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Methods
For Determination Of Arm’s Length Price
Any of the following methods which is most appropriate:
Transactional methods: A. Comparable uncontrolled price
method (CUP) B. Resale price method C. Cost plus method
2. Profit methods: A. Profit split method B. Transactional
net margin method
Transactional
Methods Comparable Uncontrolled Price Method (CUP)
Base price: Price charged or paid for property transferred
or services provided in comparable uncontrolled transaction/s.
Adjustments: Differences which could materially effect
the price in the open market such as quality of product,
terms of contract, foreign currency risks etc. Features:
Not suitable if there are material product differences
or substantial adjustments are required. Similarity
of products is important.
Transactional
methods Resale Price Method
Price: at which resold or provided to unrelated enterprise.
Adjustments: Reduce amount of normal gross profit margin
on purchase and resale of same or similar property to
the enterprise or unrelated enterprise in comparable
uncontrolled transaction/s. Expenses incurred in connection
with purchase of property or services. Functional and
other differences including differences in accounting
practices compared to comparable uncontrolled transaction
or between enterprises entering into such transactions
which could materially effect GP margin such as terms
of contract, inventory levels, marketing programs, level
of market, foreign currency risks etc. Features: Reference
to gross profit margin. Generally used for purchase
and resale. No substantial value added by purchasers
/ resellers.
Transactional
methods Cost Plus Method (CPM)
Cost : Direct & indirect cost of production incurred
by the enterprise in respect of property transferred
or services provided to an associated enterprise Adjustment
: Normal gross profit mark-up for same or similar property
or services by the enterprise or by unrelated enterprise
under comparable uncontrolled transaction Functional
& other differences such as complexity of manufacturing,
procurement, purchasing and inventory control activity,
selling, general administrative expenses, foreign currency
risks, contractual terms Features: Generally used where
manufacturing, assembly or other production of goods
is involved Emphasis on similarity of functions, risks
and contractual terms rather than similarity of products
Profit
Methods Profit Split Method
Profit : combined net profit (NP) of associated enterprises
Allocation : NP partially allocated based on basic return
with reference to market returns achieved for similar
transactions Split the remaining NP in proportion to
relative contribution made by each enterprise based
on : Functions performed Assets employed or to be employed
Risk assumed by each enterprise Reliable external market
data Features : Applicable mainly in transactions involving
transfer of unique intangibles or interrelated multiple
international transaction
Profit
Methods Transactional Net Margin Method
Net profit (NP) : as realized by the enterprise from
the transaction as a percentage of cost, sales, assets
etc. Adjustments : NP realized by the enterprise or
by unrelated enterprise from a comparable uncontrolled
transaction/s. Differences which could materially affect
the amount of NP margin in open market. Features: Considers
only profits of controlled entity attributable to transactions
under review. Inappropriate where company engages in
variety of transactions which cannot be compared.
Choosing
the Most Appropriate Method
The method should be best suited to the facts &
circumstances and also reliable. Factors to be considered
for selection: Nature & class of international transaction.
Class of associated enterprises, functions performed,
assets employed, risks undertaken. Availability, coverage,
reliability of data. Degree of comparability. Availability
of reliable and accurate adjustments for differences
between international and comparable uncontrolled transaction.
Nature, extent & reliability of assumptions for
application.
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