Arm’s Length Range

The arm’s length range is an everchanging range as different transfer pricing methods yield a different range of figures which may all be workable. With regard to this, the arm’s length principle can only generate a comparison of the set of conditions that would have been approved between independent enterprises.

The variation of the range of price indicates that independent enterprises may not set the exact price in comparable transactions and there may be a different amount of comparability in those comparable transactions.

The most valuable legal significance of the application of a range of price is when the transaction happens to be in the arm’s length range, no adjustments can be made to the profit of the taxpayer following Article 9(1)[1]. The range it falls in is inconsequential as long it does not go outside the arm’s length, there would be no legal basis for adjustment.

It has been an area of concern for where the adjustment should fall within the range and fundamentally requires a specific single amount in order to create the basis for the calculation of profits. This is often a major reason for disputes between tax authorities and taxpayers as there is guidance that any point in the range complies with the guidelines but no specific one can be clearly pointed out.

CIT[2], German Federal Fiscal[3] & GlaxoSmith[4]

In CIT[5], the Indian High Court ruled that the arm’s length price can be estimated by the calculation of the arithmetic mean of given prices in case of more than one price appearing in arm’s length range.

In comparison, the German Federal Fiscal Court[6] disdained automatic adjustment of profits to a particular point in the range. They considered all the possibilities of choosing the adjustment and came to the conclusion that intrinsically choosing the higher or lower limit would not be penalized hence the courts concluded adjustment could be made which is the most beneficial to the taxpayer as any other outcome would be akin to punishment.

GlaxoSmith[7] had somewhat of a similar approach to the German Federal Fiscal Court[8] as the tax administration concluded that if the Canadian supplier paid a price to the international associated supplier then it should be the highest price an independent Canadian company paid for the identical product.

Adjustments on comparability

Although OECD Guidelines identify controlled and uncontrolled transactions as comparable when there are no differences between the transactions that have a materialistic effect on the factor in the analysis, or if tolerable accurate adjustments are made to remove the influence of such differences[9], but transfer pricing is not definite and requires judgement[10].

The point in question is the relationship regarding the materialistic influence. The comparability in this situation does not signify the two different transactions as equal. Some changes will always remain between a beneficial comparable and a controlled transaction.[11] In a controlled and uncontrolled transaction, only reasonable accurate adjustments are capable of removing the differences.

Complex adjustments that convey a fabricated impression of the comparable search as ‘reliable and accurate’ is another caveat mentioned by the OECD[12]. The objective of comparability adjustments is to boost the accuracy of the results. Even if there is an unadjusted difference, as long as it does not have a materialistic influence on the accuracy of comparison, it may become appropriate. It is worth noting that plentiful adjustments to essential comparability factors may be an indicator of a non-comparable in the uncontrolled transaction[13]. 

Glaxo[14] & SNF[15]

SNF[16] and GlaxoSmith[17] are two such cases that deal with the above-mentioned problem. In GlaxoSmith[18], the Canadian tax administration declined to accept thirteen irrelevant European companies among the potential comparables presented by the taxpayer on the grounds that the market structure and transactions involved in Europe were significantly different from Canada. The specific differences regarding manufacture, marketing and sale may differ vastly even in different areas inside Canada, hence the judgment ruled it unacceptable to refund for these differences through adjustments.

SNF[19] is contradictory example, as the courts accepted international transactions between an overseas party as comparable. This case mainly concerned chemicals that were transported. The court noted that the suppliers in overseas countries were comparable as they carried out an identical function to the home supplier. Hence fair adjustments were made regarding volume discounts, and they were comparable.

It is essential for transactions to be identified and considered while focusing on the facts and circumstances.[20] Any results that generate extreme profits or losses need to be scrutinized as it may disclose an error in comparability or extraordinary conditions[21].

Google India[22] is such an example with an unusually huge profit margin as a comparable as the comparables in the said case were influenced by bizarre events and that comparison may not be removed until it considerably affected the enterprise’s profits and business model.[23]

[1] OECD Guidelines para 3.60

[2] CIT v Mentor Graphics (Noida) Pvt Ltd (ITA No. 1114/Del/2008)

[3] The German Federal Fiscal Court decision of 17 October 2001, I R 103/00 (BstBl II 2004 171)

[4] GlaxoSmithKline Inc v the Queen 2008 TCC 324

[5] CIT v Mentor Graphics (Noida) Pvt Ltd (ITA No. 1114/Del/2008)

[6] I R 103/00 (BstBl II 2004 171)

[7] GlaxoSmithKline Inc v the Queen 2008 TCC 324

[8] I R 103/00 (BstBl II 2004 171)

[9] OECD Guidelines, Glossary

[10] OECD Guidelines, para1.13

[11] Reimer E. and Rust, A., Eds Klaus Vogel on Double Taxation Conventions 4th Ed (Wolters


[12] OECD Guidelines, paragraph 3.52

[13] OECD Guidelines, paragraph 3.51

[14] GlaxoSmithKline Inc v the Queen [2008] TCC 324

[15] SNF (Australia) Pty Ltd v FCT [2011] FCAFC 74

[16] ibid

[17] GlaxoSmithKline Inc v the Queen [2008] TCC 324

[18] ibid

[19] SNF (Australia) Pty Ltd v FCT [2011] FCAFC 74

[20] Cahiers de Droit International Vol 77a, Transfer pricing in the absence of comparable market

prices. International Fiscal Association 1992 General Report

[21] OECD Guidelines para 3.63

[22] Google India P. Ltd. v DCIT (ITA No.1368/Bang/2010)

[23] Platform for Collaboration on Tax Discussion Draft: A Toolkit for Addressing Difficulties in

Accessing Comparables Data for Transfer Pricing Analyses

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September 2023