70. Determination of arm’s length price under section 107C

¹[70. Determination of arm’s length price under section 107C.

(1) The most appropriate method for determining arm’s length price in relation to an international transaction shall be applied in the following manner:—

(a) comparable uncontrolled price method is applied in the following manner:—

(i) the price charged or paid for property transferred or services provided in an uncontrolled transaction or a number of transactions of comparable circumstances is identified;

(ii) if the price so identified differs from the price of the international transaction, the differential amount is calculated;

(iii) the price of international transaction is then adjusted by the said differential amount;

(iv) the adjusted price under sub-clause (iii) is taken to be the arm’s length price of the property transferred or services rendered in the international transaction.

(b) resale price method is applied in the following manner: —

(i) the price at which the said property or service is resold to an independent enterprise is identified;

(ii) the price, as identified in sub-clause (i), is reduced by a comparable normal gross margin;

(iii) the price so arrived at is then adjusted for other unique costs (such as customs duty) associated with the purchase of the property or services;

(iv) the price so arrived at is then adjusted to take into account the material differences (differences that could materially affect the gross margin in open market condition) such as functions performed, risks involved, assets employed, time gap between the original purchase and the resale and accounting practices between the international transactions and the comparable uncontrolled transactions, or between the enterprises undertaking such transactions;

(v) the adjusted price under sub-clause (iv) shall be taken to be the arm’s length price of the property purchased or the service obtained in the international transaction.

(c) cost plus method is applied in the following manner: —

(i) the direct and indirect costs incurred in the supply of property or the provision of services, hereinafter referred to as cost base, are determined;

(ii) a comparable profit mark-up (based on comparable accounting policies) is identified;

(iii) appropriate adjustment is then made to the comparable profit mark-up adjusted to take into account the material differences (differences that could materially affect the mark-up in open market condition) such as functions performed, risks involved, assets employed, contractual terms and market conditions between the international transactions and the comparable uncontrolled transactions, or between the enterprises undertaking such transactions.[;] ^{Subs F. A. 2015}

(iv) the adjusted profit mark-up under sub-clause (iii) is then added to the cost base;

(v) the sum so arrived at is taken to be the arm’s length price of the property transferred or services provided in the international transaction.

(d) profit split method is applied in the following manner: —

(i) the combined profit, arising from international transaction or transactions and divisible among the associated enterprises, is identified[;] ^{Subs F. A. 2015}

(ii) the combined profit is then divided among the associated enterprises by using the following approaches:

a. each of the associated enterprises is allocated a basic return based on the basic functions (manufacturing, distribution, service provision etc.) each enterprise performed and determined by reference to market returns earned by independent enterprise in similar transaction. This basic return does not usually account for the return that would be generated by any unique and valuable assets possessed by the associated enterprises. The residual profit (which may be attributable to such unique assets), calculated by deducting the sum of basic returns allocated to associated enterprises from the combined profit, is then apportioned to the associated enterprise based on their relative contribution and taking into consideration how independent enterprises in similar circumstances would have divided such residual profit; or

b. basic return is not allocated to the associated enterprises; the combined profit is divided among the associated enterprises based on the relative contribution of each the associated enterprises to that profit;

(iii) the profit thus allocated to the assessee under sub-clause

(ii)is taken to be the arm’s length price.

(e)transactional net margin method is applied in the following manner: —

(i) the net profit margin earned by the associated enterprise from the international transaction with the associated enterprise is computed having regard to an appropriate base such as costs, sales or assets;

(ii)the net profit margin earned by an independent enterprise or enterprises from comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base;

(iii)appropriate adjustment is then made to the net profit margin referred to in sub-clause (ii) to take into account the differences, that can materially affect the net profit margin, between the international transactions and the comparable uncontrolled transactions, or between the enterprises undertaking such transactions;

(iv)the adjusted net profit margin under sub-clause (iii) is then applied to the base as referred to in sub-clause (i) to arrive at the arm’s length price in relation to the international transaction.]

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¹. Ins.by S.R.O.No.251-L/IT/2012,dt. 01-07-2012

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Nowshad Amin Chowdhury