2016 (4) TMI 663 - AT - Income Tax

Determination of Arm s Length Price - whether the goods so exported were part of the slow moving old stock? - Held that - There is absolutely no doubt that the toning down of inventory which was written down in valuation of stock has been based on the retail pricing method. TPO, on the one hand, accepting these goods as slow moving, on the other, he expects the assessee to earn margin at the same rate at which the normal goods of the assessee are also earning. TPO is contradicting himself. Secondly, the TPO had not disputed that these goods are sold to foreign entity. Therefore, even on this ground to expect the assessee to earn the same margin as in Indian market is also an unacceptable logic. Thirdly, the calculation of GP at 22.64% includes the transaction with related party. It is tainted transactions, because this GP of 22.64% is not the result of transactions with independent parties alone, but with related parties as well. It was the duty of the TPO to arrive at the ALP of this international transaction. TPO cannot use this figure of 22.64% itself as at arm s length. In effect, the sale invoices of the assessee to its AE can be compared with the sale of invoices of the AE to the independent party. The goods sold are exactly the same, as the goods were dispatched from the warehouse of the assessee to the ultimate buyer who is an independent entity. The time gap between the sale of the assessee and the sale of the AE are negligible because it has happened within the same month. Therefore, this is a fit case to use CUP as a most appropriate method. Thus the CIT(A) has rightly allowed the appeal of the assessee. The contention of the DR that the assessee instead of selling old stock through AE has directly sold the same to the third party is not correct. The CIT(A) gave finding after considering all the aspects to that effect. It can be found that the said stock was of old stock and the sale was also through the AE as well. The goods sold are exactly the same, as the goods were dispatched from the warehouse of the assessee to the ultimate buyer who is an independent entity. The time gap between the sale of the assessee and the sale of the AE are negligible because it has happened within the same month. The gross profit earned by the assessee is in India. TPO had not disputed the classification of the goods as slow moving or as old stock. Therefore, the CIT(A) has rightly held in favour of the assessee.

Summary

Issues Involved:
1. Deletion of addition made on account of adjustment proposed by TPO under section 92CA(3) of the I.T. Act.
2. Determination of whether the goods exported were part of slow-moving old stock.
3. Determination of the Arm's Length Price (ALP) for the exported goods.
4. Adoption of the rate of 8.25% versus 22.64% Gross Profit (GP) for determining ALP.

Issue-wise Detailed Analysis:

1. Deletion of Addition Made on Account of Adjustment Proposed by TPO under Section 92CA(3) of the I.T. Act:
The appeal was filed by the Revenue against the order of CIT(A) which deleted the addition of Rs. 2,87,51,769/-. The TPO had determined the arm's length price of the sale of goods to the associated enterprise (AE) at Rs. 5,73,67,313/- instead of Rs. 2,86,15,544/-, resulting in the adjustment. The CIT(A) deleted this addition, which was contested by the Revenue.

2. Determination of Whether the Goods Exported Were Part of Slow-Moving Old Stock:
The TPO argued that there was no evidence to show that the goods sold to the AE were old and slow-moving inventory. The assessee had provided invoices and stock details, claiming that the goods were purchased in 2004 and earlier, and were old stock due to the fashion trend changes every six months. The TPO found that the inventory exported to the AE was not the same as that sold to SIMO, a third party, questioning the economic prudence of holding the stock in Singapore for eight months due to high warehousing costs.

3. Determination of the Arm's Length Price (ALP) for the Exported Goods:
The TPO determined the ALP using the Comparable Uncontrolled Price (CUP) method, considering the gross profit margin of 22.64% earned by the assessee. The TPO concluded that the market value of the inventory sold to the AE should be Rs. 5,73,67,313/-. The CIT(A) found that the goods were indeed old stock and sold through the AE, supporting the assessee's valuation method based on the net realizable value as per AS-2 of the Accounting Standards.

4. Adoption of the Rate of 8.25% versus 22.64% Gross Profit (GP) for Determining ALP:
The assessee argued that the 22.64% GP margin was unreasonable for old and slow-moving stock, which typically sells at a lower margin. The CIT(A) agreed, noting that the TPO's expectation of earning the same margin on old stock as on normal goods was unreasonable. The CIT(A) also considered that the GP of 22.64% included transactions with related parties and was not solely based on independent transactions. Therefore, the CIT(A) found the CUP method appropriate, comparing the sale invoices of the assessee to the AE with the AE's sale to an independent third party within the same month.

Conclusion:
The Tribunal upheld the CIT(A)'s decision, finding that the goods were indeed old stock and the sale was through the AE. The CIT(A) correctly applied the CUP method and rejected the TPO's application of the 22.64% GP margin. The appeal by the Revenue was dismissed, affirming the CIT(A)'s order in favor of the assessee.