TaxTMI 
TaxTMI 
2024 (10) TMI 521
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....g grounds of appeal in Memo of Appeals filed with Income Tax Appellate Tribunal, for assessment year(s) 2009-10 and 2010-11, respectively:- GROUNDS OF APPEALS: A.Y. 2009-10 "1. On the facts and in the circumstances of the case and in law, the Ld. CIT (Appeals) erred in deleting the disallowance of sales commission of Rs. 2,32,04,000/- paid to two Associated Enterprise (AE) being foreign entities without appreciating the fact that the assessee failed to discharge the primary onus placed on it to establish the legitimate requirement for its business and genuineness of the payment by submitting relevant documentary proof. 2. On the facts and in the circumstances of the case and in law, the Ld. CIT (Appeals) erred in holding that necessary documentary evidence in the form of sales commission agreement was given by the assessee, which do not narrate the nature of services to be rendered by the two foreign entities so that the AE become entitle for sales commission, as such the business requirement for this payment was not established. 3. The appellant craves to add to, amend or alter the above grounds as may be deemed necessary. Relief claimed in a....
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....der under section 92CA(3) of the 1961 Act was passed by TPO on 14.12.2012 approving the transactions at Arm's Length Price with AE. The AO, during the course of assessment proceeding observed that the assessee has paid sales commission to two parties i.e. Heubach GMBH and Darlington Enterprises Ltd. The AO observed that the Heubach GMBH is an Associated Enterprise, and both the parties are foreign parties. The AO observed that in the case of AE, sale commission is an easy instrument to transfer tax liability from the AE situated in a country where tax rates are higher to another AE which is situated in a country where tax rates are favorable. The AO observed that the sales commission can be easily shown as an expense without actual rendering of any services by the concerned party and in the case sales commission paid to foreign party, it is difficult to verify the same through third party enquiry under section 133(6). The AO asked the assessee to submit documentary evidences to prove the services being actually rendered in lieu of sales commissions payment and benefit derived from it by the assessee. In response, the assessee provided the copy of agreement with both the parties Heu....
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....d. CIT(A) observed that the assessee has entered into an agreement dated 01.04.2004 in which the detailed terms and conditions were recorded as the assessee has filed the details of services rendered, and the parties to whom sales were made and debit note were issued for the commission expenses. The ld. CIT(A) observed that Darlington Enterprises was paid commission since assessment year 2005-06 and in the immediately preceding assessment year, the commission paid was Rs. 1,94,46,030/-. Thus, ld. CIT(A) observed that the Darlington Enterprise was a genuine concern and has rendered services in foreign countries to the assessee. With respect to the commission paid to Heubach GMBH(AE) at Rs.1,48,14,533/-, the ld. CIT(A) observed that the commission was paid as per the terms and condition of the agreement dated 14.06.2007. The ld. CIT(A) observed that other supporting evidences were also furnished by the assessee in this regard. It was also observed by ld. CIT(A) that the payment of commission to Heubach GMBH(AE) was also reflected in the audit report furnished in the Form No.3CEB as per section 92E relating to international transactions. The ld. CIT(A) observed that the TPO has examin....
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....on on sales to the tune of Rs. 2.32 crores(PB/page 20), which translates into total sales commissions paid being around 1% of the sales. In the immediately preceding year also, the assessee paid sales commission to the tune of Rs. 2.21 crores on the total sales of Rs. 187.43 crores. The AO has disallowed sales commissions to the tune of Rs. 2,32,04,000/- on the grounds that the sale commission was paid to two foreign parties namely Heubach GMBH and Darlington Enterprises Limited. It is admitted position that the assessee vide reply dated 11.02.2013 has provided before the AO the copy of agreement with both the afore-stated parties and the vouchers. We have gone through the reply dated 11.02.2013 furnished by the assessee before the AO which is placed in paper book at page 91-136. The AO vide questionnaire dated 06.07.2011 had asked the assessee vide question number 11 to submit details of sales commissions paid by the assessee to the tune of Rs. 2,32,04,000/-. While submitting the details before the AO, the assessee did forward the copies of agreements with Heubach GMBH and Darlington Enterprises Limited as well other documents such as some of the invoices raised by these two parti....
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....bserved that the assessee has duly provided the copy of the agreement between the assessee and Heubach GMBH as well some of the debit notes raised by the said party. These debit notes clearly demonstrate the sales effected through Heubach GMBH and the sales commission charged by Heubach GMBH. The AO never asked /show caused the assessee to produce any further documents to prove rendering of services, nor found any defect in these debit notes dehors the books of accounts and other records maintained by the assessee. The assessee has discharged its primary burden by placing all relevant documents, and it was for the AO to have made further necessary enquiries/investigations such as issuing summons to the Directors/sales manager etc. of the assessee to record their statement but the AO did not made any further enquiries. The books of accounts were also not rejected by the AO, and also no specific defect is pointed out by the AO except that the assessee failed to provide documentary evidence to prove rendering of services. The AO is both the investigator as well adjudicator. Thus, in view of the above, we are of the considered view that the assessee has discharged its onus and now it w....
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....ot find any defect in the appellate order passed by ld. CIT(A) on this issue. We order accordingly. 6. Thus, in nut-shell the appeal of the Revenue for assessment year 2009-10 is partly allowed for statistical purposes. We order accordingly. Now, we will take up appeal of the Revenue for assessment year 2010-11 in ITA No. 110/SRT/2017 7. The assesse company has e-filed return of income for A.Y. 2010-11 on 27.09.2010, declaring total income at Rs. Nil after adjusting brought forward unabsorbed depreciation. The same was processed by Revenue under Section 143(1). The case was selected by Revenue for framing scrutiny assessment. Notice under section 143(2) and 142(1) were issued by AO to the assessee, and were claimed by AO to have been duly served on the assessee. The AO observed that the assessee is engaged in the business of manufacturing of Chemicals. The AO also observed that the Gross Profit during the year declared by the assessee was 20.43% as against in the preceding year, GP rate of 31.18% and there has been a fall in the Gross Profit Ratio. 6.2 The AO observed during the course of scrutiny assessment proceedings on perusal of the quantitative details in respect ....
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...., costs of conversion and other costs incurred in bringing the inventories to their present location and conditions. 6. Here we invite your kind attention Note No.1 (b) of Schedule 21 to the audited annual account wherein such method of accounting for valuation of inventories has been prescribed. As stated therein the cost of work in progress and finished goods is valued at Material cost plus appropriate share of labour, manufacturing and other overhead. The cost of material is valued on weighted average method. For your ready reference detailed valuation of opening stock and closing stock of ATH and its net realizable value is enclosed as Annexure-2 along with necessary supporting evidences. Based on such information, the average cost of production of ATH as on 31.03.2010 is arrived at Rs. 60.62 per kgs. The NRV (being average sales value of ATH for the month of March 2010) is computed to Rs. 50.82 per kgs. 7. Based on the above working your office may kindly note that the average cost of production of closing stock comes to Rs. 60.62 which is higher than the average cost of opening stock of ATH of Rs. 56.51 per kgs. Since ATH is required to be valued at lower of cost or NRV....
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.... as goods sold on 27/03/2010 at less than half the price is with the narration" Aluminum Hydroxide Technical". 5.35 The above observation clearly indicate that the goods which has been sold on two immediate dates with a difference of selling price of more than 100%, clearly indicate that the goods sold at half the price is definitely a waste or of poor/inferior in quality. Accordingly same being considered for deriving the NRV, is definitely erroneous. 5.36 Secondly on perusal Annexure-2, the Raw Material Cost, Packing Material and overheads figures have been adopted at Rs. 26.82/- Rs. 0.94/- and Rs. 32.86/- per unit respectively. However the assessee was categorically asked to furnish the working of the same, which it has failed to do so. 5.37 It is to be understood, principle of accountancy revolves around one aspect and that is to give a true income of the business. Assessee has an option to adopt either FIFO method of WAM (Weighted average method), but the same should be such, which should not distort the real income of the business. As such while taking the average of the cost of Raw Material for the month of March, if there are purchases made whose ....
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.... of the same products cannot be lower than the value of closing WIP of the same product. Your office has therefore proposed to make addition of Rs. 1,90,52,447/- [(276.30-245.70) x 622629 qty]. In respect of the same we submit that your office has not computed the average value of closing WIP correctly. The correct average value of such WIP comes to Rs. 258.39 per kgs. Your office has considered only one product viz. Beta Blue 15.WB-Dried Powder and not the other 3 types of Beta Blue 15.30. Further the average value of closing stock of finished goods is Rs. 233.66 per kgs and not Rs. 245.70 per kgs The detail of the same along with working average cost of Rs. 258.39 & 233.66 is given vide Annexure-5. Based upon such working your office may note that the valuation of WIP is carried out at higher value as compared to the finished goods value. This is on account of reason that while computing RMC cost [for inclusion in WIP], the Assessee has considered the latest month moving average cost whereas while computing the RMC for inclusion in Finished Goods), the Assessee has considered weighted average cost of entire year. Further your office may appreciate that the qty. of finished stock ....
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....P is shown at Rs. 4.06/-, Rs. 1.066/-, Rs. 4.09/- and Rs. 23.40/-. But the same is not included in the average of Rs. 258.39/-, now claimed to be correct by the assessee. 2. The overheads expenses determined for WIP and that of Finished stock (77.05/-) varies a lot. 3. There is no working furnished in respect of deriving the Overhead expenses in respect of WIP as well as finished stock, as shown in the chart. 4. It has been stated in reply to the query regarding Aluminum Hydroxide that: "Your office may note that the opening value of such stock is also valued at NRV which was less than its cost. We therefore request your office not to make any adjustment for valuation of closing stock of Aluminum Hydroxide. " However the NRV value of finished stock is shown at Rs. 282.64 per Kg. in Annexure-5. While the average value stated to be correct is shown at Rs. 258.39/- per Kg. 5. Similarly the deriving of Packing material cost in respect of finished stock at Rs. 2.53 has also not been extended. 5.48 In view of the above observations it is amply clear that there is an anomaly in the working of finished stock of Beta Blue, which....
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....opening stock of Red Pigment-254 is Rs. 1434.03 per Kg. and Red Pigment-122 is Rs. 674.45 per kgs. For your ready reference the valuation of the same is submitted marked as Annexure-6 along with working of allocation of RMC cost and Overhead. Your office may kindly note that the valuation of closing stock of Red Pigment-122 per kgs is higher as compared to its opening stock. Whereas the valuation of closing stock of Red Pigment-254 has been decreased from Rs. 1434.03 per kgs to Rs. 1092.83 per kgs Here we invite your attention to Annexure-6 wherein your office can observed that the RMC cost included in closing stock of such finished goods is higher as compare to RMC cost included in opening stock. However the allocation of overhead included in closing stock is lower as compared to overhead included in opening stock. This is on account of decrease in fixed overhead absorption rate of fixed overhead due to increase in production of Red production by 28%. During the F.Y. 2008-09, the Assessee has produced 536,784 kgs of quantity of Red whereas the production of Red has been increased to 687,295 kgs of quantity of Red in F.Y. 2009-10. In view of the same the fixed overhead is allocated....
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....spelt out in the course of scrutiny, that whatever is the contention, the same is required to be backed by documentary evidence as also clear working. It is gathered that the assessee's claim is that the overheads expenses considered in the working of closing stock of Red Pigment 254, is less compared to that of opening stock. However in the working for overheads expenses in respect of Aluminum Hydroxide, in Annexure-2, the overheads expenses considered for closing stock is higher as compared to that of opening stock. 5.55 Hence the claim made is totally baseless and without any supporting evidence. In fact it can be assumed that the assessee has with purpose not extended such evidence, since it is aware that on account of which his contention would not stand the test of appeal. As pointed out the question that assessee needs to reply is that in respect of manufacturing of one item ie Aluminum Hydroxide, overheads expenses considered for closing stock is higher as compared to that of opening stock, than why the same is reverse in regards to this item under consideration. In view of this, the undervaluation of closing stock of Red Pigment 254 is worked out at Rs. 41,94,....
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.... of undervaluation of closing stock of Red. In respect of the same we most respectfully submit that there is no undervaluation of closing stock. The data reported in the annual accounts consists of different types of pigments of Red. The opening and closing stock of finished goods of "Red" consists of various types & grades of Red Products. For your ready reference we are submitting the complete break up of opening and closing stock of "Red" marked as Annexure-9. From the said annexure your office can verify that the Red consists of 6 different pigments of Red. The costing of each types of pigment "Red" is different due to consumption of different level of RMC & overheads. The breakup of the same is also given in the said Annexure. The working for valuation of RMC and Overhead along with supporting documents is enclosed as Annexure-10. 10. It would not be correct to compare the average cost of such six products since different products have different pricing components. Your office may kindly note that out of six products, the valuation of closing stock of two products is lower than its opening stock whereas the valuation of closing stock of balance four products is higher....
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....o Rs. 7,11,994/-, Penalty proceedings u/s. 271(1)(c) is being initiated for concealment of income and for furnishing of inaccurate particulars." 10. Aggrieved by the assessment order framed by the AO for assessment year 2010-11, the assessee filed first appeal and made detailed submissions before ld. CIT(A). The ld. CIT(A) also called for remand report from the AO. The contentions of the assessee are recorded by ld. CIT(A) at page no. 17 to 26. The ld. CIT(A) called for the remand report. The AO submitted the remand report as under:- "2. During the course of appellate proceeding, the AR of the assessee before your honour has filed an application u/s. 46A for admission of additional evidences along with written/submission paper book. Hence, as directed by your honour, the additional evidences/ submissions made by the AR of the assessee before your honour has been verified. In this regard, I submit herewith the desired report as under: 2.1. During the course of remand proceedings, an opportunity of being heard has been given to the assessee and in response, the AR of the assessee attended before the undersigned. During the course of remand proceedings, the AR of ....
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....following the methods prescribed by accounting standards for valuation of inventories and has adopted weighted average method for the purposes of ascertaining the cost of material. All the appropriate share of labour, manufacturing and other overhead are added to reach the value of the closing stock. Based on this, the average cost of production of ATH as on 31.03.2010 was arrived at by the appellant at Rs. 60.62 per kg. The net realizable value was determined by the appellant being average sales value of ATH for the month of March, 2010 at 50.82 per kg. and accordingly, this rate was adopted for the valuation of the closing stock being lower of the cost of production and net realizable value. The AO pointed out that the appellant had sold the same products on 27.03.2010 at 62 per kg., while on immediately following date, the material was sold at Rs. 30 per.kg. He has also stated that in the bill dated 28 03.2010 the narration of the goods is "Dried Aluminium Hydroxide Gel IP," where as goods have been sold on 27.03.2010 at less than half the price with the narration "Aluminium Hydroxide Technical". Accordingly, he held that the goods sold at half price is definitely a waste produc....
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....that the average value of closing WIP was Rs. 258.39 and not 276.30 as stated by the AO in his show cause. The AO has stated that two different methods i.e. FIFO as well as WAM has been adopted for valuation of WIP and that of finished stock which is illogical and same method has to be adopted for valuation of both the products. He also observed that the overhead expenses in respect of WIP had not been included in the average of 258.39. Accordingly, the AO made addition of (Rs.258.39- Rs. 233.66) i.e. 24.73 per kg. Since, the total quantity of closing stock was 6,40,054 kgs, hence, total addition of Rs. 1,58,28,535/- was made. 6.5.1. In the submission made during the appellate proceedings, the appellant has explained that the quantity of WIP was 77,496 kgs., whereas, of the finished stock it was 6,40,054 kgs. Thus, the quantity of finished stock was much higher than the quantity of WIP. Further, it was stated that production cycle of Beta Blue was only 4 days. Thus closing WIP would represent only the stocks of the last batches produced. Accordingly, the appellant has adopted the weighted average cost of raw materials for the last month for the purposes of valuation of clo....
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....s been disclosed by the appellant resulting into lower profit for the year under consideration. Hence, the AO's observations are not acceptable and it is held that the appellant has valued the closing stock by correctly following the method prescribed by the Accounting Standard AS2. Hence, this addition is also directed to be deleted. 6.6 The additions of 41,94,030/- on account of revaluation of Red Pigment 254 and of 7,11,994/- on account of revaluation of Red Pigment. The basis for addition in the case of Red Pigment 254 is the same as ATH. The AO has stated that the valuation of opening stock is at the rate of 1,434.03 per kg, where as, that of closing stock is of Rs.1092.87 per kg. The appellant has submitted that the raw material cost included in closing stock of finished goods is higher as compared to RMC cost included in opening stock. Further, the allocation of overhead Included in closing stock is lower as compared to overhead included in opening stock on account of higher production of this product during FY 2009-10 as compared to FY 2008-09. Besides, the figures of overhead expenditure have been accepted by the AO. The appellant has also contended t....
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....r the assessee drew our attention to the appellate order passed by ld. CIT(A) and submitted that the assessee has consistently followed FIFO method by applying Weighted average method. He drew our attention to para 5.44 and 5.45 of the AO, and submitted that no additions are warranted. The ld. Counsel for the assessee relied upon the appellate order passed by ld. CIT(A). 12. We have considered rival contentions and perused the material on record. The whole controversy in this appeal filed by Revenue revolves around the valuation of closing stock of inventories as at the year end i.e. work in progress and finished stocks, with respect to methodology adopted by the assessee while valuing such closing stock. The assessee is engaged in manufacturing of chemicals. The assessee produces different grades of chemicals, which have different uses keeping in view technicalities and composition. The assessee has claimed to have followed Accounting Standard 2 prescribed by ICAI while valuing inventories, and it is claimed that the assessee has adopted FIFO method by applying weighted average cost. It is claimed that the same method is adopted consistently over the years, and the revenue has ....