CUP Price stands for comparable uncontrolled Price. As the name suggests,CUP Price compares the price in the transaction which is being evaluated for arm’s length, with the price charged /received between two unrelated parties for similar goods or services.
CUP Price take place under two cases, i.e, where the transaction is between : –
- the company and unrelated third party (Internal CUP Price) . In such cases, the concerned company buys, or sells similar goods or services in comparable transactions with unrelated enterprises; or
- Two unrelated parties (External CUP Price) . In such cases, two Unrelated enterprises buy or sell similar goods or services, as is being done between the AE.
STEPS INVOLVED IN CUP PRICE METHOD – Assume examining transactions of X Ltd. for transfer pricing purpose
STEP 1 : – Identifying prices of comparable uncontrolled transaction/s
Identify prices charged from or paid to, on transfer of goods or services
in comparable uncontrolled transaction/s by X Ltd. Such transaction could be entered into by X Ltd. itself or between two unrelated enterprise.
STEP 2 : – Adjustments to uncontrolled Price
The price arrived at Step 1 should be adjusted for the following : –
- If there are any functional differences between the international transaction or the Specified Domestic Transaction (SDT) under review, and the comparable uncontrolled transactions , adjustment should be made for such functional differences to arrive at the CUP Price. Functional differences could be for the following : –
- Quality of product or service,
- Contractual terms,
- Credit terms (one entity allows a credit of 1 month and other allows credit of 6 months),
- Transport terms – Free on Board, Cost, Insurance and Freight
- Market level (wholesale, retail etc.));
- If there are any differences between the enterprises entering into such transactions, such as size of the entity (if one entity is market leader and other is a small startup in same segment), operating environment, which could materially affect the price in the open market, the price should be adjusted for such differences.
Such adjusted price will be the arm’s length price.