Transfer Pricing in India

Comparable Uncontrolled Price CUP Method

CUP method

Transfer pricing can be defined as the price paid for the goods or services provided from one unit of an organisation to the other unit situated in different countries. To calculate the transfer pricing, various methodologies have been devised out which Comparable Uncontrolled Price (CUP) method is one such method. This piece of writing discusses the meaning, methodology, usage, regulatory framework, advantages and disadvantages of CUP method.

What is Comparable Uncontrolled Price – CUP method?

The CUP method is used where the nature of the product dealt by an organisation is same and where similarity can also be observed in terms of geographical markets, credit terms and risk involved. There are two types of Comparable Uncontrolled Price methods:

Internal CUP method: In this case, the buyer is the subsidiary of the selling entity and the seller also sells the same product to some other external entity within the same geographical market where the subsidiary also operates.

External CUP method: When two unrelated entities are doing sale and purchase, it is called as external Comparable Uncontrolled Price method.

It has been observed that in external Comparable Uncontrolled Price method the parameters are not satisfied. However, in internal Comparable Uncontrolled Price method, the chances of success are very high. The ITAT has often said that internal Comparable Uncontrolled Price method should be preferred over External Comparable Uncontrolled Price method.

Some of the factors that are generally used for the purpose of Comparable Uncontrolled Price method are nature of service, time period, geographical market, contractual terms etc.

How does the CUP method work?

The first step to use CUP method is to first identify a comparable uncontrolled transaction which took place under comparable circumstances to the controlled transactions one intends to assess. Both internal as well as external comparables can be used for this purpose. Internal comparables can be those transactions that took place between one’s organisation and an independent party and external comparables can be transactions that took place between independent enterprises in comparable conditions to the controlled transaction.

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Once the above mentioned identification process has been completed, the next thing to be done is to compare the price and conditions of the controlled transaction between associated enterprises with the conditions and price of the comparable uncontrolled transaction between the independent enterprises that one has located. If the two prices come out to be the same, then these controlled transactions are said to be at arm’s length. In case the two prices are found to be different, then the transactions cannot be said to be at arm’s length price.

How to identify whether an uncontrolled transaction is comparable or not?

In order to identify whether an uncontrolled transactions is comparable or not, a person must find out answer to the following two questions:

  1. Whether any differences exist between the transactions that are being compared or between the parties entering in these transactions which could materially affect the price? The person comparing must take into account differences in the products and services, terms of contract, prevailing economic conditions, business strategies etc.
  2. In cases where the differences exist, is it possible to make reasonable adjustments to eliminate their effect on the prices that are being charged in the open market? If there exists no difference or if the differences can be reasonably adjusted to make to eliminate the effect on price, then the uncontrolled transaction can be said to be comparable. On the other, if there exist no differences and also reasonable adjustments cannot be made, then the transaction cannot be said to be comparable and an alternative method must be adopted.
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What can the CUP method be used for?

The CUP method is most useful for the commodity transactions where the same products are sold in the controlled and uncontrolled transactions. Here, an important thing to note is that products must be of similar quality, quantity and type in both the transactions and transactions ought to happen roughly at the same time in similar conditions, at the same stage in production or in distribution chain.  This method can also be used where there is slight difference in the product so long as the difference does not bring a material effect on the price. If there exists a material effect on the price and one fails to make adjustments to eliminate this material effect, then a need for different method arises.

The Comparable Uncontrolled Price method is also very useful for organisations who wish to set arm’s length payments for intercompany loans or conduct transactions which involve royalty payments.    

What are the regulations on CUP method?

The regulations related to Comparable Uncontrolled Price method are found in Rule 10B(1)(a) of the Income Tax Rules, 1962. The regulations state that:

  1. The price must be identified which is charged or paid for property transferred or services rendered in a comparable uncontrolled transaction.
  2. Such price is adjusted to the account for differences, if any, between the international transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions which could materially affect the price in the open market
  3. The adjusted price that is arrived in the sub clause (ii) is taken as the arm’s length price in respect to the property transferred or services rendered in the international transaction
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Advantages and Disadvantages of CUP method


  • Since CUP method uses market price, it becomes the most direct way of finding the arm’s length conditions. The OECD[1] also prefers Comparable Uncontrolled Price method whenever there is a choice for any analysis wherever comparable data is available.
  • Comparable Uncontrolled Price method is very much ideal for commodity transactions since these are highly comparable and it is comparatively easy to find out reliable comparable data.
  • Comparable Uncontrolled Price method also provides the convenience of combining it with other methods of transfer pricing. The only thing to take into account is that the other method must be appropriate.
  • Comparable Uncontrolled Price method also reduces the risks in transfer pricing and taxes since it provides ample evidence to be shown to the tax authorities that the transactions are directly aligned with the market conditions.


  • It is often difficult to find comparable uncontrolled transactions which meet the strict comparability criteria of CUP method. Even small differences in the product or conditions have the potential of making a material effect on price.
  • It is also possible that the adjustments made can reduce liability and accuracy of the analysis using Comparable Uncontrolled Price method. This is dependent on the extent and reliability of the adjustments made using Comparable Uncontrolled Price method.


Among other methods, CUP method is the most effective transfer pricing method. However, it can be time consuming and may get complicated at times. Therefore, it is suggested for the organisations to take care of it and avail the services of professionals in getting it done.

Read our Article:An introduction to the 5 Transfer Pricing Methods

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