Comparable Uncontrolled Price CA.Nilesh Kapadia 26th Oct 2012

- Comparable Uncontrolled Price
Presented by
Nilesh M Kapadia
Chartered Accountant
[email protected]
Choice of Most Appropriate Method
Rule 10B stipulates the methods of determination of ALP.
 Comparable Uncontrolled Price Method (‘CUP’)
 Resale Price Method (‘RPM’);
 Cost Plus Method (‘CPM’);
 Profit Split Method (‘PSM’);
 Transactional Net Margin Method (‘TNMM’).
26th October, 2012
(c) CA Nilesh Kapadia
 The Comparable Uncontrolled Price (“CUP”) method
compares the price charged for property or services
transferred in a controlled transaction to the price
charged for property or services transferred in a
comparable uncontrolled transaction in comparable
 The CUP method may also sometimes Be used to
determine the arm’s length royalty for the use of an
intangible asset.
 CUPs may be based on either “internal” comparable
transactions or on “external” comparable transactions.
26th October, 2012
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Internal / External CUP
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Comparability while applying CUP
26th October, 2012
(c) CA Nilesh Kapadia
Comparability while applying CUP
Adjustments may be made for
 Product comparability is of prime importance
 But other factors also important – i.e
 Contractual terms e.g. FOB / CIF, credit terms
 Economic conditions e.g. quantity ,
 Product characteristics – e.g. off the shelf, or customised
 Risk allocation – inventory risk Vs credit risk
 Geographical differences – Europe market Vs Asia
26th October, 2012
(c) CA Nilesh Kapadia
Comparability while applying CUP
Adjustments may be not be possible for
 Fundamental product differences
 Branded / unbranded products as effect of brand on
price may be difficult (impossible?) to quantify.
 If such adjustments are necessary, but cant be done,
CUP may not be relied upon, and other methods
looked at
26th October, 2012
(c) CA Nilesh Kapadia
When to apply CUP
 When CUT is available
 Generally should be first choice
 External comparables may be difficult to find in
practice unless the transactions involve a fairly
common and homogeneous product or service.
However, the advantages of the CUP method are great
enough to warrant a significant effort to apply the
 Generally applied when internal CUP is available (full
data in-house)
 Commodity type products
26th October, 2012
(c) CA Nilesh Kapadia
 Ideally suited for commodities which are subject
matter of frequent trade;
 In such cases market price may serve as benchmark;
 However, difficulty in case of intermediate or capital
goods, since information regarding market price
may not be readily available.
 Data compiled and maintained by other regulatory
authorities may not be useful as it may not disclose
key information.
26th October, 2012
(c) CA Nilesh Kapadia
Intra-Group Guarantees
Subsidiary State
Libor + 120
Libor + 80 bps
Guarantee fee: full
40 bps (120 less 80);
or part thereof? If
part, how much?
• Stand alone basis
• No financial guarantee
• Under guarantee
(c) CA Nilesh Kapadia
10 October, 2012
State Y
(3rd party)
Financial guarantee
CASE: VVF Ltd Vs DCIT {[ITAT Mumbai]
[1 TTR 326] (Interest Free Loans)
 The taxpayer advanced interest free loans to its AEs
out of its own funds and determined the ALP as Nil
 The TPO made an upward adjustment by adopting
14% p.a. (rate charged by Citibank on cash credit) paid
by taxpayer as arm’s length interest
26th October, 2012
(c) CA Nilesh Kapadia
Taxpayer's contentions
 Loan was granted to AEs out of the interest free funds
and since the taxpayer had sufficient interest free
funds it was justified in not charging interest on the
loans given to the AEs
 Real income concept advocated
 On a without prejudice basis, the taxpayer submitted
that the TPO in subsequent assessment years had
computed the arm’s length price of the international
transaction of interest free loan at 4.5 percent per
 The taxpayer submitted a letter from bank as external
26th October, 2012
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Tribunal Decision / Observations
 Cost of funds is not relevant for determining CUP
 Need to see comparable transactions – internal or
 CUP compares the price of an international
transaction with that of comparable uncontrolled
 Comparable transaction should be a forex loan
 ITAT rejected the application of CUP by the TPO
(rate on cash credit)
 VVF Ltd. had availed the foreign currency loan from
 Using interest rate charged thereof, confirmed the
October, 2012
(c) CA Nilesh Kapadia
for interest
Tata Autocomp (52 SOT 48 (Mum
 Whether transaction of granting interest-free
loan by assessee to its non-resident AE comes
within ambit of international transaction and,
thus, such a transaction can be subject-matter of
test of arm's length price under section 92 - Held,
yes - Whether mere fact that loan has RBI's
approval does not put a seal of approval on true
character of transaction from perspective of
transfer pricing regulation as substance of
transaction has to be judged as to whether
transaction is at arms length or not
26th October, 2012
(c) CA Nilesh Kapadia
Tata Autocomp (21 6
(Mum ITAT)
 Whether in case of loan advanced by assessee-
company to its AE located in Germany, EURIBOR
based interest rate could be most appropriate
comparable uncontrolled rate - Held, yes
26th October, 2012
(c) CA Nilesh Kapadia
Nimbus Communication Vs. Asst. CIT
[132 TTJ 351] Interest on outstanding
amount of AE
 Taxpayer had recivables outstanding from Aes for >180
 TPO attributed interest on extended credit and made
 For adjustment TPO used rate of interest charged for
inter-company loan
26th October, 2012
(c) CA Nilesh Kapadia
Tribunal Decision / Observations
 Taxpayer has not charged interest on delayed
payments from third parties
 Taxpayer has not paid interest on delayed payments
to its creditors
 TPO has not followed any of the methods in
making adjustment
 Loans and trade credit are different and not
 ITAT deleted adjustment on merits and law
26th October, 2012
(c) CA Nilesh Kapadia
Intel Asia Electronics Inc, India Branch Office
Vs. ADIT [Bangalore ITAT] [ ITA No.
131/Bang/2010] [2011-TII-14-ITAT-BANGTP]Transfer of Assets
 The assessee is a foreign company having a branch
office in India.
 The Intel Technologies India Pvt. Ltd. is the AE of the
 Assessee decided to close down the office in India and
transfer all its assets and liabilities to its AE as going
26th October, 2012
(c) CA Nilesh Kapadia
 The consideration was determined as difference of
value of assets and liabilities in the books of the
 The Value of assets was determined in accordance to
the certificate of Chartered Engineer and Registered
 TPO disregarded the valuation certificate on the
ground that the valuer has charged depreciation
arbitrarily and applied net book value method for
determining ALP of transfer of PE business
 CIT(A) upheld the order by TPO and AO
26th October, 2012
(c) CA Nilesh Kapadia
Agility Logistics (52 SOT 81)
 Assessee was logistics services provider and had
employed CUP as primary method for benchmarking
its international transactions - According to assessee it
was corporate policy of AEs all over world that after
payment of costs, profits were shared equally between
AEs that had participated in transaction - TPO
rejected CUP method and proposed adjustment in
ALP on ground that application of CUP using data of
companies operating in different geographical
locations could not provide realistic measure because
of differences in economic conditions and policies of
26th October, 2012
(c) CA Nilesh Kapadia
Agility Logistics (52 SOT 81)
 However, facts in issue for year under appeal were
identical with facts of assessment years 2004-05 and
2005-06, in which Tribunal had allowed appeals of
assessee - Whether following said decisions, appeal
filed by assessee was to be allowed and addition on
account adjustment in ALP was to be rejected - Held,
26th October, 2012
(c) CA Nilesh Kapadia
Tribunal Decision / Observation
 Rejection of Valuation report is upheld – Assets
should be valued using IT depreciation rates
 Therefore the matter is set aside to the file of AO
with direction to determined the ALP using IT rates
of depreciation.
26th October, 2012
(c) CA Nilesh Kapadia
Genesys Int (26 101)
 It was also stated that the rate charged to its AEs are
same to the rates charged to independent third party
who operate in the same geographical region availing
similar services. It is observed that assessee furnished
details of the said working to the TPO.
 Moreover, the Commissioner (Appeals) has also
tabulated in its order the details of comparable services
and rates charged by the assessee from its AEs and
Non-AEs in the relevant financial year and observed
that assessee charged higher rate from its AEs than
what it charged from third party.
26th October, 2012
(c) CA Nilesh Kapadia
Genesys Int (26 101)
 • The department has also not brought any evidence on
record to controvert the submissions of assessee that
the services rendered to the AEs and third parties are of
similar type and operate in the same geographical
 The geographical consideration has to be kept in mind
while considering the rates and to determine the ALP
while applying CUP method.
26th October, 2012
(c) CA Nilesh Kapadia
Trimex Industries (25
19 Chennai ITAT)
 The assessee has compared its sale price to the AE with
that of the export rate of the competitor, IBC Ltd. In the
case of Barite Powder, the export price by IBC Ltd. was
US$51.65 per MT, whereas the price realized by the
assessee for the shipment made in April 2005 was US$
48.50 per MT and US$54.50 per MT for the shipment
made in September, 2005. The average price realized by
the assessee on export of minerals to its AE is very
much comparable to the price reflected in the
transactions made by its competitor, IBC Ltd.
26th October, 2012
(c) CA Nilesh Kapadia
Trimex Industries (25
19 Chennai ITAT)
 The assessee is operating in a very limited sphere. The
assessee and its competitor, few in number, have
obtained licences from State Government undertaking
of Andhra Pradesh on the basis of public auction. The
dealers in this field are few in numbers. and as pointed
out by the assessee, there cannot be a large number of
cases available for comparison.
26th October, 2012
(c) CA Nilesh Kapadia
Trimex Industries (25
19 Chennai ITAT)
 The most important point is that in the case of
assessment of IBC Ltd., the authorities have made a
comparison with sale price recorded by the assessee
and that comparison was found reasonable and no
addition was made in the case of IBC Ltd. This is a sure
case of double standard. The TPO has made a
fundamental omission in not comparing the rate
declared by IBC Ltd. while proposing the additions in
the hands of the assessee company.
26th October, 2012
(c) CA Nilesh Kapadia
Trimex Industries (25
19 Chennai ITAT)
 Then what is the method of comparison adopted by the
TPO? This is apparent in the case of Bentonite Lumps.
The TPO has adjusted the price reflected in the sale of
40 MT Bentonite Lumps made to non-AE. The TPO
summarily rejected the sale price reflected in the case
of a sale of 23500 MT made to its AE. Is it fair to say
that the export price of 23500 MT would be exactly that
of a sale of 40 MT? In every trade, the volume of the
consignment is a very important factor. The price
offered to its Dubai AE will be influenced by volume,
frequency and other vital aspects of the trade.
26th October, 2012
(c) CA Nilesh Kapadia
Trimex Industries (25
19 Chennai ITAT)
 The sale of 40 MT made to non-AE was an occasional
sale, where the assessee was not constrained by such
considerations as applicable in the case of its AE.
Therefore, it is evident that the TPO has erred in
comparing the mountain with a mole hill.
26th October, 2012
(c) CA Nilesh Kapadia
Genom Biotech (21
315 (Mum ITAT)
 The TPO in his Order has not given any reason as to
why he is rejecting the CUP method adopted by the
assessee for determining the arm's length price for
reimbursement of business promotion expenses by the
assessee to the AEs. It was well settled that no method
can be rejected without giving cogent reasons. The TPO
has to state why CUP method is not applicable in this
case. After assigning reasons, then the TPO has to state
as to how 'TNMM' is the most appropriate method, to
be applied on the facts and circumstances of this case.
This is not done,
26th October, 2012
(c) CA Nilesh Kapadia
Genom Biotech (21
315 (Mum ITAT)
 There is no whisper on these issues in the order of the
TPO. Without giving any reasons for the rejection of
'CUP' method, the TPO, applied the mean of percentage
of expenditure incurred by 17 pharmaceutical
companies on advertisement and marketing and
termed the same as arm's length price arrived by using
26th October, 2012
(c) CA Nilesh Kapadia
 Thank You
26th October, 2012
(c) CA Nilesh Kapadia

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