How to calculate ALP?

Determination of price as per the guidelines notes of institute of chartered accountant

CUP (Comparable Uncontrolled Price Method)

(Applicability: When similar an uncontrolled transaction is available. Where all the term of contract is identical for both, domestic and uncontrolled transaction or otherwise the differences are quantifiable and can be adjusted.) 

Steps:

1. Determine the price charged or paid for the property transferred or service provided in a ‘comparable uncontrolled transaction’.
2. Such price is than adjusted to account for the functional difference between the international transaction and the comparable uncontrolled transaction, which could materially affect the price in the open market.
3. Such adjusted price is the arm’s length price

Resale Price Method:

(Applicability: For transfer of good with no or little addition)

Steps:

1. Determine the price at which the property purchased or service obtained by the enterprise from an associated enterprise are re-sold or provided to an unrelated enterprise.

2. Such resale price is reduced by normal gross profit margin accruing to the enterprise to the enterprise from the purchase and resale of similar goods in a comparable uncontrolled transaction; if there is no comparable uncontrolled transaction, than take the gross profit of an unrelated person from purchase and resale of similar goods.

3. Then reduce the expenses incurred by the enterprise in connection with purchase of property

4. The price so arrived is adjusted to account for the functional difference in the international transaction which could materially affect the gross profit margin in the open market.

5. The adjusted price at is the ‘arm length price’. 

Profit Split Method:

(Applicability: It may be applicable mainly in international transaction involving transfer of unique intangible assets or in multiple international transactions which are so interrelated that they cannot be evaluated separately for the purpose of determining the arm’s length price of any one transaction.

Steps:

1. Determine the combined net profit of the associated enterprise’s from the international transaction.
2. Evaluate the contribution made by each party considering the functions, responsibility, assets used and external market data.
3. Split the combined net profit in the ratio of the contribution determined above.
4. Take the profit to arrive at the ALP.

Cost Plus Method:

(Applicability : In case of semi- finished goods sold to associate and non associate party)

Steps:

1. Determine the direct and indirect costs of production in respect of property or service transferred to associated enterprise.
2. Determine normal gross profit arising from uncontrolled transactions.
3. Adjust normal gross profit for the functional and other difference in the international transaction.
4. Costs plus adjusted gross profit mark up will be ALP.

Transaction Net Margin Method:

(Applicability: Where one of the parties to the transaction is complex and has many inter related activities or when it is difficult to obtain reliable information about one of the parties)

Steps:

1. Determine the net profit margin from the international transaction with an associated enterprise.
2. Net Profit Margin from similar uncontrolled transaction is computed.
3. Adjust the net profit of uncontrolled transaction for difference between the transaction.
4. Net profit margin so arrived at is used to get the ALP.