2012 (10) TMI 718 - AT - Income Tax

Sale of raw material to holding company at less than the market price - CIT(A) deleted the addition - Held that - Assessee company purchased raw material namely fruit juice concentrate during the year 31.3.2002 for the purpose of manufacturing Tropicana Twister , a proposed new brand of juice drinks. The aforesaid raw material had been purchased in the preceding year and represented the raw material and was in respect of the proposed new brand of juice drinks. However, due to change in the market and lack of demand in the aforesaid product in the Indian Market, proposed launch of the aforesaid product could not be materialized and launch of the aforesaid product was abandoned. Also the concentrate which was imported by the assessee has a shelf life which was about to expire, and as such, assessee considered it appropriate in its business interest to sell the same to recover the cost and thus it sold the same to its holding company. Thus, there was no loss incurred in this regard. This decision was a business decision and was based on the realization that the product does not command adequate demand. Loss on sale of packing material as well as gross profit addition were based on the same rationale that the new product has limited demand in the Indian market. It is the contention of the assessee that the said aforesaid concentrate has a limited shelf life, since the same was due to expire. Assessee had to sell the same to its holding company to minimize the loss in this regard. Thus, this was a business decision of the assessee and Revenue cannot question the same. Also no evidence that assessee has sold the concentrate to its holding company which in turn has made a profit in this regard, by selling it to others. Hence, the contention of the revenue that assessee could also have found buyers as the holding company is also devoid of cogency - in favour of assessee.

Summary

Issues:
- Addition made on account of sale of raw material by the assessee company to its holding company at less than the market price.
- Deletion of addition on account of loss in sale of packing material.

Analysis:
- The Assessing Officer observed that the assessee company sold raw material and packing material to its holding company at cost price due to shelving the plan to launch a new product. The Assessing Officer made additions to the income of the assessee based on these sales. The Assessing Officer held that the company extended undue benefit to its holding company and made trading additions and disallowed the loss on sale of packing material.

- The Commissioner of Income Tax (A) noted that the cancellation of the product launch was a business decision of the assessee and that selling the raw material to recover the cost price was a reasonable step. The Commissioner deleted the additions made by the Assessing Officer, stating that there was no case for the application of certain provisions. The Commissioner also observed that the Assessing Officer did not appreciate the circumstances leading to the sale of the raw material and packing material.

- The Tribunal considered the submissions and records. It found that the sale of raw material and packing material at cost price to the holding company was a business decision due to the limited demand for the new product. The Tribunal upheld the Commissioner's decision to delete the additions made by the Assessing Officer. It noted that the actions of the assessee were based on commercial expediency and that the provisions cited by the Assessing Officer were not applicable in this case.

- The Tribunal referred to relevant precedents and concluded that there was no illegality in the Commissioner's order. The appeal filed by the Revenue was dismissed, affirming the decision to delete the additions made by the Assessing Officer.