The taxpayer’s business is distributing and servicing information technology (IT) products.
During assessment year (AY) 2006-07, the taxpayer procured IT products from its Singapore-based related entity (“associated enterprise” as the term is known in India). The taxpayer, in turn, sold the products to its Indian customers.
The taxpayer adopted the Transactional Net Margin Method (TNMM) for benchmarking its international transactions involving imports and exports of goods. In its transfer pricing study, the taxpayer noted that its related party had purchased the products from the manufacturers of hardware equipment and had provided price comparisons based on the list price available on those manufacturers’ websites.
When the case was before the Transfer Pricing Officer, the taxpayer countered that using the list price under the CUP method was not a correct method for determining the arm’s length price because: (1) the data items used were not available in the public domain; and (2) the list price could only be considered to be indicative but did not represent the true price between the related parties. Hence, the taxpayer adopted TNMM for determining the arm’s length price.
The Transfer Pricing Officer, however, countered that the most appropriate method was the CUP method because a reliable list price was available.
The tribunal rejected the taxpayer’s contention that the list price could not be used for the reason that it was not in the public domain, but nevertheless agreed with the taxpayer’s position that the list price was only an indicative price. Also, for purposes of making a comparative study under CUP method, the tribunal found that what is required is a comparison with actual sales and purchases with unrelated parties or a comparison of transactions between unrelated parties, and such comparisons could not solely be based on list prices (which may be considered only as a reference point).
Read a May 2013 report [PDF 204 KB] prepared by the KPMG member firm in India: List price only an indicative price, cannot be used as a Comparable Uncontrolled Price in determining arm’s length price in relation to an international transaction
Contact a tax professional with KPMG's Global Transfer Pricing Services.