Page 460 - MANUAL OF SOP

General Issues

Income Tax Act, 1961
19.10. The Companies Act 2013 does not prescribe any methodology to calculate
price on arm’s length basis (Section 188). However, the Income Tax Act prescribes
the following methods to compute arm’s length price under section 92C:

(i) Comparable Uncontrolled Price Method;
(ii) Resale Price Method;

(iii) Cost Plus Method;
(iv) Profit Split Method;

(v) Transaction Net Margin Method;
(vi) Such other methods as may be prescribed by the board.

19.10.1 Under the Comparable Uncontrolled Price Method (CUP), the price
is adjusted so that there are no differences between the related transaction and
the comparable uncontrolled transactions. This price adjustment accounts for
differences, if any, between the related transaction and comparable uncontrolled
transactions or between the parties entering into such transactions, which could
materially affect the price in the open market. The adjusted price is taken to be
Arm’s Length Price in respect of the product/asset transferred or services provided.
This method is used in case it is for a product or service i.e. to compare prices
charged for product transferred or a service that is provided.

19.10.2 Resale Price Method is used when product is purchased or services
are obtained from related entities and the same are further sold to unrelated
enterprises. Under this method, the price at which the service or product obtained
by a related entity and resold to an unrelated one is identified and adjusted by the
amount of normal gross profit margin accruing to the entity or to an unrelated
enterprise from the purchase and resale of the same or similar product. The price so
arrived at is further reduced by the expenses incurred by the enterprise in connection
with the purchase and sale of the property. The adjusted price arrived at is taken
to be arm’s length price in respect of the purchase of product or obtaining of the
services by the enterprise from the related entity.

19.10.3 The Cost Plus Method is generally applied in cases where there are semi-
finished goods which are sold between related parties or joint facility agreements
etc. Under this method, the direct and indirect costs of production incurred by the

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