Comparable Uncontrolled Price (CUP) Method
Comparable Uncontrolled Price (CUP) MethodMeaning and
Applicability
9th May 2012
Presented by: Sadaf FarooqiTrainee (Transfer
Pricing)ContentsComparable Uncontrolled Price (CUP) method
explanation in Indian TP RegulationsOECD TP GuidelinesUS TP
RegulationsImportant Judicial Precedents
2010 Grant Thornton India. All rights reserved. 2012 Grant
Thornton India.#CUP Method Indian TP Regulations 2010 Grant
Thornton India. All rights reserved. 2012 Grant Thornton India.#CUP
Method Indian TP regulationsApplicability of CUP As per Rule
10B(1)(a) of the Indian Transfer Pricing Regulations - Comparable
uncontrolled price method is a method by which
The price charged or paid for property transferred or services
provided in a comparable uncontrolled transaction, or a number of
such transactions, is identified; Such price is adjusted to account
for differences, if any, between the international transaction and
the comparable uncontrolled transactions (CUT) or between the
enterprises entering into such transactions, which could materially
affect the price in the open market.The adjusted price arrived at
under sub-clause (ii) is taken to be an arms length price (ALP) in
respect of the property transferred or services provided in the
international transaction
CUP method is considered as one of the traditional methods of
determining the arms length price
2010 Grant Thornton India. All rights reserved. 2012 Grant
Thornton India.#CUP Method Indian TP regulationsApplicability of
CUP No specific guidance is provided on when this method is
reliable except rule 10C(2)However typical transactions in respect
of which the comparable uncontrolled price method may be adopted
are:Transfer of goodsProvision of servicesIntangibles Interest on
LoansFactors of Comparability to be considered while selecting
CUTCharacteristics of property / services & FAR Contractual
termsConditions prevailing in the markets, location, laws in force
etc. 2010 Grant Thornton India. All rights reserved. 2012 Grant
Thornton India.#CUP Method Indian TP regulationsInternal CUP v/s
External CUPThere are two types of CUP evidences, internal and
externalInternal CUPInternal CUP evidences are gathered from the
assessees own transactions with independent third parties E.g. A
Ltd sold x commodity to A Inc., its AE and it also sold to P Ltd
(independent third party). In this case sales made to P Ltd is
internal CUP evidenceExternal CUPOn the other hand external CUP
evidences can be gathered from the sources outside the company
which includes quotes from public exchanges, report of trade
journal, data from Customs authorities etc.
Internal CUP is preferable over external, because the quality of
data is more accurate in case of Internal CUP. 2010 Grant Thornton
India. All rights reserved. 2012 Grant Thornton India.#CUP Method
Indian TP regulationsHow it is applied?Identify the price charged
or paid in CUTAdjustment of the above price for transaction level
differences on the basis of FAR analysis and enterprise level
differencesAdjusted price is the arms length priceIf two or more
uncontrolled transactions are available, arithmetic mean would
establish the arms length price 2010 Grant Thornton India. All
rights reserved. 2012 Grant Thornton India.#CUP Method OECD
Guidelines 2010 Grant Thornton India. All rights reserved. 2012
Grant Thornton India.#CUP Method OECD GuidelinesApplicability
Organization for Economic Co-operation and development (OECD)
defines CUP as under:A transfer pricing method that compares the
price for property or services transferred in a controlled
transaction to the price charged for the property or services
transferred in a comparable uncontrolled transaction in comparable
circumstancesThe CUP method is considered as the most direct and
reliable way to apply arms length principle. When Comparable
Uncontrolled price method and another transfer pricing method can
be applied in equally reliable manner, the CUP method is to be
preferred.
2010 Grant Thornton India. All rights reserved. 2012 Grant
Thornton India.#CUP Method OECD GuidelinesApplicability An
uncontrolled transaction is comparable to a controlled transaction
(i.e. it is a comparable uncontrolled transaction) for purposes of
the CUP method if one of the two conditions is met:None of the
differences between the transactions could materially affect the
price in the open market; OrReasonably accurate adjustments can be
made to eliminate the material effects of such differences Where
differences exist between the controlled and uncontrolled
transactions, reasonably accurate adjustments should be made to
eliminate the effect on price.The relative reliability of the CUP
method is affected by the degree of accuracy with which adjustments
can be made to achieve comparability.
2010 Grant Thornton India. All rights reserved. 2012 Grant
Thornton India.#CUP Method OECD GuidelinesExamples of application
of CUP methodExample 1 - Sale of Unbranded coffee beansAn
independent enterprise sells unbranded Colombian coffee beans of
similar type, quality and quantity as those sold between two
associated enterprises and the controlled and uncontrolled
transactions occur at the same stage in the production/
distribution chain and at approximately the same time then the
price charged by the independent enterprise can be used as CUP.If
the only available uncontrolled transaction involved unbranded
Brazilian coffee beans, then it should be enquired whether the
difference in the coffee beans has a material effect on the price
of the coffee beans in the open market. If the difference leads to
a difference in prices thenreasonable adjustments should be made in
the price charged in the uncontrolled transaction. If reasonable
adjustments are not possible then the reliability of CUP method
vis--vis other methods is reduced and therefore some other method
should be analyzed.
2010 Grant Thornton India. All rights reserved. 2012 Grant
Thornton India.#CUP Method OECD GuidelinesExamples of application
of CUP methodExample 2 - identical sales with difference in terms
of sale Circumstances surrounding controlled and uncontrolled sales
are identical, except for the fact that the controlled sales price
is a delivered price and uncontrolled sales are made FOB
factory.The differences in terms of transportation and insurance
generally have a definite and reasonably ascertainable affect on
price.Therefore to determine the uncontrolled sales price
adjustment should be made to the price for the difference in
delivery terms.
Example 3 - difference in Volumes A taxpayer sells 1000 tons of
a product at Rs 80 per ton to its AE and 500 tons of the same
product to an independent party at Rs 100 per ton.In this case it
is to be analyzed, with regard to the market conditions and trends,
whether the difference in volume should result for a difference in
price.
2010 Grant Thornton India. All rights reserved. 2012 Grant
Thornton India.#CUP Method US TP Regulations 2010 Grant Thornton
India. All rights reserved. 2012 Grant Thornton India.#CUP Method
US TP RegulationsComparability and reliability considerationsAs per
the US TP regulations CUP method evaluates whether the amount
charged in a controlled transaction is arms length by reference to
the amount charged in a comparable uncontrolled transaction
Similarity of products generally will have the greatest effect on
comparability under this method.Contractual terms or economic
conditions are also very important and comparability under this
method depends on close similarity with respect to these factors,
or adjustments to account for any differences.The results derived
from applying the comparable uncontrolled price method generally
will be the most direct and reliable measure of an arms length
price.
2010 Grant Thornton India. All rights reserved. 2012 Grant
Thornton India.#CUP Method US TP RegulationsFactors relevant to CUP
methodQuality of the productContractual terms (e.g. scope and terms
of warranties provided, sales or purchase volume, credit terms,
transport terms);Level of market (i.e., wholesale market, retail
etc.,)Geographic market in which the transaction takes placeDate of
transactionIntangible property associated with the sale; foreign
currency risksAlternatives realistically available to the buyer or
seller
The reliability of the results derived from the comparable
uncontrolled price method is affected by the completeness and
accuracy of data used and the reliability of assumptions made 2010
Grant Thornton India. All rights reserved. 2012 Grant Thornton
India.#CUP Method US TP RegulationsExamples for application of
CUPExample 1 Effect of trademarkA Ltd sells the same product to
controlled and uncontrolled distributors under substantially
similar circumstances. The only difference is that A Ltd affixes
its valuable trademark to the property sold in the controlled
transaction.IssueCan the sale price of sales made to uncontrolled
distributor be used as a CUP?
Example 2 - Effect of geographic differences R Ltd manufactures
radios and sells the same to a controlled and uncontrolled
distributor. All the terms and conditions of sale are the same, but
both the distributors are operating in different geographical
regions namely Europe and US IssueWhat are the factors that need to
be considered before deciding whether CUP method can be used or
not? 2010 Grant Thornton India. All rights reserved. 2012 Grant
Thornton India.#CUP Method US TP RegulationsIndirect Evidence of
CUTIn general a comparable uncontrolled price may be derived from
data from public exchanges or quotation media, but only if the
following requirements are metThe data is widely and routinely used
in the ordinary course of business in the industry to negotiate the
prices for uncontrolled sales;The data is used to set prices in the
controlled transaction in the same way it is used by uncontrolled
taxpayers in the industryThe amount charged in controlled
transaction is adjusted to reflect the product and service
variations
Limitation: Use of data from public exchanges or quotation media
may not be appropriate under extraordinary market conditions
2010 Grant Thornton India. All rights reserved. 2012 Grant
Thornton India.#CUP Method US TP RegulationsExamples for Indirect
Evidence of CUTExample1 Use of quotation mediumOn June 1, X Ltd
enters into contract with Y Ltd. its foreign subsidiary to purchase
crude oil. They agree to base their sales price on the average of
the prices published for that crude oil in quotation medium in the
five days before Aug 1, the date set for delivery. Both the
entities agree to adjust the price for the particular circumstances
of their transactionsThe quotation medium used by the entities is
widely used in ordinary course of business to establish prices for
uncontrolled sales.Issue Can the price derived from the quotation
medium be considered as an evidence of CUP? Would the answer be
different, if war breaks out in countries X and Y , major oil
producing companies, causing significant instability in the price
of oil in the world oil markets?
2010 Grant Thornton India. All rights reserved. 2012 Grant
Thornton India.#Important Judicial Precedents 2010 Grant Thornton
India. All rights reserved. 2012 Grant Thornton India.#Important
Judicial PrecedentsUCB India Private Limited v/s ACIT (Mumbai
ITAT)CUP method is the most direct method for determining arms
length price.
Serdia Pharmaceuticals (India) Pvt. Ltd v/s ACITCUP method is a
preferred method and it leads to more reliable results vis--vis the
results obtained by applying transaction profit method.
Nimbus Communications Ltd v/s ACIT (Mumbai ITAT)For computing
notional interest external CUP can be used.
DCIT v/s 3 global services Pvt Ltd (Mumbai ITAT)CUP method
preferable over TNMM where price is determined on the basis of
hourly rate and not as percentage costs .Per hour billing rate
published by NASSCOM for a specific business segment can be used as
an external CUP in determining the ALP.
2010 Grant Thornton India. All rights reserved. 2012 Grant
Thornton India.#Important Judicial PrecedentsIntel Asia Electronics
Inc v/s ADIT (Bangalore ITAT)For benchmarking slump sale, in the
absence of identical / similar transaction(s), valuation report to
be used, failing which IT WDV can be considered as a reasonable
methodology
Coastal Energy Pvt. Ltd. v/s ACIT (Chennai ITAT)Use of
comparable prices obtained from customs authorities are appropriate
in computing ALP of import transactions However, to the converse,
in the case of Serdia Pharmaceuticals (India) Pvt Ltd vs ACIT
(Mumbai ITAT) and Panasonic India Private Limited v/s ITO (Delhi
ITAT), prices obtained from customs authorities were not considered
as appropriate CUP.Agility Logistics Private Limited v/s DCIT
(Mumbai ITAT)Application of CUP method based on comparable
transactions of foreign AE with its unrelated customers upheld
2010 Grant Thornton India. All rights reserved. 2012 Grant
Thornton India.#Important Judicial PrecedentsLiberty Agri Products
Pvt Ltd V/s the Income tax OfficerCustoms rate on the date of
contract and not as on the date of actual receipt of consignment
relevant for determining ALP
Drilbits International Pvt. Ltd v/s DCITPrice charged by
predecessor business from the AE, from whom business was acquired
by the assessee can be used as CUP.Rates charged to third parties
in the domestic market were not comparable with the rates charged
to AE in the export market on account of differences between the
two segments as to product liability risk, marketing risk, bad
debts risk etc. 2010 Grant Thornton India. All rights reserved.
2012 Grant Thornton India.#Thank You 2010 Grant Thornton India. All
rights reserved. 2012 Grant Thornton India.#
