GA Ltd., a German automobile company manufactures an important component used in SUV cars. It has a subsidiary S Ltd. in India. GA Ltd. sells the components @ ₹22,000 p.u. to S Ltd. for resale in India. GA Ltd. also sell

Transfer Pricing Adjustment for S Ltd. using Comparable Uncontrolled Price (CUP) Method: GA Ltd. (German company) and S Ltd. (Indian subsidiary) are Associated Enterprises (AEs). The transaction between them (sale of components) is an international transaction. GA Ltd. also sells identical components to an unrelated retailer, RT Ltd., in India. Therefore, the most appropriate method for determining the arm's length price (ALP) is the Comparable Uncontrolled Price (CUP) Method. Step 1: Determine the Arm's Length Price (ALP) per unit. Price charged by GA Ltd. to RT Ltd. (uncontrolled transaction) = ₹17,000 p.u. However, there is a difference in the annual maintenance responsibility: For RT Ltd.: GA Ltd. takes responsibility for 5 months. For S Ltd.: GA Ltd. leaves responsibility with S Ltd. (implying S Ltd. bears the full responsibility or cost). Both GA Ltd. and S Ltd. offered extended annual maintenance at a standard rate of ₹1,200 p.a. Cost of annual maintenance service included in price for RT Ltd. (for 5 months) = ₹1,200 x (5/12) = ₹500. To make the uncontrolled transaction comparable to the controlled transaction, we need to adjust the price charged to RT Ltd. for this difference in maintenance responsibility. Since GA Ltd. provides 5 months of maintenance to RT Ltd., the effective price for the component itself (without this maintenance service) would be higher. Adjusted ALP per unit = Price to RT Ltd. + Cost of maintenance provided by GA Ltd. to RT Ltd. Adjusted ALP per unit = ₹17,000 + ₹500 = ₹17,500. Step 2: Compare ALP with the price charged to S Ltd. Arm's Length Price (ALP) per unit = ₹17,500 Actual Price Charged by GA Ltd. to S Ltd. = ₹22,000 Step 3: Calculate the difference per unit. Difference in price per unit = Actual Price Charged - ALP = ₹22,000 - ₹17,500 = ₹4,500. Since the actual price charged to S Ltd. (₹22,000) is higher than the ALP (₹17,500), S Ltd. has paid more than the arm's length price, which would reduce its taxable income in India. An adjustment is required to increase S Ltd.'s income. Step 4: Calculate the total adjustment. Number of units sold to S Ltd. = 5,000 units Addition required to be made in the total income of S Ltd. = Difference per unit x Number of units sold = ₹4,500 x 5,000 = ₹2,25,00,000. Conclusion: An addition of ₹2,25,00,000 needs to be made to the total income of S Ltd. to bring the transaction to arm's length.