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TMI Blog2023 (6) TMI 761X X X X Extracts X X X X X X X X Extracts X X X X ..... ed above at the time of the hearing." 2. The subject matter and the issues involved in the present appeal are the deletion of addition by the Ld. CIT(A) of Rs. 11,33,95,067/- made by the A.O. on account of transfer pricing issues and accepting the assessee's additional evidence contrary to the conditions laid down in Rule 46A(1) of the Income Tax Rules 1962. 3. As per the records the brief facts of the case are as under: The assessee company belongs to the Schlumberger Group and is a wholly owned subsidiary of Schlumberger B.V., Netherlands. During the year, the assessee had entered into international transactions as under: Transactions of repurchase of traded/furnished goods Rs. 56,17,99,102/- Purchase of fixed assets Rs. 35,25,038/- Borrowings Rs. 7,56,48,687/- The assessee filed its return of income declaring a loss of Rs. 10,86,15,300/-. 4. The facts of the case are that the assessee company is a reseller of products of Schlumberger Sema, dealing only in items purchased from its AEs. The assessee has eroded its net worth as a result of continuing losses year after year since its inception. The details submitted by the assessee company reveal that its gross margin ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the CUP data produced by the appellant. (5) The product, namely, 8K card is same in terms of its quality, utility, product code (M64LM11), physical attributes, etc. in all the years. (6) The appellant has purchased the same card from its US AE as well as from its Hong Kong AE. There is no difference between the 8K cards purchased from its US AE and Hong Kong AE in terms of its quality, attributes and utility. However, the data produced by the assessee during the appeal proceedings related to earlier years. Technology changes very fast, and along with it the old technology becomes obsolete. Price of the out dated technology falls very drastically. In assessee's own admission, the 8K cards were becoming out dated. The business cycle was for 12 to 18 months as per the assessee's submission. This is self evident that during FY 200102, the US-AE did not sell 8K cards to anybody else except to assessee. If the product is becoming out dated, it's price declines drastically. Therefore it is difficult accept the proposition that the earlier year prices were having significant influence over the current year prices in this case. On the contrary, the evidence only show that the prices ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same FY 2001-02. Since, the determination of arm's length price of the international transaction is for the purchases made in FY 2001- 02, the CUP available for the same financial year is more suitable instead of using the data for the earlier years. This is also justified because the technology involved in this area of business is fast changing and evolving. Higher memory cards are produced at cheaper rates at the time goes by. Even though the quality, usability, physical attributes, utility etc. of 8K cards might have been same for the earlier years as compared to the FY 2001-02, the price of this kind of products are more influenced by other products of similar nature either of higher quality in terms of speed or in terms of storage capacity or shrinking of the physical size of the cards. Therefore, element of time has a strong bearing on the product prices. In view of this, I am of the opinion that the CUP available in the same financial year is more suitable for benchmarking purposes since they are not much affected bv the time factor in comparability. Therefore, selling price of the 8K cards of Hong Kong AE to the unrelated parties should be taken as a CUP. They should be use ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... could be at arm's length. The appellant had purchased 8K cards much below this rate from its HK-AE and therefore purchase of 8K card from HK-AE is to be held at arm's length. However, appellant had purchased 8K cards from US-AE at the rate of USD 2.2 per card for the entire period. Therefore, difference between the purchase price of 8K card at USD 2.2 and arm's length price of 8K card at USD 1.99 should be the addition made per card. Through the Annexure V of the submission dated 16.01.2006 (page no. 26), the appellant has given the breakup of number of cards purchased from US-AE and its HK-AE. The total number of 8K cards purchased from US-AE is 19,78,164. The average rate of exchange between US Dollar and Indian Rupees was Rs. 47.3 per dollar. Therefore, the total addition on account of this is Rs. 187,93,367/-. Rest of the additions made under the segment 8K sim cards is to be deleted. The AO is directed to add Rs. 1,87,93,367/- to the returned income of the assessee. 9. As against the order of the CIT(A), the Department of Revenue preferred the present Appeal on the grounds mentioned above. 10. Ground No. 1 of the Revenue is directed against deletion of addition of Rs.11, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6.48 CUP b) Import of finished goods Rs. 5617.99 RPM c) Purchase of fixed assets Rs. 35.25 CUP Import of finished goods (i) Tested party : Assessee (ii) MAM : RPMN (Single segment excepting 8K cards) iii) PLI : Gross margin to sales. iv) Basis for search of comparables : Keywords "economic activity" and Products" v) No. of comparables selected : 8 Arithmetical mean 19.81% Gross margin of assessee vi) Gross margin of assessee if 8K : 6.34% segment included 14. It is not in dispute that the assessee Company itself chose Resale Price Method ('RPM') as the Most Appropriate Method in the TP Analysis. Further, the Ld. DR had also brought our attention to the TP Auditor's report produced at Page No. 114 of Paper Book 2, wherein it is clearly remarked that 'CUP cannot be applied in the absence of internal or external comparables'. The relevant portion of the TP auditor's findings is reproduced here under:- "However, due to lack of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arious judgments of ITAT and High Courts to submit that the remaining non-8k purchase transactions should be benchmarked separately. 18. On the issue of considering HK-AE's transactions with third parties as comparables, we find merit in the Revenue's argument. The ld. CIT(A)'s reasoning that geographical differences are immaterial to electronics market cannot be upheld based on the facts of the case. Further, it is clear that the ld. CIT(A) has decided that the HK-AE's sale price to third parties as comparable, without any information regarding the name of the parties the sale was made to, volume of sale, terms of sale etc. The said aspects are important factors in determining the sale price and the comparability cannot be decided in the absence of such details. 19. On the issue of comparability method to be employed, we find that during the TP Proceedings or during the appeal proceedings before the CIT(A), the assessee has not raised the issue that there was an incorrect selection of method (i.e., RPM) by the TPO. However, the Ld. CIT(A) adopted CUP based on incomplete data and ignoring geographical differences, which is contrary to TP Auditor's findings and contrary to TP Anal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter considering the above judgment of the Hon'ble High Court and other judgements. The relevant extract of the above judgment is given below: "5.2 The key question which, therefore, falls for our consideration is whether the segregation of these two transactions of payment of Royalty and Fees for technical services from the other international transactions, is justified? 5.3 The Hon'ble jurisdictional High Court in Sony Ericson Mobile Communication India (P.) Ltd. v. CIT [2015] 374 ITR118/231 Taxman 113/55 taxmann.com 240 (Delhi), has dealt with the circumstances in which aggregation can be done in the context of AMP expenses. The principles laid down in this case are universally applicable and are not confined to the peculiar facts of that case alone. It has been held that 'transaction includes the number of closely linked transactions.' Dealing with AMP expenses, it held vide paras 80 and 81 that inter-connected international transactions can be aggregated and section 92(3) does not prohibit the set off. Further, in paras 91, 121 and others, it held that the ALP of AMP expenses should be determined preferably in a bundled manner with the distribution activity. Vide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the CUP method based on incomplete data, ignoring geographical differences and contrary to the Assessee's own TP Analysis and contrary to TP Auditor's Report. The ld. CIT(A) has also erroneously aggregated the transactions despite judicial pronouncements on the issue. The various judicial pronouncements relied by the Ld. AR is not applicable in view of the above peculiar facts and circumstances of the present case. Thus, in our opinion, the order of the Ld. CIT (A) deserves to be set aside and the order of the TPO/A.O. shall be upheld by allowing the Ground No. 1 of the Revenue. Ground No.2 (Violation of Rule 46A) 25. Further in the Ground No. 2, the Revenue is aggrieved by the acceptance of additional evidence. It is the case of the Revenue that though the conditions laid down in Section 46A (1) were not satisfied, the CIT(A) has committed an error in accepting the additional evidence. On the other hand, the Ld. AR has drawn our attention to the order of the CIT(A) wherein the Ld. CIT(A) while dealing with the admission of additional evidence held as under:- "Therefore, comparing the earlier year data is not appropriate in case of such products. In view of this the addition ..... X X X X Extracts X X X X X X X X Extracts X X X X
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