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TMI Blog2015 (1) TMI 486X X X X Extracts X X X X X X X X Extracts X X X X ..... fied and legal reasoning, hence, ground of the assessee is allowed. Refusal to admit additional evidence submitted by the assessee - Held that:- DRP has allowed the assessee to submit its books of accounts and other relevant bills and vouchers before the AO during remand proceedings, hence, unable to accept this contention of the assessee that the DRP refused or declined to admit the additional evidence. Accordingly, this ground of the assessee being devoid of merits is dismissed. Transfer pricing adjustment - Addition to the income - difference between the value of MRP declared to custom authorities and the value of Maximum Retail Price (MRP) altered by the assessee on account of products sold by it to the Indian AE - Held that:- TPO through its order dated 28.2.2014 passed u/s 154 of the Act rectifying the DRP assessment order dated 26.12.2013 have held that the assessee paid 31,10,33,139/- for the purchases made from its AE as against 35,29,83,970/- which is the ALP worked out in accordance with Rule 10B(1)(b) of the Act and the price paid by the assessee for purchases being lower than the ALP worked out therein, no adjustment on this account is being made. Thus, we further hold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erred in making addition of ₹ 42,67,87,494/- being the difference between the value of MRP declared to custom authorities and the value of Maximum Retail Price (MRP) altered by the assessee on account of products sold by it to the Indian AE. 2.1 The ld. AO and DRP have failed to appreciate that the concept of MRP is a legal fiction specifically created for the purpose of section 4A of the Excise Act, read with section 3 of the Custom Act and Standard Weight & Measures Act and that MRP has no application under the Income-tax Act to a transaction like the present one where the assessee received contracted consideration for the admittedly "wholesale sales to its Indian group entity i.e., Tianjin Tianshi Indian Private Ltd." (Para 2.1 of assessment order) even though it may have to pay import duty on the basis of MRP. 2.2 That the observation of the Ld. DRP that the acceptance of ALP by the TPO "relates to the import price of goods by the assessee's branch office in India and does not relate to the price of goods at which the said goods have been subsequently sold by the assessee's Indian branch office of Tianjin India. As such, the above determination of ALP is of no relevance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anshi Biological Development Company Limited is a company incorporated under the laws of People's Republic of China. The assessee set up it's branch office in India for the first time in the year 2000. The principal business of the assessee is that of wholesale of food supplements and health care equipments, which it imports into India from the Head Office in China/Group Companies. It primarily sells the same on wholesale basis to Tianjin Tianshi India Private Limited [ in short 'Tianjin India']. Tianjin India is an Associated Enterprise [AE] of the Assessee within the meaning of section 92A of the Act. The 'food supplements' etc. are imported into India in retail packaging. The imports in the original packages are primarily sold in bulk to Tianjin, India. Therefore, the Assessee is a whole sale distributor of the products imported by it without any value addition. (ii). An addition of ₹ 426,787,494 has been made by the AO on account of alleged suppressed sales based on the information received by him from the Assistant Director O/o DRI, (Customs) Zonal Unit Chennai. Simultaneous searches were conducted by the Director of Revenue Intelligence (under the Customs Law) on the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act. The DRP remanded the matter back to the file of the AO directing him to provide the assessee with an opportunity to produce books of accounts and other relevant bills and vouchers. Further TPO was asked to re-examine the ALP of international transactions in light of the declaration of the assessee before the customs authorities. (viii). The AO and the TPO submitted their remand reports. Based thereon, the DRP accepted the assessee's objections to ad-hoc addition of ₹ 92.65 lacs out of total expenses claimed by the assessee but rejected the assessee objection on addition of the MRP as it's sales value to Tianjin India and made an addition of ₹ 42.67 crores by holding that the book result of assessee regarding sales are unreliable hence the same are rejected and the DRP computed the amount of suppressed sale of 42.67 crores by multiplying the differential MRP to the quantity of goods sold as per financial statement of the assessee. The AO in pursuance to the above order of the DRP, passed impugned assessment order vide date 13.01.2014. (ix). The aggrieved assessee has prepared ITA No.1110/Del/2014 against the impugned addition of ₹ 42.67 crores and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee, or where the method of accounting provided in sub-section (1) of section 145 of the Act or accounting standard as notified in sub-section (2) of section 145 of the Act have not been regularly followed by the assessee, the AO may make an assessment in the manner as provided in section 144 of the Act. Thus, according to statutory provisions of section 145(3), the AO has to record his dissatisfaction about the correctness and completeness of the accounts of the assessee before rejecting books of accounts. In the peculiar facts and circumstances of the present case, we observe that the DRP allowed the assessee to produce books of accounts and other related books and vouchers before the AO, hence, the AO is duty bound to accept the same during the remand proceedings and merely because the assessee had not accounted the additional custom duty paid and the AO had short span of time for verification of books of accounts and related bills and vouchers, the books of accounts of the assessee cannot be rejected. We also hold that when the DRP is allowing the assessee submission of books of accounts, then it is not open for the AO to examine the sufficient cause which prevente ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... menced in India in the year 2000. The concept of Maximum Retail Price (in short MRP) was explained in detail having regard to Excise Laws and Customs Law. According to the ld. AR the concept of MRP is a legal fiction created by section 4A of the Excise Act and section 3 of the Customs Act for the purpose of valuation of imported goods on which customs duty is levied. The ld. counsel further elaborated the contentions that how the concept of MRP is applied while charging excise duty and Customs duty and thereafter how prices are charged at different stages of the distribution chain and the MRP comes into play only at retail end of the distribution chain which is obviously the ultimate customer. The assessee i.e. the branch office of the Tianjin China imports goods from the Tianjin China i.e. HQ, and then sells it to its 100% subsidiary in India i.e. Tianjin India. Tianjin India further sells it to distributors and franchisee who in turn sell it to final consumers at MRP or at a price which could be lesser than the MRP. The ld. AR further explained that there is always a scope for discount on MRP and cited some examples. He said that at each distribution chain, the prices are negotia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mitted that the AO referred the matter to the TPO for fresh consideration of the ALP. Reading from the TPO's remand report addressed to the DRP the ld. counsel stress on paras 1, 2, & 3 thereof and strenuously contended that neither the assessee nor Tianjin Tianshi India is a retailer but they are only the second and third entity respectively in the distribution chain, and therefore, they do not sell the products at MRP to the ultimate consumer. The ld. counsel further explained that the TPO treated the HO in Chiana, the manufacturer as the first entity in sale chain, the importer i.e. BD as the second entity the sole distributor (Tianjin India) as third entity and the retailers (small distributors and franchise) as fourth stage entities in the supply chain and read the concluding paragraph of the TPO's remand report dated 18.1.2013 (paper book page 260) wherein the TPO has stated that even after taking into account the additional customs duty, the OP/Sales of the assessee is more than that of comparable and therefore the international transactions are at Arm's length Price. The ld. counsel mainly contended that the TPO has taken into consideration both the purchases and sale and n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sment order in conformity with the order of the Transfer Pricing Officer determining the arm's length price. Now the order of the TPO has been expressly made binding on the Assessing Officer. From the above it is clear that there was a lacuna in the Act as appropriate language was not used earlier. This has been modified and with effect from June 1, 2007, the order of the TPO is binding on the Assessing Officer who now has no choice but to pass an order in conformity with the order of the TPO. " 22. Thereafter the ld. counsel submitted an alternate argument with the aid of a chart (at page 535-537 in paper book -V), that only some of the products were involved in the case where MRP was altered. The list of such products was provided as a part of chart. The ld. counsel further submitted that there is no dispute with regard to the quantity sold by the assessee to Tianjin India and the dispute was about the valuation of the sale price and the MRP was altered only on retail products which are subject to MRP. The ld. counsel further explained that the calculation made by DRI for the financial year 2008-09 (relevant to AY 2009-10) and contended that for the products, on which MRP was al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the difference between the MRP declared earlier and altered MRP despite the fact that the DRP has not raised any dispute to the finding of fact by the TPO in para 3 of his remand report dated 18.11.2013 wherein it has been held that after taking into account the difference in custom duty if paid originally to transaction would be at arm's length. Ld. Counsel vehemently contended that the AO and DRP have failed to appreciate that the MRP whether originally declared or the altered one of the products sold by the assessee to Tianjin India has no nexus and impact, the actual price charged from Tianshi India. 25. On the issue of MRP, ld. DR replied that the ultimate sales effected by Tianjin India to the ultimate customer was made on MRP which was altered by the assessee in India, and therefore, the MRP is relevant and has impact on the actual price charged by the assessee from Tianshi India. Ld. DR fairly accepted that the TPO in para 3 of his remand report dated 18.11.2013 has concluded that after taking into consideration the difference in custom duty, if paid, originally the transaction would be at arm's length. 26. Apropos these grounds, ld. Counsel appearing for the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the said sales transaction is subject to transfer pricing provisions as contained in chapter I of the Act and the sales made by the assessee to Tianshi India is an international transaction as defined in section 92B of the Act. iii) Ld. Counsel of the assessee submitted that the AO/DRP erred in making addition being the difference between the value of MRP declared to custom authorities and the value of MRP altered by it on account of products sold by it to the Indian AE. Ld. Counsel contended that the AO and the DRP had failed to appreciate that the concept of MRP is a legal fiction being created for the purpose of section 4A of the Excise Act r/w section 3 of the customs and relevant provisions of the Standard Weights and Measure Act and the MRP has no application under the Income Tax Act to the impugned transaction where the assessee receives contracted considered even though it may have to pay import duty on the basis of Maximum Retail price (MRP). Ld. Counsel further contended that the observations of the DRP that the acceptance of ALP by the TPO relates to the import price of the goods by the assessee branch office in India and does not relate to the price of goods at whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any had made imports of ₹ 9.64 crore and sold the same to Tianjin India , sole all India distributor at ₹ 31.34 crores as the TPO/AO accepted the purchase price of ₹ 31.34 crore in the case of Tianjin India. Ld. Counsel further contended that if the AO accepted that the assessee's sale was of ₹ 74 crore, then Tianjin India automatically goes into loss because as per revenue authorities, Tianjin India is selling the goods at ₹ 72 crore which would lead to an absurdity. Ld. Counsel vehemently contended that the value of purchase in the case of Tianjin India was accepted by the same TPO and DRP. Ld. Counsel submitted that in the case of Tianjin India, the TPO applied TNMM and made adjustment of ₹ 16 crore to the purchases made from the assessee. If the order of the TPO is being given effect, then it would result that purchases from the assessee were only of ₹ 15 crore and therefore, the DRP accepted the objections filed by Tianjin India and directed the TPO to apply RPM method after which purchases were accepted in toto at ₹ 31.34 crore as declared by Tianjin India. Ld. Counsel has drawn our attention towards page 262 to 295 and submitte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he same and, therefore, the DRP was right in agreeing that the conclusion of the AO that the book results of the assessee regarding sale are unverifiable. The DR further contended that the AO had no option but to compute the amount of suppressed sale by multiplying the average of differential MRP to the quantum of goods sold as per assessee's financial statements. The DR supporting the action of the authorities below submitted that the proposed action of the AO with regard to the suppressed sale did not require any interference by the DRP and, therefore, the same was upheld. 34. On careful consideration of above submissions, we observe that in the case of Tianjin China i.e. headquarter or parent company, the TPO vide its order dated 18.1.2013 has held that no adverse inference is drawn in respect of international transaction undertaken by the assessee during FY 2008-09 pertaining to the AY 2009-10 which is assessment year under consideration. The relevant operative part of this order reads as under:- "2.2 The Group is primarily providing high quality health products for consumers globally. TIENS is the brand name of Tianshi Group products, the food supplements manufactured by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no choice but to pass an order in conformity with the order of the TPO. The relevant operative part of the order of the Special Bench (supra) at page 206 and 207 reads as under:- "It is clear from above that decision of Supreme Court in the case of Rajesh Kumar (supra) itself indicate that words 'having regard to' suggest that assessment is to be made having regard to the report of the TPO which is required to be considered with other relevant material available on record. There is nothing to suggest that TPO's report on transfer pricing is conclusive and debars Assessing Officer from looking at any other material. The aforesaid conclusion is also in line with latest change made in Section 92C by the Legislature through the Finance Act, 2007. Sub-section (4) of Section 92CA has been substituted with the following sub-section w.e.f. 1.6.2007: [(4) On receipt of the order under Sub-section (3), the Assessing Officer shall proceed to compute the total income of the assessee under Sub-section (4) of section 92C in conformity with the arm's length price as so determined by the Transfer Pricing Officer] 53. Now words "having regard to" have been replaced b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a and from branch office to 100% owned subsidiary company Tianjin India. We further note that the TPO through its order dated 28.2.2014 passed u/s 154 of the Act rectifying the DRP assessment order dated 26.12.2013 have held that the assessee paid ₹ 31,10,33,139/- for the purchases made from its AE as against ₹ 35,29,83,970/- which is the ALP worked out in accordance with Rule 10B(1)(b) of the Act and the price paid by the assessee for purchases being lower than the ALP worked out therein, no adjustment on this account is being made. Thus, we further hold that the AO/DRP is duty bound to pass an order in this regard in conformity with the value determined by the AO and the provisions of the Act do not allow this authority to take a different stand or view against the order of the TPO. From the order of the DRP, we also observe that in para 4.4, the DRP has held that the determination of ALP by the TPO is of no relevance in deciding the issue of suppressed sale by the assessee. We also note that the sales shown by the assessee to Tianjin India has been accepted by the AO in the case of purchaser i.e. Tianjin India, hence, the sales made by the assessee cannot be disturbe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccepted and reliance cannot be taken into account at this stage." 39. In view of above, we observe that the AO took a very contradictory view in two remand reports as we note that in the first remand report dated 22.10.2013, the AO mentioned that on verification of books of accounts, nothing adverse has been found. On the other hand, in the subsequent remand report dated 26.11.2013 which was actually sent to the DRP, the AO rejected the books of accounts of the assessee and held that the genuineness of the expenditure incurred by the assessee cannot be verified in this short span of time and the assessee has not given any reason which prevented the assessee to produce the books of accounts at the time of draft assessment proceedings. This approach of the AO is not acceptable and justifiable in view of our conclusion regarding ground no. 4 of the assessee, which have been adjudicated in favour of the assessee. 40. Turning to the issue of alleged suppressed sale by the assessee, after careful consideration of written submissions and arguments placed by both the both sides, at the outset, we observe that the DRP held that the determination of ALP is of no relevance in deciding the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... para 4.1 of the DRP at page 11 of the impugned order, we further observe that the DRP has taken the basis of the remand report of the AO wherein it has been mentioned that the custom duty paid on the revised MRP as per DRI's search has not been accounted by the assessee. But the TPO in its order dated 18.1.2013 has mentioned that even after taking into account the revised total expenditure with 2.58 crore differential custom duty the revised operative profit in this scenario would work out to ₹ 5.05 crore and after considering the payment of differential custom duty, there would not be any impact on the ALP determined by the TPO. 43. From a careful reading of the operative part of the DRP, we note that the DRP has noticed differential MRP of only three products i.e. zinc capsules, cell rejuvenation, calcium tablets and the DRP further adopted average of differential of these three items and applied the same to the 83 products of which 883618 units were sold by the assessee in India. Ld counsel for the assessee on this point has drawn our attention towards pages 535 to 537 of Paper Book V of the assessee and submitted that only some of the products were involved in the case w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aside the reports of the TPO which approved and confirmed that the international transaction effected by the assessee and its associates in India was in conformity with the comparables adopted for determination of ALP. The AO/DRP proceeded to make the addition by estimating the suppressed sale adopted by the assessee by making estimation. We also note that for the purpose of estimation of alleged suppressed sale, the AO picked up three items and their average differential was adopted for the purpose of quantification of alleged suppressed sale. For final calculation, the AO considered the quantity of 883618 of 83 various products sold by the assessee in India which includes petty items of very minimal value such as cap of bottles, tie pins, umbrella, buttons, CD, Cloth covers etc. We further note that the AO took average of differential of only three vital items and multiplied the same to the total, units of all 83 products i.e. 883618. To the best of our understanding, we are unable to accept the basis of the AO and the DRP as noted above for quantification of value of alleged suppressed sale of the assessee. 46. On the basis of foregoing discussion, we reach to a logical conclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the expenses was not amenable to verification in such a short span of time. 1.4 Whether the Hon'ble DRP erred in directing the AO to delete the proposed addition on account of unverifiable expenses on the ground that nothing adverse in relation to the expenses claimed by the assessee had come to light during the proceedings before the Directorate of Revenue Intelligence (DRI) & Customs Authorities, not appreciating the fact that the scope of the action taken against the assessee by the said authorities was completely different and that neither the quantum nor the genuineness of business expenses is the subject-matter for inquiries in the proceedings before these authorities." ITA No.1117/Del/2014 - Revenue's Appeal Ground No. 1, 1.1, 1.2, 1.3 & 1.4 of the Revenue 49. Apropos aforementioned grounds of the Revenue, ld. DR submitted that the DRP has erred in directing the AO to delete the proposed addition of ₹ 92,65,306/- being 10% of the total expenses claimed by the assessee, proposed to be disallowed by the AO on account of failure of the assessee to produce, without any reasonable cause, the books of accounts and vouchers despite repeated opportunities during the cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to produce the books of accounts at the time of draft assessment proceedings and the genuineness of the expenditure incurred and claimed by the assessee cannot be verified in the short span of time. Ld. Counsel strongly contended that the AO during the remand proceedings rejected books of accounts despite directions of the DRP that the assessee should be allowed to produce books of accounts and relevant vouchers and the action of the AO is also contrary to the letter and spirit of provisions of section 143(3) of the Act. Ld. Counsel further contended that while the action of the AO rejecting books of accounts of the assessee is not valid and justified, then the disallowance of 10% of claimed expenditure on estimated basis is not sustainable, therefore, the DRP deleted the impugned addition with a cogent and reasonable observations and findings. 52. On careful consideration of above, we find it appropriate to reproduce the relevant operative part of the DRP which deleted the ad hoc addition made by the AO on estimated basis. The relevant para 4.4.3 of the DRP reads as under:- "4.4.3 Coming to ground no. 2.1 relating to the proposed adhoc disallowance of ₹ 92,65,306/- being 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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