Direct Tax Laws & International TaxationMCQQuestion 5850 of 986

Orion India Ltd. sold 5,000 units of specialty microchips to its associated enterprise (AE) Orion Inc., USA at $120 per unit. In an uncontrolled transaction, Orion India sold 1,000 identical units to an independent third party Beta Corp in USA at $150 per unit. Orion India provides 3 months credit to Beta Corp (cost of credit = $5 per unit), whereas sales to the AE are against 100% advance payment. Compute the Arm's Length Price (ALP) per unit under the Comparable Uncontrolled Price (CUP) method.

Select Your Answer (Keyboard: A, B, C, D)

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Correct Answer

✅ Option B — $145 per unit

All Options:

A$150 per unit
B$145 per unit ✓
C$155 per unit
D$120 per unit

Detailed Solution & Explanation

Application of CUP Method under Rule 10B(1)(a) of the Income-tax Rules, 1962:
1. **Comparable Uncontrolled Price**: $150 per unit.
2. **Functional / Economic Adjustment**: Credit period of 3 months was extended to the independent third party Beta Corp, which includes a built-in interest financing cost of $5.
3. Sales to the Associated Enterprise (AE) are made on advance payment basis (no credit cost).

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Hence, **Option B** is the correct answer.

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