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TMI Blog2011 (3) TMI 1684X X X X Extracts X X X X X X X X Extracts X X X X ..... g. (on an average), admittedly representing the average cost of production for the year. It was accordingly called upon to explain the same; the sales ostensibly having been made at a loss of ₹ 30 per kg. The assessee explained before the authorities that its selling price, which was different for different grades, had no relation with its cost of production, which nevertheless has to be borne by it and, in the facts of the case, witnessed an increase for the year under reference due to a lower volume of production, as the fixed cost/s had necessarily to be met, so that there was an increase in the per unit cost proportionately, i.e., as relatable there-to. The sales to the sister concerns, and which were the only sales made by it in the course of export, were governed by the obtaining rates in the international market. Accordingly, what was relevant is the ruling price of the relevant grades of cashew kernels at the relevant time. If the price charged by the assessee to its sister concerns is in tandem therewith, i.e., allowing a suitable margin to account for a reasonable trading profit there-to; no charge toward under-pricing would hold. It furnished relevant data (before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l on record. 4.1 We shall proceed on first principles. The first thing is whether an addition toward under-selling, i.e., without showing receipt of consideration there-against, could be made. We consider that it could not be said of the same as a rule, and the matter rests on facts, as we find to be the case in each of the case law relied upon by the assessee. It is permissible where, as in the present case, the transaction is between related parties and the tax motivation for the alleged under-charge is apparent; the buyer, i.e., sister concerns, being eligible for deduction under section 80HHC. This is as the power of assessment of the assessing authority under the Act is plenary, and he has to look at the substance of the transactions, so that if these are shown to be calibrated and not representing the actual/commercial transactions, he is not bound by the technical rules of evidence, which are not applicable to the tax proceedings, and empowered to interfere and determine what in his opinion the actual profits, as between the men of commerce transacting on one-to-one basis, would be; the books of account being not conclusive as the profits earned or the losses incurred. Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay, that being admittedly the cost of production, so that it represents the average per unit cost of production for the year, the least one would expect, i.e., under the normal circumstances, is that the same (cost of production) is realized, so that there is no loss, i.e., the same is a no profit no loss measure. As the adoption of the same, in the facts of the case, leads to the assessment of profits of the assessee s relevant concern at ₹ 72.57 lacs as against the returned loss of ₹ 0.38 lakhs (the balance difference of ₹ 0.08 lacs being on account of depreciation), that would only imply that the valuation of the sales (to the sister concerns) at the value charged has led to a decline in the profits or, put differently, an absorption of the profit of the said concern for the current year, from its other sales of cashew kernels, i.e., to other parties, by ₹ 72.87 lacs. 4.2 We may now examine the facts to see if there is sufficient material for the AO to come to the conclusion that the books of account of the assessee do not reflect true and full particulars of her transactions in-so-far as these relate to sales to the sister concerns, i.e., are not co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure of ₹ 10.06 lacs during the year on sales of export quality production, which though is not taken for valuation (of closing stock) purposes and written off wholly to the profit and loss account for the year; - the assessee has during the year earned a net profit of ₹ 82.63 lacs on the domestic sales of cashew kernels, resulting in a net loss of ₹ 0.30 lacs only for the year; -. the purchase of cashew kernels (raw nuts) for the year (including for the domestic production/sales) is also (as stated) principally from sister concerns and, further, at the average rate of ₹ 166 per kg.[this information arises only out of the assessee s additional ground before us]; and - the income of the sister concerns from exports is subject to deduction u/s. 80HHC of the Act. 4.4 The assessee s explanation for the loss suffered on the sales to the sister concerns during the year is as:- a) the sale rate is de-linked from the cost of production and, rather, governed by the ruling international prices; b) in all cases, the exports made by the sister concerns are at rates which vary with grades at a profit to the sister concerns, and which, on an average, is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cost) is a different matter, and which may depend upon the demand and supply position in the relevant market. Generally speaking, the lesser the degree of processing suffered or value addition incurred, the higher would be the sympathy or the degree of correlation between the market price of the output (sale) and input (purchase). The same would hold for the other input (conversion) costs as well. If not thereon, on what would be the cost and, thus, the price of the output, depend, or at least in time? This is as any industry to be viable has to over time generate a surplus, i.e., an excess over cost. Of course, the market may not respond to, or to that degree, to the cost considerations of an individual firm, but there is nothing on record to show that the firm s cost for the year was abnormal or out of tune with that of others in the industry. The demand and supply factors, where markets are competitive, as we have every reason to believe that the instant industry is, only cause one to align or bring one s efficiency (be it for bought-out or conversion cost) with the industry/trade norm. E.g., if the industry norm is for a rejection rate of (say) 2%, one cannot possibly sustain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is over three times the export quality production/sales. There is no finding by the authorities below on this; the said fact having been brought to the fore by the assessee only before us through/in pursuance of its additional ground, the import of which we are unable to understand. What is its understanding with the sister concerns, considering that the assessee is both purchasing from and selling to them? Is there a buy-back arrangement, a fixed mark-up, as also appears from the arguments advanced by the assessee, when it says that its price for the export segment is linked to the price being ultimately realized by the Export House (also refer Comments on audit report u/s. 44AB /PB pg 14), the relevant clause reading as:- 5. Transfer prices for transfers of saleable goods to/from related units are determined keeping in view the quality/grades and export prices realized by the Export House (Buyer). The assessee has thereby allowed a fixed margin to its sister concerns, so that the cost plus method is being indeed followed, though by and for the benefit of, or with respect to the cost of, the sister concerns. Further, even assuming there is an arrangement in place, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Calcutta Discount Co. (1973), 91 ITR 1 (SC). This is as it is only the real, actual profit, and not one that could be realized, which would, thus, only be notional, that can be subject to income-tax. However, the onus to establish its bona fides, under the circumstances that exhibit a systematic diversion of profit to related parties enjoying tax exemption, and incurring a huge loss in the process, is on the assessee, and heavy. We say diversion or suppression of profit as the assessee s purchases could only be taken at the obtaining market prices, while the market price of its produce (output) during the year is much higher, as apparent from the surplus on sales to third parties, which it terms of Rs.domestic sales. The Revenue has discharged its primary onus by making out a prima facie case in this respect (also refer para 4.1 of this order). The assessee s explanation in the matter is far from satisfactory, the various aspects of which stand discussed in detail per preceding part (para # 4.5) of this order. In fact, it admits to an arrangement with the buyers, whereby the price charged to them is to be fixed in view of the price being charged by them from their buyer(s) on act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the fair market value. The same is only a Rs.no profit no loss measure, and which is perfectly valid under the circumstances which demonstrate the existence of domestic market prices in excess of cost, as well as in the export market, net of selling expenses, at a higher figure. It was open to the assessee, given the average purchase price for each grade, to contend for a different cost of production (average) for each grade, i.e., by adding the average conversion cost to the average purchase price for each grade (on which the data is available), which constitutes the bulk of the cost of production, which it did not. We draw support for our conclusions on the decisions listed at para 4.1 of this order as well as others as in the case of Patel Chemical Works vs. CIT (supra), clarifying the legal position in the matter. So however, in view of our finding that full facts, including the details of and qua the working of the selling arrangement with its sister concerns, who also its suppliers, need to be brought on record and properly understood, we consider it proper, in the interest of justice, to remit the matter back to the file of the first appellate authority, to afford an o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had claimed and stood allowed deduction u/s. 80HHC on its exports. On an addition being effected to its trading account qua its export business, it claimed a corresponding increase in the deduction u/s. 80HHC on the ground that the addition sustained only amounts to an increase in the profits of the year, which stood upheld by all the appellate authorities. The argument is unexceptional, as stands also explained by this bench of the tribunal in its order in the case of Asstt. CIT v. Skyline Buiders (in ITA Nos. 989 990/Coch/2008 dated 14/12/2010). The said decision is, however, not applicable in the present case; there has been, firstly, no claim for deduction u/s. 80HHC by the assessee either per its return or revised return of income. Further, as pointed out by the ld. CIT(A), there has been no disclaimer of the export benefit u/s. 80HHC by the assessee s buyer in its favour as a supporting manufacturer, for it to be even entitled to the said deduction, i.e., notwithstanding its non-claim aforesaid. So however, as we have remitted the matter back ot the file of the first appellate authority with regard to the principal issue, we consider it just and proper to do like-wise for ..... X X X X Extracts X X X X X X X X Extracts X X X X
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