2009 (11) TMI 653 - AT - Income Tax

Closing stock on account of unutilized Modvat Credit - AO taking note of the provisions of section 145 A, came to the conclusion that the assessee had not made correct valuation of the closing stock by not including the unutilized Modvat Credit. Resultantly the said sum was added to the value of closing stock an addition was made accordingly - HELD THAT - Section 145 A has been inserted by the Finance (No. 2) Act, 1998 with effect from 1-4-1999. As per this section value of purchase and sale of goods and inventory is to be made in accordance with the method of accounting regularly employed by the assessee and further adjusted to include the amount of tax, duty, cess etc. actually paid or incurred by the assessee to bring the goods to the place of its location and condition. As in CIT v. Mahavir Alluminium Ltd. 2007 (11) TMI 41 - HIGH COURT OF DELHI has held that the unutilised Modvat credit is to tie included in the value of the closing stock and at the same time for the purposes of giving effect to section 145 A, there must necessarily be made a corresponding adjustment in the value of opening stock of that year - we set aside the impugned order on this issue and restore the matter to the file of Assessing Officer for giving effect to the provisions of section 145 A in entirety and not restricting its operation to the value of closing stock alone. Disallowance of deduction u/s 80HHC - absence of any profit available to the assessee from exports - HELD THAT - CIT(A) was justified in rejecting the ground of the assessee on the claim of deduction under section 80HHC in the absence of any eligible profit. This ground is, therefore, not allowed. TP Adjustment - most appropriate method for determining of ALP - Internal CUP method as per Revenue or the External CUP method as argued by the assessee - HELD THAT - The price on which a particular product is available in one country may largely vary from the price prevailing in other countries due to host of factors. The country which is producer of a particular commodity or its raw material may have lower sale price in comparison with the country which is short of such natural resources. Similarly the price may vary from one country to another depending upon climatic conditions and the demand and supply factors. Thus the price charged by an Indian party from UK or Australia may be at much variance with that charged from USA. In such a scenario no valid comparison can be made between the price charged by the assessee from other countries with that from USA, more particularly when we view the quantity exported to USA on wholesale basis with that to other countries in small lots on retail basis. We, therefore, hold that the Internal CUP method is not suitable in the present circumstances. External CUP method - As this method contemplates comparison of the price charged by the assessee from its AE with that at which the goods are available in the open market in that country from transactions between the unrelated third parties. With a view to determine the price at which such goods are available in the open market in that country, it is sine qua non to consider the price at which such goods are imported by other parties on an average basis. Such an average price should be some realistic price representing the price from the whole or the large part of whole of the imports made in USA of this product and not some isolated or a stray transaction. The report of Mr. Buhn, as it is, cannot be the sole basis for determining the ALP on comparable uncontrolled price method for the reason that Mr. Buhn is not a Government Agency of USA, who could vouch for the price at which Dicamba is imported in USA from various countries. He, in turn, has relied on certain stray instance of M/s. Albaugh Inc. importing Dicamba from China at CIF value/Lb. technical at 5.44 US per Kg. Reliance on such selective data, when he himself is acknowledging that for certain transactions in this lot too, the rate is not known and further the price which has been taken note of by him is not substantiated by any Government Agency of USA, cannot be a best guide for the determination of ALP. As such we are not inclined to accept the price shown in the report of Mr. Buhn as representing the correct ALP. Assessee has placed on the record one Paper book containing additional evidence, which in his opinion has certain data from the Government of USA agency relevant for determining ALP of Dicamba. Since the authorities below have gone by the determination of ALP on the basis of Internal CUP method, which in our considered opinion is not appropriate in the given circumstances, it will be in the interest of justice if impugned order is set aside on this score and the matter is restored to the file of Assessing Officer. We order accordingly and direct him to get the fresh ALP determined from the TPO in the light of our foregoing discussion.

Summary

Issues Involved:
1. Confirmation of addition to the value of closing stock on account of unutilized Modvat Credit.
2. Confirmation of disallowance of deduction under section 80HHC.
3. Determination of Arm's Length Price (ALP) of the international transaction of exports of Dicamba.

Issue-wise Detailed Analysis:

1. Confirmation of addition to the value of closing stock on account of unutilized Modvat Credit:
The Assessing Officer added Rs. 6,06,70,534 to the closing stock value due to unutilized Modvat Credit, citing section 145A. The assessee's valuation method did not include this credit, leading to the addition. The Tribunal referenced the Delhi High Court in CIT v. Mahavir Aluminium Ltd. and the Bombay High Court in CIT v. Mahalaxmi Glass Works (P.) Ltd., which mandated including unutilized Modvat credit in the closing stock value and making corresponding adjustments in the opening stock. Consequently, the Tribunal set aside the impugned order and remanded the matter to the Assessing Officer for complete adjustment under section 145A.

2. Confirmation of disallowance of deduction under section 80HHC:
The assessee conceded that no profit from exports was available, thus disqualifying them from the section 80HHC deduction. The Tribunal upheld the CIT(A)'s decision, confirming that the deduction was rightly disallowed due to the absence of eligible profit.

3. Determination of Arm's Length Price (ALP) of the international transaction of exports of Dicamba:
The Assessing Officer, following the TPO's recommendation, adjusted the ALP of Dicamba exports to Rs. 25,64,24,779 from Rs. 19,19,72,067, adding Rs. 6,44,52,712. The TPO used the Comparable Uncontrolled Price (CUP) method, comparing the price charged to the AE (14.66 US$ per Kg) with prices to unrelated parties (19.47 to 25.00 US$ per Kg). The TPO's average price was 20.67 US$ per Kg, adjusted to 19.587 US$ per Kg after considering selling and distribution expenses, geographical differences, and freight differentials.

During the appeal, the assessee argued that section 92 CA was inapplicable as there was no tax liability reduction. The Tribunal rejected this, emphasizing that transfer pricing provisions aim to prevent artificial reduction of tax payable in India, regardless of the AE's tax situation. The Tribunal also dismissed the applicability of the Resale Price Method, as it pertains to goods purchased, not sold.

The Tribunal found the Internal CUP method unsuitable due to the significant differences in export destinations and quantities. The External CUP method, based on Mr. Buhn's report, was also deemed unreliable due to lack of comprehensive data and official validation. The Tribunal remanded the issue to the Assessing Officer for fresh ALP determination by the TPO, allowing the assessee to present new evidence.

Conclusion:
The appeal was partly allowed for statistical purposes, with the Tribunal remanding the ALP determination issue for reassessment, ensuring a comprehensive review based on reliable data and appropriate methods.