Resale price method

C. RESALE PRICE METHOD.

2.21 The resale Price method begins with the Price at which a product that has been purchased from an associated enterprise is resold to an independent enterprise. This price (the resale price) is then reduced by an appropriate gross margin on this price (the resale price margin) representing the amount out of which the reseller would seek to cover its selling andother operating expenses and, in the light of the functions performed (taking into account assets used and risks assumed), make can be regarded, after adjustment for other costs associated with the purchase of the product (e.g. customs duties), as an arm’s length price for the original transfer of property between where it is applied to marketing operations.

2.22 The resale price margin of thereseller in the controlled transaction may be determined by reference to the resale price margin that the same reseller earns on items purchased and sold in comparable uncontrolled transactions (internal comparable). Also, the resale price margin earned by an independent enterprise in comparable uncontrolled transactions may serve as a guide (external comparable). Where the reseller is carrying on ageneral brokerage business, the resale price margin may be related to an brokerage fee, which is usually calculated as percentage of the sales price of the sales prices of the product sold. The determination of the resale price margin in such a case should take into account whether the broker is acting as an agent or a principal.

2.23 Following the principles in Chapter I, an uncontrolledtransaction is comparable to a controlled transaction (i.e. it is a comparable uncontrolled transaction) for purposes of the resale price methods if one of two conditions is met: a) none of the differences (if any) between the transactions being compared or between the enterprises undertaking those transactions could materially affect the resale price margin in the open market; or, b) reasonablyaccurate adjustments can be made to eliminate the material effects of such differences, In making comparisons for purposes of the resale price method, fewer adjustments are normally needed to account for product differences that under the CUP method, because minor product differences are less likely to have as material an effect on profits margins as they do on price.

2.24 In the market economy, thecompensation for performing similar functions would tend to be equalized across different activities. In contrast, prices for different products were substitutes for one another. Because gross profit margins represent gross compensation, after the cost of sale for specific functions performed (taking into account assets used and risks assumed), product differences are less significant. For example,the facts may indicate that a distribution company performs the same functions (taking into account assets used and risks assumed) selling toasters as it would selling blenders, and hence in a market economy there should be a similar level of compensation for the two activities. However, consumers would not consider toaster and blenders to be particularly close substitutes, and hence there wouldbe no reason to expect their prices to be the same.

2.25 Although broader product differences can be allowed in the resale price method, the property transferred in the controlled transaction must still be compared to that being transferred in the uncontrolled transaction. Broader differences are more likely to be reflected in difference in functions performed between the parties to thecontrolled and uncontrolled transactions. While less product comparability may be required in using the resale price method, it remains the case that closer comparability of products will produce a better result. For example, where there is a valuable or unique intangible involved in the transaction, product similarly may assume greater importance and particular attention should be paid to it to ensure...