India: Mumbai Tribunal Ruling On The Application Of Comparable Uncontrolled Price Method And Resale Price Method To Determine The Arm's Length Price

Last Updated: 26 January 2010
Article by Vispi T. Patel

Gharda Chemicals Ltd. V. DCIT (Mum) (2009-TIOL-790-ITAT-MUM)


Gharda Chemicals Ltd. ("GCL India "/ "the assessee"), a company incorporated in India, was engaged in manufacturing of fertilizers and chemicals. Since direct export to USA was not permissible and in order to overcome this difficulty and keeping into consideration the business interest, the assessee had set up its wholly owned subsidiary, Gharda USA Inc. ("Gharda USA" / "WOS") in USA.

During the FY 2001-02, GCL India had exported Dicamba to its associated enterprise ("AE"), Gharda USA at USD 14.66 per kg. The assessee had determined the Arm's Length Price ("ALP") by applying the Comparable Uncontrolled Price method ("CUP" method). GCL India also exported Dicamba to third parties located in non-US countries viz. UK, Netherlands, New Zealand, Australia, France, etc. at the rates ranging between USD19.47 to USD 25.00 per Kg. The total quantity exported by the assessee to different countries was 418,803 Kgs. inclusive of 272,100 Kgs. sold to its AE. The Transfer Pricing Officer ("TPO") determined the average rate of sale to all independent enterprises at USD 20.67 per Kg., which was found to be substantially higher than USD 14.66 per kg charged by the assessee from its AE. On being show caused as to why the average rate of USD 20.67 per kg be not applied in respect of sale to AE, the assessee furnished a report of an external expert, which indicated that the price charged by the assessee from its AE was higher than the price charged by China from similar goods exported to USA to some other party. The TPO observed that there was no authenticity of the report of the external expert as no reliable data was considered by him for his this purpose. Even credentials of the external expert were doubted as it was not known that in which capacity he was making such report. In the light of these facts, the TPO came to the conclusion that the External CUP, being the report of the external expert could not be considered in preference to the Internal CUP, being the price at which the assessee sold the goods to other unrelated parties in several other countries. The TPO also rejected the assessee's alternative submission for adoption of "Resale price method" for calculating ALP. The TPO determined ALP at USD 19.587 per kg after reducing USD 2.03 per kg on account of selling and distribution expenses along with geographical differences and further increased the same by USD 0.92 per kg on account of freight differential and excess credit period. This resulted into an addition of Rs. 6.44 crores.

The Commissioner of Income tax (Appeals) ["CIT(A)"] also confirmed the order of the TPO. The assessee had, therefore preferred an appeal to the Income tax Appellate Tribunal ("ITAT").

Contention of the Assessee before the ITAT:

  • GCL India had floated a WOS in USA only for the fact that direct export was not allowable in USA.
  • The ALP had been determined on the basis of the report of a third party expert and the same deserves to be accepted.
  • GCL India sold Dicamba to Gharda USA on a wholesale basis whereas it sold Dicamba around 35% of the total quantity to independent third parties in non-US countries on a retail basis. Therefore, Internal CUP should be rejected as the most appropriate method to determine the ALP.
  • AE was a loss making entity and the export of Dicamba to AE at USD 14.66 per kg did not result into lowering of the tax incidence on the fact that if higher prices would have been charged from AE, that would have resulted into further losses in the hands of AE and there is no ultimate effect on the tax liability of GCL India, when considered in totality along with its AE.
  • The entire exercise of determining ALP of the transactions between the two enterprises is useless as the price charged or paid by one enterprise to another AE is tax-neutral on totality, therefore, is sans merit.
  • It was submitted that instead of CUP, the Resale Price Method should be considered as the most appropriate method to determine the ALP as the ALP cannot be ascertained at an exorbitant figure in disregard to stark reality of there being a loss in the hand of AE.

Contention of Revenue before the ITAT:

  • The Internal CUP method pressed into service by the TPO was most appropriate in this case and there was no need for relying on External CUP method as the external evidence, being the report of external expert was not reliable for several reasons.
  • There was no material to indicate as to whether the external expert, being a private individual claimed by the assessee as expert in this field, was even competent to issue such report, which, in turn, was in the nature of a self serving evidence.
  • The price stated in the report was not backed by any data from some Government agency in USA. It was pointed out that the external expert took into consideration only certain instances of import made by one USA party from China which was inappropriate in as much as it was imperative to consider the import price of Dicamba in relation to all the parties in USA so as to determine the correct and fair ALP of the transaction between assessee and AE. Since the assessee had itself effected exports to other countries, the ld. D.R stated that the price charged from other unrelated customers threw a proper light on the correct ALP which would have been charged by it from its AE.

ITAT's observations and the ruling:

Application of Provision of Sec 92CA

The argument that the transfer pricing provisions are not applicable in view of the total incidence of tax remaining at the same level due to losses incurred by AE offsetting the income of the assessee, does not merit acceptance. The intent and purpose of these provisions are not to ensure that there is no diminution in the tax liability of Indian Enterprise as well as its AE on a total basis. Rather the logic is to make certain that the transactions between the AEs should not be arranged in such a way that the ultimate tax payable in India is artificially reduced. What is material is that the rightful tax payable in India should not suffer due to the adjustment of price for goods or services between the related enterprises.

The payment of tax by the AE abroad does not contribute anything to the Indian exchequer. Important factor is the payment of tax qua India and not qua the assessee along with its AE on a whole. If the assessee's total tax liability logic is accepted, it would render the provisions of Sec 92 to 92F redundant.

Resale Price Method

The Resale Price method is applicable with reference to the property purchased or services obtained by an enterprise from its AE, which is thereafter resold or are provided to the unrelated enterprise. It shows that if the Indian Enterprise purchases goods or obtains services from its AE in an international transaction, then the ALP shall be determined by adjusting the price at which the property is purchased or services are obtained by the Indian Enterprise.

In the instant case, the property is sold and not purchased by the Indian Enterprise from its AE abroad and therefore, ex-consequenti the Resale Price method cannot be invoked in the hands of the assessee in India for the determination of ALP. If the situation had been otherwise that the assessee had purchased the goods from its AE situated in USA, then this method could have been invoked for determining the ALP. For these reasons, the ITAT has held that the Resale Price method is not even appropriate, what to talk of the "most appropriate method" for determining of ALP in the present international transactions.

CUP Method

The CUP method is applicable both in the cases where property is purchased or sold. The only requirement is that the price which is charged or paid in comparable uncontrolled transaction should be adjusted to account for differences.

The price charged by an Indian party from UK or Australia may be at much variance with that charged from USA. In such a scenario no valid comparison can be made between the price charged by the assessee from other countries with that from USA, more particularly when the quantity exported to the USA is on wholesale basis with that to other countries in small lots on retail basis. The Internal CUP method is not suitable in the present circumstances.

The External CUP method contemplates comparison of the price charged by the assessee from its AE with that at which the goods are available in the open market in that country from transactions between the unrelated third parties. With a view to determine the price at which such goods are available in the open market in that country, it is sine qua non to consider the price at which such goods are imported by other parties on an average basis. Such an average price should be some realistic price representing the price from the whole or the large part of whole of the imports made in USA of this product and not some isolated or a stray transaction. The third party report cannot be the sole basis for determining the ALP on comparable uncontrolled price method for the reason that the third party is not a Government Agency of USA, which could vouch for the price at which Dicamba is imported in USA from various countries. The third party, in turn, had relied on certain stray instance of importing Dicamba from China. Reliance on such selective data cannot be a best guide for the determination of ALP.

Matter Restored to the Assessing Officer

The assessee placed on the record at the time of hearing before the Tribunal certain data from the Government of USA agency relevant for determining ALP of Dicamba, as additional evidence.

Since the lower authorities have gone by the determination of ALP on the basis of Internal CUP method, which is not appropriate in the opinion of the ITAT, the matter has been set aside to the Assessing officer by directing him to get the fresh ALP determined from the TPO after allowing the assessee fresh evidence in support of its case.

Our View:

This judgement clearly brings out the importance of the most critical element of any transfer pricing analysis, i.e. the use of comparable data for the purpose of benchmarking the controlled transaction. Further, it emphasizes that the standard of the comparable data while applying the CUP method is more stringent and need of similar economic relevant transactions is of paramount importance. Mere product similarity is not sufficient for applying the CUP method, unless the economic circumstances surrounding the transaction is also similar.

Further, the reasoning behind the rejection of the Resale Price Method, and the ITAT's conclusion with regard to its applicability only from an Indian Transfer Pricing perspective, in our humble submission, needs reconsideration, as application of any of the specified methods under section 92C is not restricted to the Indian Enterprise, being the tested party, and the Foreign AE can also be a tested party for the purpose of comparability analysis.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.