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HMRC internal manual

International Manual

Transfer pricing: Methodologies: OECD Guidelines: Comparable uncontrolled price: the search for comparables

DSG Retail and others v HMRC

The practical difficulties of searching for reliable comparable uncontrolled transactions (see INTM421030) were demonstrated in DSG Retail and others v HMRC (TC00001), a case heard by the Special Commissioners and decided in HMRC’s favour. The hearing concerned extended warranties (‘EW’) which Dixons Stores Group (‘the group’) sold to its customers when they bought electrical goods in its shops. The EWs took the form of service contracts sold on behalf of a newly formed Isle of Man company owned by third parties. This company contracted with the group’s Isle of Man-based captive insurance company, DISL, to insure the contracts for 100% of the risk. HMRC contended that the terms of the arrangements were more favourable to DISL than would have been agreed at arm’s length and did not sufficiently recognise the importance of the point of sale advantage of the UK stores operated by the group.

Differences between the parties’ bargaining positions (see INTM485050 for more on the concept of bargaining power) were found to be crucial to the various arm’s length commission arrangements put forward by the group as CUPs in an attempt to demonstrate that the group’s UK operations were adequately rewarded for their point of sale advantage in relation to the sale of EWs. The Special Commissioners did not find a sufficient degree of comparability in any of these, or any other evidence which would allow adjustments to be made to provide a CUP.

For example one of the arrangements put forward related to a much earlier period, when the market for EWs on domestic electrical goods was quite different. Others related to sales of warranties on a single type of product (mobile phones) rather than a range of products, or to a different place and method of sale (so the advantage of offering the EW at the point of sale of the electrical goods was not present).

The level of risk taken on by the insurer was found to be an important factor in the bargaining position of the parties. A commission agreement between a major retailer of a similar range of goods and a third-party insurer dating back to 1982 was not considered to provide a reliable comparable. At that time there had been little available data on levels of claims (loss ratios) and the profitability of the business would have been much more uncertain than it was 15 years later. The bargaining position of retailers would have improved as more data showing low loss ratios became available.

The decision in this case shows that rigorous analysis is needed when identifying comparables if a CUP is to be used. However, in carrying out any comparability analysis careful consideration should not only be given to the relevance of differences such as those mentioned above to the controlled transaction, but also to the feasibility of reasonably accurate comparability adjustments.

For example if there were no significant changes in market conditions other than inflation since the time of an uncontrolled transaction it might be possible simply to adjust for observed price increases to provide a CUP for a later period.