The Resale Price Provisions: Distributors and Gross Margin

The resale price provisions sit inside the methods set of Chapter 2 of the OECD Guidelines (2.62-2.80). The method works backwards: the reseller’s resale price to an independent customer, less a comparable gross mark-up, is the arm’s length purchase price. The tested party is the reseller — typically a limited-risk distributor — and the method is the natural home of distributor benchmarks where the resale price to unrelated customers is observable.

The provisions at a glance

Subject	What it covers
The RPM in principle	The arm’s length price is the reseller’s resale price to an independent party, less a comparable gross mark-up that covers the reseller’s costs and a normal profit
The tested party	The reseller (or limited-risk distributor or agent) is the one-sided tested party, selected under the least-complex rule at 2.48 in Chapter 2
The gross mark-up	The mark-up on the cost of goods sold — the reseller’s distribution cost plus a normal profit — that is the PLI for the method
When it fits	Distributors that resell to unrelated customers at observable prices and hold little inventory, market or product risk
Comparability and adjustments	The adjustments to the reseller’s results for measured, reliable differences — working capital, functions, market — before the mark-up is applied
The range the result is tested against	How the mark-up results of the comparables form the arm’s length range — developed in building the range

The tested party is the reseller

In paraphrase, the provision applies the method to the party whose result can be measured against the resale: the reseller. That selection follows the tested-party rule at 2.48 — the side with the least complex FAR profile, the one whose profitability is most reliably benchmarked. For a distributor that resells a branded or standard product, performs a defined distribution function, holds no material market risk and takes no product-development risk, the reseller is the tested party, and the benchmark is the gross mark-up the independent resellers earn.

The gross mark-up, and why it fits distributors

In paraphrase, the mark-up is the one independent resellers performing the same distribution function achieve — distribution cost plus a normal profit, measured on the cost of goods sold. It is the PLI the method carries, and the reason the method fits the limited-risk distributor profile:

• The resale price is observable. The reseller sells to unrelated customers, so the starting point of the method is a real market price.
• The function is routine. A defined distribution function with limited assets and risks is exactly the profile 2.48 points to, and the gross mark-up is the PLI that reflects it.
• The risk is the reseller’s, not the manufacturer’s. Where the distributor bears inventory and receivable risk but not market or product risk, the backwards method prices the purchase correctly.

When the RPM is not the method

• No observable resale. If the distributor sells only to group entities, there is no resale to work backwards from — the method is unavailable, not inapplicable.
• The reseller is not routine. A distributor that carries its own brand, develops the market or bears product risk is not the 2.48 tested party for this method; the analysis moves to cost based methods or profit split.
• The adjustment is large. Where the gap between the tested party and the comparables needs more than measured, reliable adjustments, the adjust-versus-exclude rule at 3.30-3.31 excludes the comparable set rather than forcing the mark-up.

What it means in practice

The RPM is the most-cited method in Indian distributor benchmarks, and its working content is the mark-up: which base, which PLI, which range. The method-specific mechanics — including the range construction and the median question — are carried in building the range; the method itself is covered in the resale price method guide.

Where this takes you

• The RPM in practice: the resale price method guide.
• The profile it fits: limited-risk distributor.
• The range the result is tested against: building the range.
• The method it is often compared against for the same distributor: cost plus method.