Search Results For: Cost Plus Method

DATE: December 31, 2014 (Date of pronouncement)
DATE: January 1, 2015 (Date of publication)
AY: 2003-04 to 2006-07
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Transfer pricing: To apply the "Cost Plus Method", there must be a “comparable uncontrolled transaction”. The fact that the same product is sold by the assessee to its AEs as well as to third parties does not mean that the two sets of transactions are comparable if the business model, marketing, sales promotion etc is different

The fundamental input for application of CPM method, next only to ascertainment of historical costs, is ascertainment of the normal mark-up of profit over aggregate of such direct costs and indirect costs in respect of same or similar property or services in a “comparable uncontrolled transaction” or, of course, a number of such “comparable uncontrolled transactions”. When compared with CUP method, as against the “price” of a comparable uncontrolled transaction, one has to find out “normal mark up of profit” in a comparable uncontrolled transaction. Whether it is “price” or “normal mark up of profit”, the starting point of both these exercises in the CUP and the CPM is finding a “comparable uncontrolled transaction”. In order for such comparisons to be useful, the economically relevant characteristics of the situations being compared must be sufficiently comparable. It is only elementary, as is also noted in the OECD Transfer Pricing Guidelines, that “to be comparable means that none of the differences (if any) between the situations being compared could materially affect the condition being examined in the methodology (e.g. price or margin), or that reasonably accurate adjustments can be made to eliminate the effect of any such differences”