TaxTMI 
TaxTMI 
2020 (2) TMI 421
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....ng it as an apparent loss under no commercial compulsion in the absence of a cogent finding by Assessing Officer to this effect. (b) When the AO has failed to bring on record any defects, discrepancies or irregularities in trading results or to show that profit earned by the assessee was lower and thus with no material in his possession to show underselling, it was apparent that transactions with sister concerns were genuine or bonafide. CIT (A) erred therefore in concluding that the transactions with sister concerns were not genuine or bonafide resulting in a loss on Sale of Cashew Kernels to the sister concerns amounting to Rs. 89,76,885/-. (c) Both AO and CIT (A) failed to appreciate that the appellant had only followed Arms Length Price (ALP) and hence no loss incurred; ALP being cost + in the case of wholes(superior grades) and splits, butts and pieces (inferior grades) at prices corresponding to wt. average market price of direct exports of such grades accepted by the Dept. all these years. Elsewhere he has taken cognizance of the fact that pricing of direct exports can be relied upon. Purchases of various grades of kernels by the appellant from these sister....
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....cerns, corresponding addition in the purchase cost of the latter ought to have been recognized and benefit given in their assessment. Thus, the whole exercise becomes revenue neutral (2010) 236 CTR (SC) 113. Supreme Court decision was misconstrued. (7) Having accepted the trading results filed by the appellant, no addition was made by the Sales Tax Dept. either on the assessee or sister concerns in any of these years. For the above and other additional grounds that may be advanced and further evidence or records that may be produced at the time of hearing, the appellant prays that the appeal be allowed. 3. We shall consider the facts as narrated in ITA No.37/Coch/2016 in the case of R. Pratap. As per details filed by the assessee, the Assessing Officer noticed that the assessee had sold various grades of cashew kernels to concerns owned by near relatives at values much lower than the cost of production in the course of export. It was, therefore, proposed to disallow the loss on sale of cashew kernels incurred by the assessee through such dealings and the loss was worked out as follows: Sr. No. (1) Name of sister concern (2) Quantity sold (in Kg.) (3) ....
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.... loss by resorting to the above strategy and loss of Rs. 89,76,885/-was disallowed. The Assessing Officer made similar disallowance for all the assessment years in respect of all the assesses. 3.1 For the assessment year 2010-11 in the case of R.Pratap, as per details filed by the assessee, the Assessing Officer noticed that the assessee had sold various grades of cashew kernels to concerns owned by near relatives at values much lower than the cost of production in the course of export. It was, therefore, proposed to disallow the loss on sale of cashew kernels incurred by the assessee through such dealings and the loss was worked out as follows: Sr. No. (1) Name of sister concern (2) Quantity sold (in Kg.) (3) Sale Price (4) Average rate of sale (5) Cost of production (6) Cost of goods sold (Col. 3x6) (7) Difference (Co. 7-4) (8) 1. Swathy Foods 23,814.000 60,90,000 255.73 269.20 64,10,729 3,20,729 2. Prakash Exports 77,737.780 2,03,29,000 261.51 269.20 2,09,27,010 5,98,010 3. Chethana Cashew Corporation 41,504.400 1,11,54,180 268.75 269.20 1,11,72,984 18,804 4. Nut Products Com....
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.... 148.977726 190 581742 125602 4. Pratyush Exports 249.48 40920 164.021164 190 47401.2 6481.2 5. Surya Exports 1701 261000 153.439153 190 323190 62190 TOTAL 62967685 2064606.8 3.4 For the assessment year 2009-10 in the case of R.Prakash, as per details filed by the assessee, the Assessing Officer noticed that the assessee had sold various grades of cashew kernels to concerns owned by near relatives at values much lower than the cost of production in the course of export. It was, therefore, proposed to disallow the loss on sale of cashew kernels incurred by the assessee through such dealings and the loss was worked out as follows: Sr. No. (1) Name of sister concern (2) Quantity sold (in Kg.) (3) Sale Price (4) Average rate of sale (5) Cost of production (6) Cost of goods sold (Col. 3x6) (7) Difference (Co. 7-4) (8) 1. Sunfood Corporation Ltd. 154276.3 31561690 204.57899 229 35329272.7 3767582.7 2. Nut Products Company 48761.98 10862580 222.76741 229 11166493.42 303913.42 3. Chethna Cashew C....
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....600 112000 247 309 140162 28162 Swathy Foods 17010 4050000 238 309 5256090 1206090 TOTAL 20061121 3.7 For the assessment year 2009-10 in the case of T.C. Usha, as per details filed by the assessee, the Assessing Officer noticed that the assessee had sold various grades of cashew kernels to concerns owned by near relatives at values much lower than the cost of production in the course of export. It was, therefore, proposed to disallow the loss on sale of cashew kernels incurred by the assessee through such dealings and the loss was worked out as follows: Sr. No. (1) Name of sister concern (2) Relation (3) Quantity sold (in Kg.) (4) Sale Price (5) Average rate of sale (6) Cost of production (7) Cost of goods sold (Col. 3x6) (8) Difference (Co. 7-4) (9) 1. Vijayalakshmi Cashew Co. Husband 2313.6 470814 203 275 636240 165426 2. Vijayalakshmi Cashew Co. Husband 34166.84 6564540 192 275 9395881 12831341 3. Vijayalakshmi Cashew Co. (Firm) Husband, assessee & Others 5139.92 134200 ....
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.... assessment year 2009-10, in the case of M/s. Vijayalaxmi Cashew Co., as per details filed by the assessee, the Assessing Officer noticed that the assessee had sold various grades of cashew kernels to concerns owned by near relatives at values much lower than the cost of production in the course of export. It was, therefore, proposed to disallow the loss on sale of cashew kernels incurred by the assessee through such dealings and the loss was worked out as follows: Loss on sale in the course of export to sister concerns Rs. 4,37,61,625/- 3.9.2 For the assessment year 2010-11, in the case of M/s. Vijayalaxmi Cashew Co., as per details filed by the assessee, the Assessing Officer noticed that the assessee had sold various grades of cashew kernels to concerns owned by near relatives at values much lower than the cost of production in the course of export. It was, therefore, proposed to disallow the loss on sale of cashew kernels incurred by the assessee through such dealings and the loss was worked out as follows: Sr. No. (1) Name of sister concern (2) Quantity sold (in Kg.) (3) Sale Price (4) Average rate of sale (5) Cost of production (6) Cost of goods sold (....
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.... that business expediency to sell the cashew kernels at rates much below to the domestic rates when the assessee is not entitled to the export benefits on sales to sister concerns nor having claimed deduction under section 80HHC of the Act, has not been explained. 4.1 Before the CIT(A), the assessee argued that assessee's selling price has nothing to do with cost of production since sales made to sister concerns consisted of a mix of higher grades and inferior grades. The CIT(A) observed that while the higher grades realized above cost, the inferior grades consisting of splits, butts and pieces fetched a price below to the cost price which is akin to the international price. According to the CIT(A), white wholes, scorched wholes, scorched wholes seconds, dessert wholes etc. were considered to be higher grade cashew kernels and similarly, splits, butts, large white pieces, scorched butts, scorched pieces, scorched pieces seconds etc. were considered to be inferior grade cashew kernels. The CIT(A) observed that the assessee claimed to have sold both the higher grade and inferior kernels to the sister concerns and third parties in the domestic market and the assessee also claimed t....
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....Rs. 178 per kg and the sales to sister concerns were made between Rs. 153 per kg to Rs. 177 per kg. The CIT(A) observed that sales to sister concerns for a price between Rs. 153 to Rs. 177 can be on arms length basis only when the price is closer to the export market price of the sister concerns. In the absence of export price details of the sister concerns for verification, the CIT(A) felt that export price to which cashew kernels were exported directly by the assessee can be relied on. The assessee claimed to have exported higher grade cashew kernels for a price between Rs. 172 and Rs. 364 and inferior grade between Rs. 137 and Rs. 150. According to the CIT(A), had the assessee followed arms length price, he should have sold cashew kernels to sister concerns for a higher price than he sold between Rs. 153 and Rs. 177. In view of the above, the CIT(A) was of the opinion that the assessee had not followed the arms length price against the cashew kernels sold to his sister concerns. According to the CIT(A), for the purpose of assessment under the IT Act, each business entity and even if it is a sister concern, it is to be treated as a separate unit of assessment and the profit and l....
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.... only be arrived at by taking the average cost of production which was accepted by the AO. It was submitted that the average cost of production of cashew kernels was arrived at on total cost basis in accordance with generally accepted accounting principles (GAAP). According to the Ld. AR, within the domain of Export quality cashew kernels produced and exported by the assessee, there were superior grades consisting of wholes and inferior grades consisting of (splits/pieces, butts). It was contended that the assessee had been selling cashew kernels to firms and business concerns owned by close relatives and the object behind such transfer was to help them honour their export commitments on time. Superior Grades comprising 'Wholes' were generally sold at 'cost plus' having proximity with market prices of direct exports by the assessee. However, it was submitted that grades representing splits, butts and pieces have a market price below cost which is validated by the monthly bulletin of international prices. Thus, it was submitted that 'Cost Plus' pricing generally followed for direct exports or exports through sister concerns cannot be automatically extended to....
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....CIT (2011) 139 TTJ (Del. Trib.) 318 5.4 The Ld. AR submitted that system of Accounting, books of account and accounting policies were accepted by the AO which implied inter alia that grade wise valuation of stock of kernels were recognized by the Dept, which proved commercial expediency or compelling circumstances to sell inferior grades of kernels at a market price below cost. This would imply that averaging cannot be done in a scenario when quality is a crucial factor. For this, he relied on the judgment of the Bombay High Court in the case of Director of Income Tax (International Taxation) vs. Boston Scientific International B.V. (2013) 90 DTR (Bom.) 357. It was submitted that the A.O. had accepted the pricing methodology of the assessee in the following transactions (a). Direct exports i.e. sales to unrelated parties consisting of wholes and splits having separate wt. average rates. (b). Purchases from these very sister concerns consisting of wholes and splits. It was submitted that he ought to have applied the same yardstick in the matter of pricing of sales to sister concerns for their export. Notwithstanding the above, the Assessing Officer reached an....
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....8A as the case may be. According to the Ld. AR, in sales tax terminology they are termed as sales in the course of export and these sales are invoiced grade wise corresponding to the grades exported by the sister concern and relevant export contract price. Hence, it was submitted that timing of contract is very important. The Ld. AR submitted that being for exports, the prices changed to sister concerns grade wise vis-a-vis exports to unrelated parties are comparable and sales to sister concerns in the course of export are at Arms Length Price(ALP). According to the Ld. AR, for lower grades such as splits and pieces, the market price being lower than the production cost, they cannot be sold above market price to sister concerns and, if so, they will be hit hard by Section 40A(2). Hence, it was submitted that there was no shifting of profits in favour of sister concerns for their benefit as the transfer price was based on ultimate export price obtaining for respective grade(s) which therefore, constituted ALP on the date of relevant export contract. 5.7 The Ld. AR submitted that it is virtually impossible to presume that sale price remained constant throughout the year for every ....
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....rding to the Ld. AR, the assessing officer missed the vital point that income was below taxable limit after b/f losses were set off during the current year. Moreover, there was no finding by the department that sister concerns benefited in any manner. 5.9 The Ld. AR submitted that prior to abolition of section 80HHC, there was an apprehension that underpricing could be done to enable sister concerns claim greater 80HHC benefit. This is no longer the case from A.Y. 2005-06. It was submitted that both assessee & sister concern(s) paid tax at maximum marginal rate. According to the Ld. AR timing of contracts is also an important parameter in the matter of fixing transfer prices. For example when price of say W320 grade contracted earlier was Rs. X which is less than cost or current price, assessee is bound to sell at contracted price only. It was submitted that A.O. wrongly presumed that entire sales in India were to sister concerns. The sales were effected in the domestic market through depots, consignment agents etc. The Ld. AR submitted that in the absence of a clear finding by AO to the contrary, it was only fair and reasonable to presume that the transactions with sister conce....
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.... was submitted that 15% allowance was considered for which a working had been given on 21/11/2019 which can be broadly broken up as follows: 10% to account for such factors as composition of grades in the sales mix, quality of kernels, etc. 5% to cover Profit and indirect overheads of sister concern(s). For this, the Ld. AR relied on the decision of the Tribunal in the case of Merck Ltd. vs. DCIT (2016) 139 DTR (Mum Trib.) 1. 5.9.3 The Ld. AR submitted that ALP is determined by taking result of a comparable transactions in comparable circumstances and by making suitable adjustments for the differences. For this, he relied on the decision of the Tribunal in the case of Mentor Graphics (Noida) (P) Ltd. vs. DCIT 109 ITD 101 (Del.). The Bench observed that ALP does not mean maximum price or maximum profit in the range. Comparison has to be made with like entities - apples to be compared with apples. 5.9.4 The Ld. AR submitted that the Assessing Officer confined himself to a small sample out of total sales to related units and banking on its wt. average when a part of closing stock comprising inferior grades having a market price below cost will not yield a fa....
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.... 121 5.9.6 The Ld. AR submitted that even after appreciating the key issues and summarizing them, CIT(A) upheld the addition made by A.O. holding that assessee had no case. The Ld. AR submitted that his abrupt conclusions emanated from following his order in A.Y. 2008-09 that lay at the core of dismissing all the 13 Appeals of the assessee/sister concern(s). The CIT(A) observed that the transactions were carried out without following Arms Length Price (ALP) and proved to be a planned device to reduce the tax incidence by diverting profits to sister concerns(buyer) to enable them claim higher benefit through section 80HHC overlooking the fact that section 80 HHC went out of statute from A.Y. 2005-06. Hence, he concluded that the transactions were not genuine and bonafide and that the judgment of the Supreme Court in the case of CIT vs. Calcutta Discount Company Ltd. 91 ITR 8 cannot be applied. 5.9.7 The Ld. AR submitted that though CIT(A) professed that taxation is on real profit and not on unearned profits which is at the core of above Apex Court decision, still he held that this decision will not apply and upheld the addition on imaginary profits on the pretext that there is....
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....he Supreme Court in the case of S.A. Builders Ltd Vs. CIT 288 ITR 1, quoting from the judgment of the Delhi High Court in the case of CIT Vs. Dalmia Cements Ltd (2002) 254 ITR 377. 5.9.9.1 The Ld. AR submitted that the judgment of the Supreme Court on revenue neutrality in the case of CIT vs. Glaxo Smithkline Asia (P) Ltd. (2010) 236 CTR (SC) 113 was misconstrued both by A.O. and CIT(A) taking a dramatic U turn that all units are independent and separately assessed even while confirming addition on sale of kernels to sister concerns. 6. According to the Ld. AR, from a few sample figures extracted from the voluminous data, the CIT(A) presumed that the assessee had sold substantial quantity of lower grade kernels at a price below cost without explaining the commercial expediency to do so and the assessee had not explained yet the reason for the pricing policy adopted to sell the kernels to sister concerns at a price below the ' maximum export price' assessee had got on direct exports. 6.1 According to the Ld. AR, a sample consisting of inferior grades such as splits, butts and pieces was chosen from the details furnished to the CIT(A) to conclude that sale price was ....
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....basis was held to be underpriced. When the Assessing Officer found that wt. average of entire sales to related units was above average cost, he resorted to selective picking such method which will never establish underpricing. According to the Ld. AR, the Assessing Officer as well as the CIT(A) expected every Kg of cashew kernels to be sold above cost and he substituted 'cost' for market price realized. The Ld. AR submitted that sale price cannot remain static. Hence, the Ld. AR submitted that addition is to be deleted for following reason: 1. Under pricing not proved. 2. The A.O. had not pointed out any discrepancies in accounts thereby accepting trading results/margin. Hence it has to be presumed that transactions are genuine & bonafide and not sham. Therefore, addition under conjectures & presumptions was not sustainable. 3. Transactions were at Arm's Length Pricing. The Ld. AR relied on the judgment of the Punjab & Haryana High Court in the case of CIT vs. Jyothi Industries 330 ITR 573. 4. No comparable cases were given by A.O. to show that profits returned by 'A' are low or not and commensurate with volume of business. A ....
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....ield to sister concerns. This is unsubstantiated by the judgment of the Supreme Court in the case of Calcutta Discount Company 91 ITR 8 relying on Madras High Court Decision in the case of Sri. Ramalinga Choodambika Mills Ltd Vs. CIT 28 ITR 952. On the contrary, A.O. relied heavily on his order in Preetha S. Nair for Assessment Year 2009-10 to hold that there was no revenue yield to the sister concern(s). Her income from business was Rs. 2.49 crores for Financial Year 2008-09. After set off of b/f losses it was below the taxable limit. 6.6 The Ld. AR submitted that the A.O. should have appreciated that taxation is on real income and this was the essence of the above judgment of the Supreme Court and other judgments. Though CIT(A) endorsed this, he ignored the same and on his insistence, wt. average price chart was prepared in the manner prescribed by him which he simply ignored it. It was submitted that every year similar chart was given to A.O and there was no categorical finding by the Assessing Officer in any of the assessment years in question that there was shifting of profits by the assessee in favour of his/her sister concerns. 6.7 The Ld. AR submitted that the CIT(A) ....
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.... also relied on the following case laws on selective picking of data: 1) Henkel Adhesives Technologies India (P) Ltd. vs. DCIT (2014) 163 TTJ 491 (Pune Trib.) 2) Intimate Fashions (India) (P) Ltd. vs. ACIT (2012) 149 TTJ (Chennai) 775 3) ITW India Ltd. vs. ACIT (2015) 169 TTJ (Del) 60 6.9.1 The Ld. AR also relied on the following case law on price not remaining static as per CIT(A). 1) Satnam Overseas Ltd. & ANR. vs. Addl. CIT (2010) 228 CTR (Del) 121 6.9.2 The Ld. AR also relied on the following case law on absence of comparable cases or any evidence on record. 1) JLC Electromet P. Ltd. vs. Addl. CIT (2016) 178 TTJ 28 (UO) (Jaipur Trib.) 2) CIT vs. Modi Xerox Ltd. (2010) 41 DTR 55 (All HC) 3) Airtech (P) Ltd. vs. DCIT (2011) 139 TTJ (Del) 318 6.9.3 The Ld. AR relied on the decision of the Tribunal in the case of Merck Ltd. vs. DCIT (2016) 139 DTR (Mum. Trib.) 1 wherein it was held that whole determining ALP, adjustment for quality difference has to be considered. 6.9.4 The Ld. AR also relied on the decision of the Tribunal in the case of Dy. CIT vs. Firstsource Solutions Ltd. (2018) 168 DTR (Mum. Trib.) 161....
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....ined by the assessees are not complete and correct. As can be seen from the findings of the Assessing Officer in the assessment orders, the Assessing Officer has merely proceeded on a surmise that profits of the assessees were sought to be reduced by selling their products to the sister concerns at a lesser price. There is no instance of falsity or incompleteness of the books of account pointed out by the Assessing Officer in the assessment orders. The books of account were duly audited by Chartered Accountants and they reflected the true state of affairs of the assessees. The fact that the assessees had sold their products to the sister concerns at a price lesser than the price at which the same product was sold to the third parties, in our opinion, this would not be sufficient ground to come to the conclusion that the books of account of the assessees are not complete and correct. There is no evidence brought on record that over and above the price shown in the books of account, the assessees received something more from the sister concerns or any comparable cases were brought on record by the Assessing Officer. It is for the businessman to decide the price at which he has to sel....
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.... the Supreme Court in Collector of Central Excise New Delhi vs. Guru Nanak Refrigeration Corporation Ltd. 2003 INDLAW SC 301 which approved the decision of the Appellate Tribunal (CEGAT) to the effect that just because sale price was less than cost of production there was no justification to reject the valuation of goods sold for charging Central Excise Duty when the transactions were at Arm's Length. 8.3 It is not permissible for the Assessing Officer to make additions without bringing any comparable cases on record. In this case, no comparable cases were brought on record by the Assessing Officer to counter the price fixation by the assessee. In our opinion, the lower authorities must have been satisfied that the price charged to the various grades by the assessees for their sales to sister concerns have proximity to the price of export to unrelated parties and indeed the Assessing Officer failed to compare the assessees' price pattern with other comparable cases and he cannot arbitrarily make addition on the basis of guesswork. The Assessing Officer cannot disturb the sales pricing pattern of transaction between the sister concerns, unless it was shown to be perverse. Thi....
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.... correct. Reliance is placed on the decision of the Tribunal in the case of ITW India Ltd. vs. ACIT (2015) 169 TTJ (Del) 60, wherein held that to arrive at a fair rate of adjustment, it is appropriate to adopt quality adjustment of 10% with regard to particle size and bulk density test, as the product imported by the assessee is demonstrably superior to the locally manufactured drugs. This underlines the need for determination of separate wt. average pricing for wholes and splits with suitable adjustments and for a cogent and meaningful comparison, the same cannot be aggregated. The ALP therefore could be wt. average of direct exports and wholes and/splits, pieces and butts respectively which can be a benchmark for comparison with suitable adjustments factoring for following circumstances: (1) The composition of grades in the sales mix even among low grades. (2) Those grades entering into direct export not forming part of sales to sister concerns and vice versa. (3) Timing of contracts & price variation even among superior grades. (4) Exchange rate variation. Accordingly, at least 10% allowance to account for such factors as composition of gra....
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....vouchers have not been found defective by the Assessing Officer at any point of time. When the quantitative details certified by the statutory authorities which are also part of the record subject to scrutiny by the Assessing Officer have not been rejected by him, then the Assessing Officer cannot presume that the assesses had suppressed the profits. It is not the case of the Assessing Officer that there were any material defects noticed at the time of examination of the books of account and also that there was no change in the method of accounting adopted by the assessees from what was regularly adopted. Accordingly, we are of the opinion that the Assessing Officer cannot blow hot and cold at the same time and onus clearly lies on the Assessing Officer to prove that the books of account maintained by the assessees suffers any defects. In the absence of any documentary evidence indicating any lapse on the part of the assessees in maintenance of books of account which were subjected to audit by the statutory authorities, we are of the opinion that the additions made by the Assessing Officer to the profits of the assessees only on the basis of surmises and conjectures of low profits ....
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.... relevant export contract. 8.7 It cannot stand to reason that the sale price of cashew kernels remained constant throughout the year so that the basis of sale price could be arrived at. The sale price has fluctuation due to demand and supply and market conditions. It does not remain at constant level. This view is fortified by the judgment of the Delhi High Court in the case of Satnam Overseas Ltd. vs. Addl. CIT 329 ITR 237 (Del.), wherein held that where it cannot stand to reason that the price of sale of paddy / rise / pulses remained constant throughout the year so that on the basis of an average price of closing stock, the sale price for the entire year comprising of 12 months, 48 weeks and 365 days can be ascertained in that the same would have remained fixed throughout this period. Even assuming that this logic is correct, it was surely an exercise which the A.O. could have done on the basis of material which he is now presently seeking to do because when the very same materials were available with him in the relevant assessment years and merely because the A.O. feels that he has failed to do what he ought to have done cannot be a valid ground for seeking initiation of rea....
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....9-10 to hold that there was no revenue yield to the recipient sister concern and so, under pricing was done to reduce tax incidence. The assessing officer missed the vital point that income was below taxable limit after b/f losses were set off during the current year. Moreover, there was no finding by the lower authorities that sister concerns benefited in any manner. Being so, in our opinion, these cannot be any additions towards low selling price charged to sister concerns. These grounds of appeals are allowed in all the appeals of the assessees. 9. The next ground in ITA No. 40/Coch/2016 in the case of R. Prakash is with regard to charging of interest u/s. 244A of the Act. 10. The facts of the case are the assessee was in receipt of interest amounting to Rs. 3,84,680/- for the AYs 2006-07 & 2007-08 under section 244A of the Act but did not offer the same for tax in the year in which it was received i.e. during the assessment year under consideration. The same was not offered for tax because of the accounting policy the assessee was following as per which on refund received would be offered for tax only at the time of finalizing the assessment. As the interest is to be asse....