports and segment notes
- Acceptance/rejection log
- Final margin working
Common mistakes and how to avoid them
- Using unexplained reject labels. Compare the conclusion with the search strategy and filters and resolve any conflicting facts.
- Selecting only favourable margins. Trace the affected item to the annual reports and segment notes before finalising the working.
- Ignoring a company’s actual revenue mix. Use the final margin working to make the final position and remaining exceptions clear.
Before you finalise
Recheck the example’s assumptions against the actual assignment, resolve the identified exceptions and make the final figure or conclusion traceable to its source. Preserve the reviewed version and the reason for material changes. For this task, the final margin working should agree with the conclusion presented to the client, reviewer or authority.
Frequently asked question
Does a larger set automatically improve reliability? No. A smaller defensible set can be more reliable than many functionally different companies.
Sources and further reading
- Income Tax Department — transfer-pricing methods and Rule 10B
- Rule 10D — transfer pricing information and documents
- OECD Transfer Pricing Guidelines, 2022
Related guide: Identify associated enterprises form 3ceb section 92a.