2020 (6) TMI 820 - AT - Income Tax

TP Adjustment - Upward adjustment u/s. 92CA(3) - Adjustment in respect of sale of Di-Penta to AE at lower rate than the rate at which the same product is sold to non-AE in domestic market - HELD THAT - The assessee had sold substantially large quantity of Di-Penta to its AE in Germany i.e. 18,500 Kgs @ Rs.256/- per Kg, whereas, the assessee sold same product in the domestic market at Rs.333/- per Kg. Undisputedly, the quantity of product sold in the domestic market was mere 460 kgs. Thus, where there is huge difference in the volume of sales to AE and non-AE, comparison of rates between the two transactions is unfair. The assessee was justified in offering volume discount to AE, as the quantity sold to AE was more than 40 times the quantity sold to non AE in domestic market. Assesse had offered volume discount to AE on a product that was slow moving and had miniscule demand. The assessee had already stopped manufacturing of the said product. This fact is evident from annual accounts of the assessee for the Financial Year ending on 31/03/2010. The assessee temporarily stopped manufacturing Di-Penta since January 2009, as there was global economic slowdown and the demand for the product had reduced substantially. In the case of Clarient Chemicals (India) Ltd 2013 (11) TMI 1703 - ITAT, MUMBAI in principle accepted volume discount to AE, where there was substantial difference in volume of sales to AE and Non-AEs. In the case of ITO vs. Adidas India Marketing (P) Ltd 2016 (4) TMI 663 - ITAT DELHI accepted discount on export of goods to AE where the assessee had sold old stock/ slow moving items to its AE. Thus upward adjustment made in respect of sale of Di-Penta to AE is unjustified and hence, deserves to be deleted. We hold and direct accordingly. The ground No.1 of the appeal is allowed.

Summary

Issues:
1. Adjustment u/s. 92CA(3) of the Act aggregating to Rs.14,24,500/-
2. Action of A.O of initiating penalty proceedings u/s 271(1)(c)

Analysis:

Issue 1: Adjustment u/s. 92CA(3) of the Act
The appeal challenged an upward adjustment under section 92CA(3) of the Act regarding the sale of Di-Penta to an Associated Enterprise (AE) at a lower rate compared to non-AE domestic sales. The Transfer Pricing Officer (TPO) made an adjustment to the Arms Length Price (ALP) based on the differential pricing. The assessee contended that the volume discount offered to the AE was justified due to the substantial difference in the volume of sales. The Tribunal acknowledged the volume discount practice in similar cases, citing precedents like Clarient Chemicals (India) Ltd. vs. JCIT and ITO vs. Adidas India Marketing (Pvt.) Ltd. The Tribunal found the adjustment unjustified, considering the slow-moving nature of the product, the volume disparity, and the economic circumstances leading to the temporary halt in manufacturing.

Issue 2: Initiation of Penalty Proceedings u/s 271(1)(c)
The second ground of appeal challenged the initiation of penalty proceedings under section 271(1)(c) of the Act. The Tribunal deemed the challenge premature at this stage, dismissing it as such. The premature nature of the challenge indicated that further proceedings related to penalty assessment needed to be addressed at the appropriate stage in the process, separate from the current appeal on the substantive tax adjustments.

In conclusion, the Tribunal partially allowed the appeal, directing the deletion of the unjustified adjustment while dismissing the challenge to the premature initiation of penalty proceedings. The Tribunal also noted the delay in pronouncing the order, attributing it to extraordinary circumstances due to the COVID-19 pandemic, following a pragmatic approach in interpreting the time limits for order pronouncement.