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2022 (9) TMI 1035 - AT - Income Tax


Issues Involved:
1. Sustaining the addition pertaining to the presumed cost difference of goods transferred to the branch at Guwahati.
2. Correctness of the transfer pricing analysis.
3. Comparable analysis to determine the Arm's Length Price (ALP).
4. Presumption of transfer price at a lower rate.
5. Reworking of the branch transfer.
6. Presumption of tax evasion.
7. Violation of principles of natural justice.

Issue-wise Detailed Analysis:

1. Sustaining the Addition Pertaining to the Presumed Cost Difference:
The assessee argued that the products supplied by its Puducherry unit to the Guwahati unit were at a semi-finished stage, unlike the fully finished goods purchased from a third party, M/s. Aeroaroma Home Care Products. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] believed that the assessee shifted profits to the Guwahati unit to claim higher tax benefits under section 80IC, as opposed to the 25% deduction under section 80IB for the Puducherry unit. The Tribunal found the AO's reasons unconvincing and noted that the price difference alone was insufficient to conclude under-invoicing for tax benefits.

2. Correctness of the Transfer Pricing Analysis:
The Tribunal observed that the AO and CIT(A) failed to appreciate that the products from the Puducherry unit were semi-finished and required further processing at the Guwahati unit. The assessee's explanation that the additional costs incurred at the Guwahati unit made the total cost comparable to the third-party supplier's price was found reasonable and bona fide.

3. Comparable Analysis to Determine the Arm's Length Price (ALP):
The Tribunal criticized the AO's reliance on the price charged by the third-party supplier to determine under-invoicing. It noted that pricing depends on various factors, including functions performed, assets employed, and risks involved. The Tribunal emphasized that minor differences in pricing are normal and cannot solely justify the AO's conclusions.

4. Presumption of Transfer Price at a Lower Rate:
The Tribunal found that the AO's presumption of a lower transfer price was unsubstantiated. The assessee demonstrated that the semi-finished products from the Puducherry unit, after additional processing costs at the Guwahati unit, resulted in a negligible price difference compared to the third-party supplier's fully finished goods.

5. Reworking of the Branch Transfer:
The Tribunal disagreed with the reworking of the branch transfer by the AO and CIT(A). It noted that the Central Excise department had accepted the value declared for the products without any disturbance, which should have been considered by the income-tax authorities.

6. Presumption of Tax Evasion:
The Tribunal found the AO's presumption of tax evasion to be unjustified. It emphasized that the assessee's operations were shifted to Guwahati due to compelling commercial reasons, as the manufacturing activity was done exclusively for M/s. Godrej Saralee Ltd. The Tribunal concluded that there was no deliberate attempt to under-invoice products for tax benefits.

7. Violation of Principles of Natural Justice:
The Tribunal noted that the CIT(A) failed to give proper consideration to the submissions made by the assessee at various stages. The Tribunal reversed the findings of the CIT(A) and directed the AO to delete the additions made towards suppression of income on account of under-valuation of stock supplied to the Guwahati unit.

Conclusion:
The Tribunal allowed the appeals filed by the assessee, concluding that the AO and CIT(A) erred in making and sustaining additions based on presumed cost differences and under-invoicing. The Tribunal emphasized the importance of considering the semi-finished nature of the products, the additional processing costs, and the acceptance of declared values by the Central Excise department. The Tribunal's order was pronounced on 21st September 2022.

 

 

 

 

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