Contents - AL-Tax

5.4 Analysis Under Alternative Regime 87many commodities, diamond pricing is not exceptionally volatile over comparativelyshort periods.)The Group’s categories are defined by certain ranges of color, quality and cut.Within categories, quality gradations are generally moderate, albeit clearly in evidence.Thus, for example, variations of 5%–15% in IS’ prices for stones includedin the same internal category, sold to the same third party on the same date, arecommon. However, in limited instances, there are significant variations in quality(and hence, price) within grades, as evidenced by the fact that IS’ prices for stonessold to the same third party on the same date and in the same category periodicallydiffer by as much as 40%–50%.We interpret the CUP methodology, as applied to IS, as follows: We postulate that, within the Group’s internal grades, pricing on the majority ofmatched intercompany and third party transactions (75%–80%) should not differby more than 10%–15% in either direction (and not consistently in only onedirection). These comparatively limited differentials in price may be attributableto (a) limited variations in quality within categories, (b) the fact that prices areestablished through bilateral negotiations, (c) the differing dates of the transactionsbeing compared or (d) a combination thereof. Wider disparities in prices on the remaining 20%–25% of IS’ matched transactionscan reasonably be attributed to significant differences in the diamonds’physical properties, widely differing assessments of value, material changes inmarket conditions (within quarters) or a combination thereof. If the above observations are borne out, IS’ percentage discounts from RAP,used to establish its intercompany prices on sales of generic stones to USS, areconsistent with arm’s length prices. Hence, under this set of facts, IS’ transferpricing practices vis-a-vis non-proprietary diamonds would satisfy the arm’slength standard. Disparities in excess of 10%–15% in the pricing of matched transactions, onmore than 25% of such transactions, would indicate that IS’ intercompany pricingof generic polished diamonds is not arm’s length.Our quantitative analysis of IS’ matched transactions entails (a) computing theabsolute value of the difference in intercompany and third party prices on individualpaired transactions, expressed as a percentage of the higher price, (b) determiningthe percentage of the total sample transactions for which this difference was lessthan or equal to 10% and 15%, respectively, and (c) quantifying the percentage oftransactions, within each of these thresholds, for which the intercompany price washigher than the third party price, and conversely.Our findings are as follows: For close to 90% of all paired transactions, IS’ third party and intercompanyprices differed by 15% or less. The intercompany price exceeded the third party price in 46% of paired transactionsmeeting the 15% threshold, and the third party price exceeded the intercompanyprice in 54% of paired transactions meeting the 15% threshold.