TaxTMI 
TaxTMI 
2016 (9) TMI 148
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....llant, manufacturer of printed circuit boards, in respect of exports amounting to INR 197,55.19.0001- made by the appellant to AT &8 AG for further sale to independent customers at same prices. 2. That on the facts and in the circumstances of the case and in law, the DRP/AO erred in not appreciating that tile Comparable Uncontrolled Price ('CUP') Method would be the most appropriate method in determining the arm's length price of the international transaction involving sale of printed circuit boards by the appellant 10 AT &S AG. 3. That on the facts and in the circumstances of the case and in law, the DRP/AO failed to adopt transaction-by-transaction approach and determine separately the arm's length price of the international transaction involving payment of distribution commission by the appellant to AT&S AG, having been income in the hands of AT&S AG, which was netted of against sales in the books of the appellant and duly demonstrated before the DRP/TPO. 4. That on the facts and in the circumstances of the case and in law, the DRP/AO erred in disregarding the principle of consistency enunciated by the Hon'ble Supreme Court of India in various judici....
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.... industries. The assessee filed its income tax return declaring a loss of Rs. 74,11,66,860/-. Thereafter the case was selected for scrutiny and accordingly notice under section 143(2) of the Act was issued and served upon the assessee. The assessee during the year had international transactions with its Associated Enterprises (AE for short) for supplying the PCB manufactured by it. The Assessing Officer after having the approval from the CIT made reference to the Transfer Pricing Officer (TPO for short) u/s 92 CA(1) of the Act to determine the Arm's Length Price (for short ALP) in respect of international transactions reported in the audit report in form 3CEB as submitted by the assessee. The assessee, for the year under consideration has undertaken various international transaction inter-alia export of PCB for a value of Rs.197,55,19,200/- to its AE which is under dispute. The transfer pricing study of the assessee for determining the ALP of the PCB goods exported to its AE reveals the following facts :- The assessee is performing various functions such as production & manufacturing, Logistics, warranty support, Sales & marketing for Indian Customers, Information technology and....
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.... Price. 5.1 However during the assessment proceedings, TPO observed that only 9 companies are mentioned in the TP report though the assessee claimed to have selected 25 companies. The companies selected by the assessee are in different activity such as computer, fax, printer, toner, telecommunication products, PC hardware, software, peripherals, projectors, cartridges, scanner, USB, TVs etc. but not the PCB. The Annual report, FAR analysis of the companies selected as comparables has not been submitted to ascertain the functional comparability. The annual report and financial statement of the tested party was also not submitted to ascertain the functional comparability. In view of above, the TPO issued the show cause notice for rejecting the TP study of the assessee with regard to the determination of ALP for the export of PCB. The TPO proceeded to determine the ALP by selecting the assessee as tested party i.e. AT& S India with TNMM method and PLI as operating profit on sales. Accordingly the TPO searched for suitable comparables from different data base of public domain on certain criteria as mentioned on page 58 of the TPO order. Accordingly, the TPO worked out the average me....
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....ee during assessment proceedings has also submitted the current year annual reports of 20 comparable companies for the purpose of functional analysis. The assessee from the 20 comparable companies worked out the arithmetic mean @ 2.95% and the return on sales of AE for the year under consideration is 2.6% as certified by PWC. The assessee has also submitted audited standalone financial statements of the tested party for the year 2009-10 and the consolidated financial statements of the tested party for the year 2010-11 for the purpose of making the functional analysis. As per the OECD guidelines the tested party should be the one that has less complex functional analysis. In the instant case the assessee is a full fledged manufacturer and therefore it has more complex functions rather than the AE as it has less risks and its function is limited to distribution activity. The AO in the AY 2009-10 and 2010-11 has accepted the AE as tested party for carrying out foreign bench marking in relation to the aforesaid international transactions. 6. In the instant case the AE is entitled only for distribution commission @ 6% of the gross price and preliminary guarantee price @ 2% of the ....
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.... and relied. Besides the above the TP study was not acceptable as the AE was treated the tested and FAR analysis of the comparable companies selected are not available. 6.1 The TPO has also not accepted the financial of the distribution segment of AE as it was not the part of annual report of the AE and it was prepared for the management only for the purpose of tax audit in India. The TPO also observed with certain defects in the financial information submitted by the assessee which are enumerated on page 73 of the assessment order. The TPO also not accepted the plea of the assessee for treating the AE as tested party in view of the Hon'ble Mumbai ITAT order in the case of Onward Technologies Limited Vs. DCIT 35 taxmann.com 584 and Cyber tech System & Software Limited Vs. ACIT 33 taxmann.com 371 where it was decided that only Indian entity can be held as tested party. In the instant case the financial prepared of the AE are based on the GAAP which are different with India GAAP. Besides the foreign companies selected for comparables are not following Indian Accounting standards so those companies cannot be compared. With regard to the consistency of the assessee method a....
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....n describing the assessee as a contract manufacturer. 7.2 However the DRP has disregarded the claim of the assessee and upheld the order of the AO after making some changes and by observing as under : "The panel has examined FAR analysis of the assessee and its foreign AE. It is seen that foreign AE is gathering' business by obtaining orders from potential customers abroad. It is negotiating sale price with customers and is liable to customer regarding product quality and warranty. All credit risk lies with foreign AE. It is responsible for getting the product manufactured from its group company having right kind of technology for the product under consideration. The foreign AE is having substantial intangibles. On the other hand, the assessee is responsible for manufacturing the product as asked for by its foreign AE. It is assured of pre-determined sale price and is not liable to end customer [or warranty etc. Though the assessee may not be in a position of contract' manufacture in strict sense, yet it is not even full-fledged manufacturer. Considering function and risk analysis as above, it can be said that the assessee is more close to contract manufacturer. In no....
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....e operates. The panel is of the view that TPO should have applied export income filter so as to enhance comparability analysis. The panel considers 50% export income filter to be appropriate and therefore these companies shall not be good comparables. Regarding Centrum Electronics Ltd., the assessee submitted that it has two segments, product and service. Further, a scheme of amalgamation has been approved by Hon'ble HC which indicates exceptional economic event. DRP is of the view that since TPO has used only product segment for comparability analysis and the assessee could not establish whether amalgamation has impacted the profitability of the company, it is a good comparable. Regarding Essae Electronics Pvt. Ltd., the assessee submitted that its financials are not available on public domain. DRP is of the view that sufficient guidance is available from various judicial decisions that information collected by TPO cannot be used at back of the assessee. Therefore, this comparable is to be dropped. Regarding Fineline Circuit (L) Ltd., the assessee submitted that it operates in a bigger market. This objection of the assessee does not sound good as the assessee is also not....
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..... It is also important to note that AT&S AG further deducted preliminary warranty guarantee @ 2% of gross distributor's price out of the aforesaid sale proceeds for the purpose of incurring warranty expenses arising from further sale of PCBs of the appellant by AT&S AG to independent customers. It was also submitted that the total amount of deduction made by AT&S AG for preliminary warranty guarantee exceeded the actual warranty expenses incurred by AT&S AG during the relevant financial year and the excess deduction was returned by AT&S AG to the appellant as recorded in Form No. 3CEB. The distribution commission and preliminary warranty guarantee were thus netted off against sales in the books of the appellant and duly demonstrated before the DRP/AO. In order to substantiate the above facts, the assessee submitted copies of back-to-back invoices (i.e. invoices issued by the appellant to AT&S AG for sale of PCBs and the corresponding invoices issued by AT &S AG to independent customers in Europe for further sale of the PCBs imported from the appellant) on sample basis to the TPO [enclosed in page no. 347, 349 and 348 (computation) and 527 to 553 (copies of backto- back invoi....
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....from the appellant when the PCBs were delivered by the appellant to the warehouses of AT&S AG, AT&S AG was exposed to credit risk in relation to further sale by AT&S AG to independent customers in the open market as mentioned in paragraph no. S.S(a) of the Distribution Agreement. 9.1 In view of the ld. AR submitted that in the instant case, the prices at which PCBs were sold by the appellant to AT&S AG having been equal to the prices at which PCBs were sold by AT&S AG to independent customers. Therefore the international transaction involving sale of finished goods by the appellant to AT&S AG is at the arm's length principle as per the Indian Transfer Pricing Regulation under the CUP Method. In the instant case, AT&S AG earned income from the international transaction involving payment of distribution commission by the appellant to AT&S AG in return for distribution services received by the appellant from AT&S AG under the 'Distribution Agreement' during the relevant financial year. In view of the above it can be concluded that the income actually realized by AT&S AG in return for distribution services rendered to the appellant need to be compared with those of the c....
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.... DRP and made by the AO in the final assessment order has no valid basis in view of various decisions rendered by the Hon'ble Tribunals of our country, wherein the Hon'ble Tribunals have Honoured the 'principle of consistency' enunciated by the Hon'ble Supreme Court of India and directed bench marking of an international transaction on 'transaction-by-transaction' basis. The Hon'ble Tribunals in various decisions have accepted the selection of foreign tested party in appropriate cases and further accepted selection of foreign comparable companies available in foreign database where tested party is a foreign entity. Though the relevant decisions were submitted before the DRP during the course of proceedings, the same were disregarded by the DRP and the appellant did not get justice from the DRP. Finally the ld. AR prayed that the AE should be treated as tested party and its transfer pricing report should be accepted. Alternatively the AR also submitted that in case the assessee is treated as the tested party then CUP method should be applied for the determination of ALP. As the price charged by the assessee is same as the price charged by the AE from ....
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....ase. Further, it is equally if not more important to maintain and appropriately present evidence including but not limited to agreements, correspondence and other documents that bring out the actual contributions, capabilities, and other features of the concerned parties, ex-ante negotiations / studies, business strategies adopted by the management in the attendant circumstances, risk management strategies, data on comparables and the market (in terms of the geographic location; the size of the markets; the extent of competition in the markets and the relative competitive positions of the buyers and sellers, etc.) and other economic conditions, at the time of audit to substantiate the various claims / averments and pass the 'litmus test'. Such an approach would go a long way to avert protracted litigation and gain certainty in an ever-evolving field of transfer pricing. Ld. DR further relied in the case law in the case of Sony Ericsson Mobile Communication India Pvt. Ltd. v. CIT (ITA No. 16/2014) - Taxsutra.com, wherein the Hon'ble High Court held that distribution and marketing are intertwined and may be examined as bundled/inter-connected transactions Clubbing of closely linked t....
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....ion of the Hon'ble Mumbai Tribunal in the matter of Mattel Toys (I) (P) Ltd. vs. Deputy Commissioner of Income Tax, Circle-6(3) reported in [20131 34 taxmann.com 203 (Mumbai Trib.) .Further, the appellant has relied on various judicial decisions in its written submission which are reproduced as under: 2.7.75 Attention is further invited to the decision of the Hon 'ble Delhi Tribunal in the matter of Hughes Systique India (P) Ltd. vs. ACIT reported in [2073] 36 taxmann.com 47 (Delhi-Trib), wherein the Hon'ble Tribunal inter alia held that: " 6.5 The CUP method provides the most direct comparison for the purpose of determining the arm's length price of international transactions and is to be preferred over the other profit based methods. Reliance is placed in this regard on the following decisions: - Aztec Software & Technologies Services Ltd. vs. Asstt. CIT [2009] 107 ITO 141/162 Taxman 179 (Bang.)(SB) - UCB India (P) Ltd. v. Asstt CIT [2009130 SOT 95 (Mum.) - Gharda Chemicals Ltd. v. Dy. CIT [2070135 SOT 406(Mum.) - Intervet India (P) Ltd. v. Asstt CIT [2070139 SOT 93 (Mum.) - Asstt. CIT v. Dufon Laboratories [2070139 SOT 59 (Mum.) 2.7.76. Re....
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....below: "Internal CUP method envisages comparing the uncontrolled transactions of the appellant itself with other unrelated parties so as to determine the ALP with the AE. However, the external CUP method disregards the price charged or paid by the appellant to or from its unrelated parties and contemplates the comparison of the price so charged from or paid to its AE with some external dependent reliable price data under similar circumstances of transactions with AE. Ordinarily the Internal CUP method should be preferred over external Cup method as it neutralizes several distinguishing factors, such as the local factors and the economies available or unavailable to the appellant in particular, having bearing over the comparison of price charged from unrelated parties and AE". 1.2. The CUP method is followed to determine the price of the goods or services transacted whereas profit of international transaction between related parties is determined under TNMM method. In determining arm's length price, there are, two aspects viz. FAR an analysis and economic analysis. In the FAR analysis, after selection of most appropriate method, the comparison has to be made with respect t....
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....sk The Appellant faces minimal credit risk on sale of finished products to its AEs, because the risk of default on account of non-realization of sales proceeds is very negligible. Whereas, the Appellant bears the credit risk when it sells the finished goods to third parties, and would have to bear the loss on account of bad debts if it fails to realize the sales proceeds. iii. Difference in credit period The credit period offered by the Appellant to its AEs differs from the credit period offered by the Appellant to third parties. The Appellant has a policy of offering 30 days credit on sales made to its AEs, from the date of the airway bill. Whereas, the credit period offered to third parties is 45 days from the date of airway bill invoice. The aforesaid differences also have an impact on the pricing at which the products are sold by the Appellant to its AEs/ third parties. iv. Difference in Sales volume Quantity sold to the AE is almost 88 percent of total sales and the quantity sold to the third party constitute minimal. v. Marketing function It is important to note that with respect to sale of finished products to AEs, the Appellant is not required to undert....
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....ding (a) geographical location and size of market (b) overall economic development and level of competition in the market; and (c) whether the market are wholesale or retail. The true test, therefore, is whether the market in which uncontrolled transactions have taken place are materially different than the market in which controlled transactions have taken place. In a situation in which there are indeed material differences, including, of course, for the reason of geographical location and size of markets, those uncontrolled transactions cannot constitute valid comparables for benchmarking similar transactions between the AEs". Given the above, it is submitted that the CUP method cannot be considered as the most appropriate method to demonstrate the arm's length nature of international transaction pertaining to export of finished goods. 1.8 Now, it is better to appreciate the relevance TNMM method over the CUP method. 1.8.1 Meaning * Examines the net profit margin relative to an appropriate base that a taxpayer realizes from a controlled transaction - Costs - Sales - Assets - other relevant base * Most frequently used method - In India, due to lack of availab....
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....omparable return cannot be determined. g. TNMM is applicable to either side of the controlled transaction (i.e. related party manufacturer or the distributor). 1.8.5 In view of above, the application of TNNM method is most ideal when compared to CUP method. The assessee itself has applied TNMM in its transfer pricing study report. Just because the TPO rejected foreign AEs as tested party, the assessee claimed application of CUP method. As stated above TNMM is applicable to either side of the controlled transaction (i.e. related party manufacturer or the distributor). The case laws relied upon by the appellant also state that the ultimate aim of the transfer pricing is to examine whether the price or margin arising from international transaction with related party is at ALP or not. The various judicial decisions relied upon by the appellant hold that the most appropriate method shall be adopted. In the instant case, since, profit derived by the appellant out of the sale of PCBs to the foreign AEs is at ALP or has to be ascertained. The moot point is to determine whether the profit is at ALP or not and not the prices at which the goods are sold to foreign AE. Therefore, the mos....
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....transfer pricing legislation. Section 92C(1) of the Income Tax Act, 1961 speaks about "nature of transaction or class of transaction". Further the terms "transaction" itself is defined in Rule 10A(d) of the Income Tax Rules, 1962 to include a number of "closely linked transactions". 2.2.3 The OECD transfer pricing guidelines .Para 3.9 and 3.11 also highlight that in certain situations it is difficult to evaluate transactions separately and need to be evaluated by bundling them. 2.2.4. Recent landmark ruling of Delhi High Court in case of Sony Ericsson Mobile communication Pvt. Ltd(TS96-HC-2015 ( DEL)- TP) while deciding on the issue of AMP has also discussed in detail about the aggregation of transactions while using the Transaction Net Margin Method ( 'TNMM'). It has considered the OECD guidelines linking the same with the Indian regulation. The High Court observed that expression "class of transaction", "functions performed by the parties" under section 92C( 1) of the Act, illustrate that the word "transaction" includes a bundle or group of connected transactions. Clubbing of closely linked, which include continuous transactions, may be permissible under the Act and....
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....o. The products within the portfolio may be priced differently for marketing strategy to promote certain products or penetrate in a particular market. 2.2.7 In the present case, the appellant has treated commission and warranty payments in connection with export of PCBs to AE as distinct transactions and would like to determine the price by transaction by transaction basis. It is pertinent to mention here that the appellant has to pay commission and warranty to AE purely on account of export transaction without the goods being exported the appellant has no occasion to make payment of commission and warranty. The payments of commission and warranty are inextricably related to export transaction. In other words the payments of commission and warranty germinate from the export transaction. The above payments do not have independent existence. Therefore, as held in the above judicial decisions, the export of PCBs to AE and the payments of commission and warranty are closely linked transactions. Hence the action of TPO in treating them together and arriving at ALP is in order. 3. Selection of tested party: In this regard in its submission the appellant has relied upon on the fo....
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....ward group is global provider of Engineering software Development services and solutions to end users. 3. During the relevant previous year, assessee rendered IT enables services to its AE in USA and Germany for Rs. 22 Cr. 4. Assessee subsidiaries in USA and Germany were responsible for carrying out primarily sales and marketing activity along with sales and site support services to clients in respective countries and remunerate subsidiaries at cost plus 5% mark up. Further sale price received by foreign AE from services ultimately sold to customers is equal to that charged by the assessee firm its AE. 5. Assessee choose its foreign AE as tested party, adopted TNMM as appropriate method and did TP study by comparing NP profit margin of foreign AE with six foreign companies doing similar activities. 6. TPO held that price determined by assessee in providing IT enables services is not in accordance with 92C( 1) & 92C(2) and rejected assessee TP study. The issue before Tribunal was can Foreign AE be taken as Tested party for TP study held Foreign AE cannot be taken as tested party by explaining TP law in India as under: (a) Section 92( 1) provides that any income from i....
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....P]. explicitly discarded assessee's selection of foreign AE as tested party. While arriving at its conclusion, IT AT categorically held that under transactional net margin method ("TNMM"), it is the net margin earned by the Indian assessee and not it's foreign AE which is compared with that of the comparable companies. The IT AT interpreted the meaning of word 'enterprise' used in Rule 1 OB( 1 )(e) of the Income tax rules, 1962 ("Rules") (which describes the manner of application of TNMM) as 'Indian entity'. The Hon'ble ITAT also held that adoption of foreign AE as tested party has no legal sanctity under the Indian transfer pricing regulations. Furthermore, the ITAT also mentioned that the data used by the assessee with respect to the comparable companies does not conform to the comparability standard laid down under Rule 10B of the Rules. In view of the above the decision of onward technologies is directly applicable to the facts of the case. Hence the action of TPO in rejection of Foreign AE as tested party may be sustained. Further as observed by the DRP in its order at page No. 9 Para 6.2, the findings of the DRP are reproduced as under. 6.2. ....
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....e foreign AE and there is almost full capacity utilization. Why the foreign AE is selling the product at such cost which does not cover even the cost of production of the assessee. TPO is not required to examine the deal between foreign AE and foreign customers. The mandate of TPO is to examine international transaction which is between the assessee and its foreign AE. Here in this case, it is admitted fact that international transaction is sale by the assessee to its foreign AE. 4. Rule of consistency: i. Firstly, the rule of consistency is applicable only with respect to any method of accounting treatment. ii. Secondly, as the subject of transfer pricing is evolving day by day, rule of consistency may not be strictly applicable. iii. Thirdly, the TPOin his order has discussed on the issue of consistence by referring to the comments made by Hon' ble Justice P. N. Bhagavati (Page No. 193 to Paper Book). iv. Lastly, the appellant cannot rely on rule of consistency when the appellant itself has deviated and claimed that CUP method to be applied. As TPO has rejected selection Foreign AE as tested party the assessee charged his stance and would like to adopt CUP meth....
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....above provisions indicates that firstly, a transaction between two or more associated enterprises is called an international transaction; secondly, any income from such international transaction is required to be determined at ALP; thirdly, the ALP in respect of such international transaction should be determined by one of the prescribed methods, which also include the TNMM. Under this method, the net profit margin realized by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base, which is then compared with the net profit margin realized by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction. The modus operandi of determining ALP of an international transaction under this method is that firstly, the profit rate earned by the assessee from a transaction with its AE is determined (say, profit A), which is then compared with the rate of profit of comparable cases (say, profit B) for ascertaining as to whether profit A is at arm's length vis-à-v....
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.... requirement under our law is to compute the income from an international transaction between two AEs having regard to its ALP and the same is required to be strictly adhered to as prescribed. This contention, is therefore, repelled." Reliance is also placed in another decision of Hon'ble Mumbai Bench in the case of Cybertech Systems & software limited Vs. ACIT (33 taxmann.com 371) wherein the assessee had tried to justify the arm's length value of the transaction on the ground that the overseas AE had been incurring losses on the margin retained from the assessee. On appeal, the Tribunal rejected the assessee's argument that such transactions have to be considered at arm's length on ground that there is no shifting of profits. The Tribunal categorically held that the assessee i.e., the Indian party has to be taken as the tested party and the TNMM method is to be followed. Recently the Delhi Bench of ITAT in the case of Ranbaxy Lab Ltd. vs. Addl CIT (AY 2004-05) rejected the assessee's case since it had taken the foreign AEs as 'tested parties' and calculated its ALP. The ITAT agreed with the AO's contention that such benchmarking is not in consonance with the Income Tax rules. ....
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....saction' has been defined in the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administration, July 2010 (hereinafter referred to as the 'OECD Guidelines), which inter-alia reads as under: "Comparable uncontrolled transaction A comparable uncontrolled transaction is a transaction between two independent parties that is comparable to the controlled transaction under examination. It can be either a comparable transaction between one party to the controlled transaction and an independent party ("internal comparable") or between two independent parties, neither of which is a party to the controlled transaction ("external comparable'). The OECD Guidelines inter alia defines the CUP Method as follows: "Comparable uncontrolled price (CUP) method A transfer pricing method that compares the price for property or services transferred in a controlled transaction to the price charged for property or services transferred in a comparable uncontrolled transaction in comparable circumstances. " 11.1 We also find support from the decision of the Hon'ble Mumbai Tribunal in the matter of DCIT vs. Isagro (Asia) Agrochemicals (P.) Ltd reported ....
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....he method of determining arm's length price as 'TNMM' in respect of export of PCBs valued INR 197,55,10,0001- with regard to the commission and preliminary warranty guarantee. Transfer Pricing Study was silent about the method for benchmarking the gross prices receivable by the appellant from AE for export of PCBs. But the DRP identified the aforesaid export as a separate transaction ('Sale') and confirmed the application of the TNMM at the entity level. However, we find that the DRP should have applied the method which is the most appropriate and in the instant we have already held that the CUP method as the most appropriate method. 11.3 In this connection, we rely in the decision of the Hon'ble Mumbai Tribunal in the matter of Mattel Toys (I) (P.) Ltd vs. Deputy Commissioner of Income-tax, Circle - 6(3) reported in [2013] 34 taxmann.com 203 (Mumbai - Trib.), wherein the Hon'ble Tribunal inter alia held that: "41. Now coming to the argument of the learned Departmental Representative that once the assessee itself has chosen TNMM as most appropriate method in TPR, then it cannot resort to change its method at an assessment or appellate stage. In ....
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....iple enunciated by the Hon'ble Mumbai Tribunal in the aforesaid case, we apply the CUP Method in respect of the international transaction involving export of printed circuit boards and accordingly delete the adjustment of INR 69,30,53,397/- made in the assessment order. 11.4 We also find that various Hon'ble Court have held that the CUP Method being preferred over the profit based methods. In this connection we rely in the decision of the Hon'ble Delhi Tribunal in the matter of Hughes Systique India (P.) Ltd vs. ACIT reported in [2013] 36 taxmann.com 41 (Delhi - Trib.), wherein the Hon'ble Tribunal inter alia held that: "6.5 The CUP method provides the most direct comparison for the purpose of determining the arm's length price of international transactions and is to be preferred over the other profit based methods. Reliance is placed in this regard on the following decisions: - Aztec Software & Technologies Services Ltd. v. Asstt. CIT [2007] 107 ITD 141/162 Taxman 119 (Bang.) (SB) - UCB India (P.) Ltd. v. Asstt. CIT [2009] 30 SOT 95 (Mum.) - Gharda Chemicals Ltd. v. Oy. CIT [2010] 35 SOT 406 (Mum.) - Intervet India (P.) Ltd. v. Asstt. CIT [2010] 3....
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....re in below: "Internal CUP method envisages comparing the uncontrolled transactions of the appellant itself with other unrelated parties so as to determine the ALP with the AE. However the External CUP method disregards the price charged or paid by the appellant to or from its unrelated parties and contemplates the comparison of the price so charged from or paid to its AE with some external independent reliable price data under similar circumstances of transactions with AE. Ordinarily the Internal CUP method should be preferred over the External CUP method as it neutralizes several distinguishing factors, such as the local factors and the economies available or unavailable to the appellant in particular, having bearing over the comparison of price charged from unrelated parties and AE." 11.5 In view of the above judicial precedents, we find that the CUP method provides the most direct comparison for the purpose of determining the arm's length price of international transactions and is to be preferred over the other profit based methods. Accordingly in the instant case internal CUP method should be preferred over the external CUP method. Hence, we hold that in the instant ....
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....the assessee is in second appeal before us . The ld. AR before us submitted that the appellant follows a consistent accounting policy of adding back the excess provision while computing taxable income in case the closing balance exceeds the opening balance and deducting the extra provision created in case the opening balance exceeds the closing balance of the provision. The said principles have been accepted by the AD in all the prior years. In the assessment year under consideration, Your Honors may please note that the opening balance of the provision for diminution in the value of inventories was INR 6,60,23,0001/- while the closing balance of the provisions was INR 6,52,75,0001/- thereby leading to an excess provision of INR 7,53,519/- being created during the year which was otherwise entitled to deduction from the computation of income but was inadvertently added back in the computation of total taxable income. In view of our above submissions, that the above amount representing the excess provisions is not taxable in the hands of the appellant. It was an inadvertent mistake committed by the appellant while filing the return of income which should have been otherwise not....