TaxTMI 
TaxTMI 
TaxTMI 
2020 (2) TMI 421
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....sion 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 concerns for export were also accepted. d) CIT(A) ought to h....
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....enefit 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) Sale Price (4) Average rate of sale (5) Cost of production (6) Cost of goods sold (Col. 3x6) (7) Difference (Co. 7-....
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....rs 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 Company 49,215.600 1,15,92,620 235.55 269.20 1,32,48,840 16,56,220 19,87,061.360 54,02,90,715 3.2 For the assessment year 2011-12, in the case o....
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....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 Corporation 118911.2 26803600 225.40854 229 27230664.8 427064.8 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 3.5 For the assessment year 2010-11 in the case of R.Prakash, as per details filed by the assessee, the Assessing Officer noticed that ....
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....rough 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 4. Vijayalakshmi Cashew Co. (Firm) Husband, assessee & Others 1259.100 271 275 1413478 20178 5. Sun Food Corporation Son 19845.00 3799880 191 275 5457375 1657495 6. Prakash Exports Son 2885 551100 191 275 733468 182368 7. Nut Products Company Daughter 1428 337220 236 275 392947 55727 TOTAL 65778.36 13116854 18029389 4912535 3.8 For the assessment year 2010-11 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 ker....
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....wer 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. Chethna Cashew Corporation 2,48,618,160 6,46,28,060 259.99 268.41 6,67,31,600 21,03,540 2. Nut Products Company 3,61,541,880 8,42,41,320 233.01 268.41 9,70,41,456 1,28,00,136 3. Prakash Exports 4,70,020,320 11,24,49,520 239.24 268.41 12,61,58,154 1,37,08,634 4. Prathyush Exports 13,335.840 29,98,800 224.86 268.41 35,79,473 5,80,673 5. Sunfood Corporation Ltd. 6,07,086.940 16,04,89.080 264.36 268.41 16,29,48,206 24,59,126 TOTAL 48,13,52,780 3,16,52,119 3.9.3 For the assessment year 2011-12, 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 c....
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....sidered 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 to have had direct exports. Before the CIT(A), the assessee filed unit wise and grade wise sales made to sister concerns and grade wise direct export details for verification. According to the CIT(A), macro analysis of such details revealed that sale price of cashew kernels was not static throughout the year but varied mostly from Rs. 128 per kg to Rs. 310 per Kg. and the higher grade kernels of white wholes (W-180, W-210, W-240, W-320 etc) and scorched wholes (SW-180, SW-210, SW-240, SW-320 etc) were sold to sister concerns for a price mostly between Rs. 163 per kg and Rs. 176 per kg. The CIT(A) observed that very rarely the higher grade kernels were sold to sister concerns for Rs. 300 and above per kg. It was observed that the lower grade kennels such as butts, splits and pieces were mostly sold for a price between Rs. 137 and Rs. 147 per kg. Substantial quantity of higher grade cashew kernels were sold to sister concerns and seeing from the g....
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.... 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 loss is to be independently arrived at and assessed to. The CIT(A) was of the view that in the event of underselling and the sales to the sister concerns were not made on the basis of arms length price, then addition is to be made on the basis of arms length price. The CIT(A) opined that the judgments of the Supreme Court in the case of DIT (International Taxation) vs. Morgan Stanley and Co Inc (292 ITR 416), CIT vs Glaxosmithkline Asia (P) Ltd. (236 ITR 113) and CIT vs. Calcutta Discount Company Ltd (91 ITR 8) relied on by the assessee cannot be applied to him since the first decision is on the taxability of the permanent establishment under the double taxation avoidance agreement and as ruled in the second decision, the concept of revenue neutral cannot be applied to the case of the assessee since all the concerns of the assessee group were doing their business independently having no access with each other and the profit the assessee otherwise....
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....w 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 pricing of inferior grades sold to them, a fact which was evident also from grade wise details of sales of wholes as well as splits, pieces and butts furnished each year to the Assessing Officer during regular assessment u/s. 143(3) of the Act and which was verifiable on a comparison with peers in industry which proved the commercial compulsion to invoice sales of such inferior grades at prices below cost. 5.2 The Ld. AR submitted that specimen export invoices of such grades, contracts etc were produced for verification by Assessing Officer. It was submitted that the valuation of closing stock of cashew kernels is at cost or net realizable value (NRV) whichever is lower with inferior grades valued at market price, being below cost as per relevant Accounting Standard of ICAI which was duly disclosed in Significant Accounting Policies. The Ld. AR submitted that in compliance of notices u/s. 143(2) and 142(1), details of sales to sister concerns, ....
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....plits. 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 abrupt and negative conclusion that 'A' had a policy to sell cashew kernels to sister concerns (related units) at below cost apparently under 'no commercial compulsion'. The Ld. AR contended that for A.Y. 2008-09 the A.O. made an addition of a meagre amount of Rs. 43,494/- on account of 'apparent loss'. Total Turnover Rs. 106.72 crores Trading margin Rs. 10.79 crores Sales % of export to sister concerns Rs. 64.70 crores Wt. average price Rs. 194 per kg. Cost of production Rs. 178 per kg. Value of sales picked out by A.O. Rs. 2.30 crores 5.5 The A.O. made the addition by observing as follows: "Loss on sale in the course of Export to Sister Concerns: As per details filed by the assessee, it was seen that the assessee has sold cashew kernels to sister concerns in the course of export as under: Sl. No. Name of sister coincerns Quantity sold (in Kg.) Sale Price Average rate of sale Cost of production Cost of goods sold (co. 3x6) D....
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.... submitted that it is virtually impossible to presume that sale price remained constant throughout the year for every grade and for every kilogram so that on the basis of average closing stock price the entire sales should be above this price. Hence, it was submitted that weighted average price of entire sales was not an appropriate method to conclude underselling as it had severe limitations. For this, the Ld. AR relied on the Tribunal in the case of Vijay C. Kamdar vs. ITO (2009) 305 ITR (AT) 163 (Mum) where it was held as follows: (iii) that the Assessing Officer formed the belief that the assessee over invoiced the purchase by relying upon the statement of K in the income-tax proceedings. The disallowance was without making any further enquiry only for the reason that the supplier of the assessee did not appear before him. This statement was not relied upon by the Additional Commissioner of Customs and he had dropped the proceedings. These materials were not sufficient to hold that the assessee had over-invoiced the purchases. There were different varieties of pens available in the market whose costs differed according to quality and there were different factors to determine....
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....ding by AO to the contrary, it was only fair and reasonable to presume that the transactions with sister concerns were regarded genuine and bonafide. The Assessing Officer relied on the judgment of the Supreme Court in the case of CIT vs. Calcutta Discount Company Ltd. (1973) 91 ITR 8, yet he stood by artificial loss to the assessee from alleged under pricing with no revenue yield to the recipient sister concern(s). 5.9.1 The Ld. AR submitted that mere fact that sales were made at prices lower than cost or even the market rates would not entitle the Income tax Department to assess the difference between the cost/market price and the price paid by the sister concern(s) as profits of the assessee. The Ld. AR relied on the judgment of the Supreme Court in the case of CIT vs. Calcutta Discount Company Ltd. (1973) 91 ITR 8 approving the decision of the Madras High Court in Shri Ramalinga Choodambika Mills Ltd vs. CIT reported in (1955) 28 ITR 952 (Mad). The Ld. AR relied on the judgment of 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 effec....
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....inferior grades having a market price below cost will not yield a fair result at all. He relied on the judgment of the Rajasthan High Court in the case of Singhal Natural Stone (P) Ltd. (2011) 243 CTR (Raj) 414. The Ld. AR submitted that by applying real income concept, the officer should have appreciated that only income which an assessee had earned or which had accrued to him should be taxed. The Ld. AR relied on the judgment of the Supreme Court in the case of CIT vs. Calcutta Discount Company Ltd. (1973) 91 ITR 8 (SC). It was submitted that no addition had been made by the sales tax Dept either on the assessee or sister concerns in respect of such sales which were all documented. The Ld. AR relied on the judgment of the Madras High Court in the case of CIT vs. Sakuntala Devi Khetan (352 ITR 484) wherein it was held that Assessing Officer has to adopt the figures and turnover finally assessed by the Sales Tax authorities. The Ld. AR drew our attention to the following Annexures: Annexure I - Bulletin of International Prices Annexure II - Comparison chart showing overall wt. average of sales Vs. Cost Annexure III- wt. average chart Vs. ALP Annexure IV - Comparison wit....
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....rofits on the pretext that there is no infirmity in the order of A.O. The CIT(A) brushed aside all the relevant decisions cited, copies thereof given. In so far as A.O. had accepted the veracity of documents produced before him/her during assessment, the Ld. AR submitted that the CIT (A) should have deleted the addition in the absence of any incriminating evidence to prove that transactions were colourable & sham device to avoid tax. The Ld. AR relied on the decision of the Tribunal in the case of ITO vs. PKS Holdings (2017) 152 DTR (Kol.) (Trib.) 215. 5.9.8 The Ld. AR submitted that unit wise, grade wise details of sales to sister concerns had been furnished to A.O. for each year well before assessment and only upon being advised by CIT(A), details were again reproduced in respect of one assessee for 2008-09, 2009-10 and 2011-12, issue being common for all years and for all assesses. However, CIT (A) remarked details were not given separately for other assessment year(s). 5.9.9 The Ld. AR submitted that although the CIT(A) had maintained that the export price at which cashew kernels were exported directly by the assessee can be relied on to fix an ALP yet he did not peruse the....
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.... conclude that sale price was not static. It was submitted that the CIT(A) was not correct on picking out a single invoice on maximum price pertaining to direct exports, and to say why this price was not attainable on sale of all grades. For this, the Ld. AR relied on the decision of the Tribunal in the case of ITW India Ltd. vs. ACIT (2015) 169 TTJ (Del) 60. The CIT(A) could not appreciate that superior higher grades sold to sister concerns were at cost plus and were in tandem with export market price. The Ld. AR submitted that pricing for exports cannot be equated with that for domestic sales. For this, he relied on the decision of the Tribunal in the case of (2011) 142 TTJ (Pune) 89. 6.2 Thus, it was submitted that both A.O. and CIT(A) failed to consider the quality of kernels entering the sales before reaching an erroneous conclusion that assessee did not follow ALP and cost was assumed to be ALP at all times leading to distorted results. The CIT(A) placed reliance on the judgment of the Gujarat High Court in the case of Patel Chemical Works vs. CIT (2004) 265 ITR and 273, wherein it was held that a sale to sister concern at a price below market price was a device for tax avo....
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..... A comparison with peers in industry would have helped A.O. to come to a cogent conclusion that transactions were at Arm's Length. 5 Sales Tax Department had accepted the Accounts each year. 6. Confirmation of abysmally low addition of Rs. 43000/- by A.O. in Assessment Year 2008-09 was the basis for CIT(A) to come to an erroneous conclusion of underpricing. A.O. ought to have appreciated that cost + pricing is generally adopted for sales (exports) of superior grades. The same principle cannot be extended to inferior grades since by virtue of their nomenclature they have a market price lower than cost, a fact which is verifiable from invoices, Cashew business bulletin & other literature. This proved commercial expediency or compelling circumstances to sell such grades below cost. ALP is worked out by taking comparable transactions in comparable circumstances and by allowing a reasonable margin for various factors like timing of contracts for exports, composition of grades, quality of kernels, exchange rate, a reasonable % to cover indirect overheads & profit of related units. Pricing has to be identified separately for wholes & splits. After all, apples have to be compare....
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.... diversion of profits was possible to enable sister concerns only to enjoy higher 80HHC benefit. Hence, he concluded that the transactions were not genuine and bonafide. Accordingly, the Ld. AR submitted that the judgment of the Supreme Court in the case of Calcutta Discount Company cited supra was not applicable and that section 80HHC went out of statute from assessment year 2005-06. 6.8 The Ld. AR relied on the judgment of the Supreme Court in the case of Calcutta Discount Co. Ltd Vs. (1973) 91 ITR 8 (SC) endorsing Madras High Court in Sri. Ramalinga Choodambika Mills Ltd Vs. CIT (1955) 28 ITR 952 and the judgment of the Supreme Court in the case of CIT vs. Virtual Soft Systems Ltd. (2018) 404 ITR 409 wherein it was held that transactions are genuine & bonafide & not sham. Real income concept to be followed which CIT(A) had rightly observed. The Ld. AR relied on the decisions of the Tribunal in the case of ITO vs. PKS Holdings (2017) 152 DTR 215 (Kol) (Trib.) and in the case of Flipkart India (P) Ltd. vs. ACIT (2018) 193 TTJ (Bang.) 685. The Ld. AR relied on the judgment of the Supreme Court in the case of CIT & ANR vs. Glaxo Smithkline Asia (P) Ltd. (2010) 236 CTR (SC) 113 and....
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.... assessee that both assessee and payee sister concern are liable to pay tax at the same rate, hence no disallowance u/s. 40A(2) is called for has merit. 7. The Ld. DR relied on the order of the lower authorities. 8. We have heard the rival submissions and perused the material on record. The Ld. DR reiterated the stand by the Revenue that the assessees shifted the profits to the sister concerns, thereby reducing its tax liability. On the other hand, the learned AR placed reliance on the judgment of the Hon'ble Supreme Court in the case of CIT vs. Glaxo Smithkline Asia (P) Ltd. (2010) 236 CTR (SC) 113, wherein held that even in the case of domestic transaction between the related persons it was necessary to examine whether there was any motive to shift the profit making concern to a loss making concern. It was submitted that in the present case, there was no motive to shift profits from the hands of the present assessees to the sister concerns and it was revenue neutral in the sense that the profits of the sister concerns should be reduced to the extent the assessees' profits is sought to be reduced. Prior to abolition of section 80HHC, there was an apprehension that underpricing....
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.... the Supreme Court in the case of S.A. Builders vs. CIT 288 ITR 1. The law is wellsettled that the Revenue cannot insist on the way in which the businessman should conduct his business. The Revenue cannot compel a businessman to sell his products at a particular price, so that the assessee derives maximum profits so as to pay higher income tax. The calculation of cost of production on which the Assessing Officer has placed reliance, has nothing to do with the completeness and correctness of the books of account. This allegation is very vague and it is not sufficient to reject the book results of the assessees. Being so, we cannot uphold the conclusion reached by the lower authorities. 8.2 The transactions entered by the assessees with the sister concerns are genuine and bona fide and there is no allegation by the Assessing Officer that they are sham transactions. The price charged by the assessees to their sister concerns are in conformity with the normal commercial practice whereby the assessees got huge orders in large quantities with timely recovery of the debts. In our opinion, in the absence of specific findings by the Assessing Officer that the transactions were entered int....
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.... Jyothi Industries 330 ITR 573. 8.3.1 The addition made on conjectures and surmises cannot be sustained. All the goods sold by the assessee are not of same quality. There were different grades of kernels and also pieces and butts. Therefore, uniform rate cannot be applied and the rates at which the sister concerns sold in the export market cannot be the basis for determining the sale value of the assessee's products. The Assessing Officer computed the cost of production per kg. and observed that the assessee sold the goods below the cost of production per kg. and thereafter compared it with price at which the sister concerns sold the goods . There were no comparable cases brought on record by the Assessing Officer. This is the only evidence on the basis of which the Assessing Officer had formed the belief of shifting of profit and observed that there was understatement of sale price. These material are not sufficient to hold that the assessee had under-invoiced the sale price. We, accordingly, do not find any reason to agree with the finding of the lower authorities. In these cases, there were different varieties of grades of kernels sold by the assessee and there are different f....
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....considered, then no addition is warranted. For this, reliance is placed on the decision of the Tribunal in the case of Merck Ltd. vs. DCIT (2016) 139 DTR (Mum Trib.) 1. 8.4 Further, as held by the Madras High Court in the case of CIT vs. Anandha Metals Corporation 273 ITR 262 when the return of the assessee accepted by the Commercial Taxes Department is binding on the Income Tax authorities, the Assessing Officer is not justified to reject the value of the closing stock declared by the assessees which was accepted by the Commercial Taxes Department and consequently, no addition could be made in respect of unexplained differences between closing stock as noted in the seized documents and the value determined by the assessee. By applying the above ratio, we are of the opinion that there is no finding by the I.T. Department that the assesseees' returns were rejected by the Commercial Taxes Department and it was duly accepted by the Commercial Taxes Department and in the accepted accounts, the I.T. Department cannot find any difference so as to make the additions. In our opinion, before rejection of books of account, the Assessing Officer should prove that the books of account produc....
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....ve alone the Assessing Officer's own logic . Accordingly, we are of the opinion that the basis adopted by the Assessing Officer for making additions towards lower profits cannot be sustained. As such, the additions made on this count are deleted in all the assessment years. This ground of appeals of the assessees for all the assessment years is allowed. 8.6 The 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, reliance is placed 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. 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). Pu....
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....ce remained constant throughout the year for every grade and for every kilogram so that on the basis of average closing stock price the entire sales should be above this price. Hence, the application of weighted average price of entire sales was not an appropriate method to conclude underselling as it had severe limitations. This view of ours is also supported by the order of the Tribunal in the case of Vijay C. Kamdar vs. ITO (2009) 305 ITR (AT) 163 (Mum) where it was held as follows: (iii) that the Assessing Officer formed the belief that the assessee over invoiced the purchase by relying upon the statement of K in the income-tax proceedings. The disallowance was without making any further enquiry only for the reason that the supplier of the assessee did not appear before him. This statement was not relied upon by the Additional Commissioner of Customs and he had dropped the proceedings. These materials were not sufficient to hold that the assessee had over-invoiced the purchases. There were different varieties of pens available in the market whose costs differed according to quality and there were different factors to determine the cost of pens. Without bringing any material ....