9911796707
|
Home
Forgot password New User/ Regiser ⇒ Register to get Live Demo
2024 (10) TMI 521 - AT - Income TaxDisallowance of sales commission paid to two Associated Enterprise (AE) being foreign entities - onus to prove - 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 - CIT(A) deleted addition - HELD THAT - The assessee never furnished the details before the AO w.r.t. sales commission which also included sales commission to both domestic parties as well foreign parties namely Heucotech Limited, Edward Kellar(Philippines) Inc., Diethelm Co.(SE Asia) Limited, Fuji Kasei Trading Corporation etc.. The AO mistook the entire commission as being paid to the afore-stated two foreign parties. Thus, the sales commission was never verified by the AO as the assessee never submitted complete details of sales commission, despite being called upon by the AO to explain the same. CIT(A) gave relief on account of sales commission without calling remand report from the AO, as additional evidences were filed by the assessee w.r.t. the aforesaid sales commission paid by the assessee which were not forwarded by ld. CIT(A) to the AO for comments/remand report. Thus, there is a breach of Rule 46A of the Income-tax Rules, 1962, and the matter needs to be restored back to ld CIT(A) for adjudicating again sales commission. Rule 46A is not an empty formality - Thus ground of appeal raised by Revenue so far as allowability of sales commission by ld. CIT(A) which was earlier disallowed by the AO, is allowed for statistical purposes. Sales commission paid by the assessee to the foreign entity Heubach GMBH - we are of the considered view that the assessee has discharged its onus and now it was for the Revenue to have brought on record cogent material to disallow the sales commission paid by the assessee to its AE Heubach GMBH, which department failed to do so Thus, ground of appeal raised by Revenue so far as allowability of sales commission paid to Heubach GMBH by ld. CIT(A) which was earlier disallowed by the AO, is dismissed as we donot find any defect in the appellate order passed by ld. CIT(A) on this issue. We order accordingly. Sales commission paid to Darlington Enterprises - 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 was for the Revenue to have brought on record cogent material to disallow the sales commission paid by the assessee to Darlington Enterprises Limited, which department failed to do so Thus, ground of appeal raised by Revenue so far as allowability of sales commission paid to Darlington Enterprises Limited by ld. CIT(A) which was earlier disallowed by the AO, is dismissed as we do not find any defect in the appellate order passed by ld. CIT(A) on this issue. We order accordingly. Undervaluation of finished/Closing stock of Beta Blue - DR submitted that it is the valuation of stock which is a matter of dispute between the assessee and the Revenue -submitted that the assessee has consistently followed FIFO method by applying Weighted average method - HELD THAT - As observed that the assessee has applied weighted average cost method of the yearly costs while valuing finished stock, and weighted average cost method of monthly costs while valuing WIP. The assessee has itself stated that WIP is of 4 days, while we have observed that finished goods holding for different products varies from 1-3 months. AS-2 clearly stipulates that formula used in determining the cost of an item of inventory needs to be selected with a view to providing the fairest possible approximation to the cost incurred in bringing the item to its present location and condition. FIFO formula assumes that the items of inventory which were purchased or produced first are consumed or sold first, and consequently the items remaining in inventory at the end of the period are those most recently purchased or produced. Under the weighted average cost formula, the cost of each item is determined from the weighted average of the cost of similar items at the beginning of a period and the cost of similar items purchased or produced during the period. The average may be calculated on a periodic basis, or as each additional shipment is received, depending upon the circumstances of the enterprise. Thus, in view of prescription by AS-2, it requires to be determined the fairest possible approximation to the cost incurred in bringing the items to its present location and condition. The assessee need to explain this aspect of reasons for adopting yearly costs while valuing finished goods and adopting monthy costs while valuing WIP, and we are of the considered view that the assessee be given one more opportunity to justify before the AO reasons for adopting weighted average cost method of the yearly costs while valuing finished stock, and weighted average cost method of monthly costs while valuing WIP. The claim of the assessee that the assessee has consistently followed the same method while valuing inventory over the years and the same was accepted by Revenue also need verification. Thus, to this limited extent, we are setting aside the matter back to the file of the AO for adjudication afresh, after giving opportunity to the assessee.
Issues Involved:
1. Disallowance of sales commission for the assessment year 2009-10. 2. Valuation of closing stock of Aluminum Hydroxide for the assessment year 2010-11. 3. Valuation of finished stock of Beta Blue for the assessment year 2010-11. 4. Valuation of finished stock of Red Pigment 254 for the assessment year 2010-11. 5. Valuation of closing stock of Red Pigment for the assessment year 2010-11. Detailed Analysis: 1. Disallowance of Sales Commission (A.Y. 2009-10): The primary issue was the disallowance of sales commission of Rs. 2,32,04,000/- paid to foreign entities Heubach GMBH and Darlington Enterprises Ltd. The Assessing Officer (AO) disallowed the commission, arguing that the assessee failed to provide documentary evidence proving the services rendered. The CIT(A) deleted the disallowance, noting that similar commissions were paid in previous years without disallowances and that the Transfer Pricing Officer (TPO) had approved the transactions at Arm's Length Price. The Tribunal upheld the CIT(A)'s decision, noting that the assessee had provided agreements and debit notes as evidence, and the AO had not conducted further inquiries to disprove the genuineness of the transactions. 2. Valuation of Closing Stock of Aluminum Hydroxide (A.Y. 2010-11): The AO added Rs. 8,65,735/- to the income, claiming undervaluation of closing stock of Aluminum Hydroxide, as the closing stock was valued lower than the opening stock. The assessee argued that it followed Accounting Standards (AS-2), valuing inventories at cost or net realizable value, whichever is lower. The CIT(A) deleted the addition, accepting the assessee's explanation that different grades of Aluminum Hydroxide were sold at different prices and that the valuation method was consistent and compliant with accounting standards. The Tribunal agreed with the CIT(A), noting the AO's failure to provide adverse comments in the remand report. 3. Valuation of Finished Stock of Beta Blue (A.Y. 2010-11): The AO added Rs. 1,58,28,535/- for undervaluation, arguing that the finished stock was valued lower than the work-in-progress (WIP). The assessee explained that different methods were used for WIP and finished goods due to their production cycle and inventory characteristics. The CIT(A) accepted the assessee's valuation method, noting that applying a consistent method would have resulted in a lower valuation. The Tribunal upheld this decision, emphasizing the need for a fair approximation of costs in compliance with AS-2. 4. Valuation of Finished Stock of Red Pigment 254 (A.Y. 2010-11): The AO added Rs. 41,94,030/- for undervaluation, as the closing stock was valued lower than the opening stock. The assessee justified the lower valuation due to increased production spreading fixed overheads over a larger quantity. The CIT(A) deleted the addition, agreeing with the assessee's rationale and noting that the AO did not dispute the overhead figures. The Tribunal concurred with the CIT(A), recognizing the validity of the assessee's valuation method. 5. Valuation of Closing Stock of Red Pigment (A.Y. 2010-11): The AO added Rs. 7,11,994/- for undervaluation, observing discrepancies in the valuation of different grades of Red Pigment. The assessee provided a detailed breakdown of different pigments, arguing that variations in valuation were due to differences in raw material consumption and overheads. The CIT(A) accepted the assessee's explanation, directing the deletion of the addition. The Tribunal agreed with the CIT(A), acknowledging the comprehensive records maintained by the assessee and the consistency of the valuation method. Conclusion: The Tribunal partly allowed the appeals for statistical purposes, directing the AO to reconsider specific valuation aspects for the assessment year 2010-11 while upholding the CIT(A)'s decisions on other issues. The Tribunal emphasized the importance of adherence to accounting standards and the necessity for the AO to conduct thorough inquiries before making disallowances.
|
