Canada Ltd., a Canadian company has a subsidiary, Maharana Ltd. in India. Canada Ltd. sells computer monitors to Maharana Ltd. for resale in India. It also sells computer monitors to MCI Ltd., another computer reseller.

Canada Ltd., the foreign company and Maharana Ltd., the Indian company are associated enterprises. Since Canada Ltd. is the holding company of Maharana Ltd. Canada Ltd. sells computer monitors to Maharana Ltd. for resale in India. Canada Ltd. also sells identical computer monitors to MCI Ltd., which is not an associated enterprise. The price charged by Canada Ltd. for a similar product transferred in comparable uncontrolled transaction is, therefore, identifiable. Therefore, Comparable Uncontrolled Price (CUP) method for determining arm's length price can be applied. While applying CUP method, the price in comparable uncontrolled transaction needs to be adjusted to account for difference, if any, between the international transaction (i.e., transaction between Canada Ltd. and Maharana Ltd.) and uncontrolled transaction (i.e., transaction between Canada Ltd. and MCI Ltd.) and the price so adjusted shall be the arm's length price for the international transaction. For sale of monitors by MCI Ltd., Canada Ltd. is responsible for warranty for 3 months. The price charged by Canada Ltd. to MCI Ltd. includes the charge for warranty for 3 months. Hence arm's length price for computer monitors being sold by Canada Ltd. to Maharana Ltd. would be: Particulars Amount in ₹ Sale price charged by Canada Ltd. to MCI Ltd. 9,000 Less: Cost of warranty included in the price charged to MCI Ltd. (1,000 x 3/12) (250) Arm's length price 8,750 Actual price paid by Maharana Ltd. to Canada Ltd. 10,000 Difference per unit 1,250 No. of units supplied by Canada Ltd. to Maharana Ltd. 40,000 units Addition required to be made in the computation of total income of Maharana Ltd. (₹ 1,250 per unit * 40,000 unit) 5,00,00,000 Note: No deduction under chapter VI-A would be allowable in respect of the enhanced income of ₹ 5.00 crores.