Persistent loss-maker test in transfer pricing: isolated losses do not justify exclusion of comparable companies under TNMM.

In transfer pricing benchmarking under TNMM, companies are excluded from comparables only if they are persistent loss makers, meaning losses in three consecutive financial years including the relevant year and the two preceding years. Mere isolated or intermittent losses in one or two years do not satisfy that test. On the facts noted, one company had a loss in only one year and the other two had losses in two years, so none met the persistent-loss criterion. The three companies were therefore treated as comparable, and the proposed transfer pricing adjustment based on their exclusion did not survive.

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Issues: Whether companies suffering losses in one or two financial years, but not persistent losses, could be excluded from the set of comparables for transfer pricing analysis.

Analysis: The assessee's transfer pricing study had selected comparable companies for benchmarking its international transactions under TNMM. The Revenue's adjustment was based on excluding three companies only on the ground that they had incurred losses. The governing principle applied was that exclusion is warranted only where a company is a persistent or continuous loss maker, meaning losses in three consecutive financial years including the relevant year and the two preceding years. On the financial data placed on record, one company had suffered loss in only one year, while the other two had suffered losses in two years, so none answered the test of persistent loss making. The Tribunal therefore agreed with the view that mere isolated or intermittent losses did not justify exclusion.

Conclusion: The exclusion of the three companies was not justified, and the transfer pricing adjustment did not survive; the Revenue's challenge failed.

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