9911796707
TMI Blog2024 (10) TMI 521X X X X Extracts X X X X X X X X Extracts X X X X ..... on without calling remand report from the AO, as additional evidences were filed by the assessee w.r.t. the aforesaid sales commission paid by the assessee which were not forwarded by ld. CIT(A) to the AO for comments/remand report. Thus, there is a breach of Rule 46A of the Income-tax Rules, 1962, and the matter needs to be restored back to ld CIT(A) for adjudicating again sales commission. Rule 46A is not an empty formality - Thus ground of appeal raised by Revenue so far as allowability of sales commission by ld. CIT(A) which was earlier disallowed by the AO, is allowed for statistical purposes. Sales commission paid by the assessee to the foreign entity Heubach GMBH - we are of the considered view that the assessee has discharged its onus and now it was for the Revenue to have brought on record cogent material to disallow the sales commission paid by the assessee to its AE Heubach GMBH, which department failed to do so Thus, ground of appeal raised by Revenue so far as allowability of sales commission paid to Heubach GMBH by ld. CIT(A) which was earlier disallowed by the AO, is dismissed as we donot find any defect in the appellate order passed by ld. CIT(A) on this issue. We o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the enterprise. Thus, in view of prescription by AS-2, it requires to be determined the fairest possible approximation to the cost incurred in bringing the items to its present location and condition. The assessee need to explain this aspect of reasons for adopting yearly costs while valuing finished goods and adopting monthy costs while valuing WIP, and we are of the considered view that the assessee be given one more opportunity to justify before the AO reasons for adopting weighted average cost method of the yearly costs while valuing finished stock, and weighted average cost method of monthly costs while valuing WIP. The claim of the assessee that the assessee has consistently followed the same method while valuing inventory over the years and the same was accepted by Revenue also need verification. Thus, to this limited extent, we are setting aside the matter back to the file of the AO for adjudication afresh, after giving opportunity to the assessee. - SHRI RAMIT KOCHAR, ACCOUNTANT MEMBER AND MS. SUCHITRA KAMBLE, JUDICIAL MEMBER For the Assessee: Sh. Milin Mehta, AR For the Revenue: Sh. Atul Pandey, Sr. D.R ORDER PER SHRI RAMIT KOCHAR, ACCOUNTANT MEMBER: These two appeals ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shed Stock of Rs. 1,58,28,535- of Bet Blue by holding that the assessee had correctly valued the same disregarding that the value does not correspond to the value of WIP of Beta Blue shown by the assessee. 3. Whether the Ld. CIT(A) erred in deleting the addition on account of revaluation of Red Pigment 254 of Rs. 41,94030/-by holding that by showing the overhead rates lower for finished goods, the assessee has shown higher profits, disregarding the fact the value does not correspond to the value of Opening Stock of Red Pigment 254. 4. Whether the Ld. CIT(A) erred in deleting the addition on account of revaluation of Red Pigment of Rs. 7,11,994/- by holding that by showing the overhead rates lower for finished goods, the assessee has shown higher profits, disregarding the fact the value does not correspond to the value of Opening Stock of Red Pigment. 3. First, we will take up appeal of the Revenue for assessment year 2009-10 in ITA no. 3367/Ahd/2016. The brief facts of the case are that the assessee company filed its return of income on 30.09.2009 declaring total loss of Rs. 89,02,854/-. The return of income was revised by the assessee on 11.08.2010, declaring loss of Rs. 6,50,27,3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vide assessment order dated 14.03.2013 passed by the AO u/s 143(3) of the 1961 Act. 3. Aggrieved by the assessment framed by the AO, the assessee filed first appeal with ld. CIT(A). The ld. CIT(A) observed that the assessee has filed copy of agreement and other details to justify the payment of commission before the AO, and the AO has mainly disallowed the same on the ground that there was no evidence to prove the services rendered. The ld. CIT(A) observed that the AO has noticed that the commission was paid to foreign parties namely Heubach GMBH and Darlington Enterprises Limited, and the first party is AE ad such payments to AE are normally made to transfer tax liabilities. The ld. CIT(A) observed that the similar commission was paid even in the earlier years and in the immediately preceding years, the amount of commission paid was Rs. 2,21,21,000/-. There is no material on the record that commission was disallowed in any of the earlier year. The ld. CIT(A) observed that the AO has disallowed the entire commission even without verifying the details of commission paid. The ld. CIT(A) observed that the assessee has paid commission during the year under consideration to as many as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the AO was deleted by ld. CIT(A) vide appellate order dated 05.09.2016. 4. Aggrieved by the appellate order dated 05.09.2016 passed by ld. CIT(A), the Revenue has filed second appeal with ITAT. The ld. DR opened arguments before the Bench, and drew our attention to the assessment order. It was submitted that the commission was paid to foreign parties. It was submitted that the assessee has filed details/submissions before the ld. CIT(A). The assessee also filed additional evidences before ld. CIT(A). No Remand report was called by ld. CIT(A). The ld. DR submitted that there is no details available on record as to the commission paid for the earlier year. He drew attention to the agreement with the parties and which is placed at paper book at page no. 93. The ld. DR relied upon the assessment order of the AO. 4.2 The Ld. Counsel for the assessee submitted that with respect to Heubach GMBH, the transaction was referred by AO to TPO who has not made any adjustment and accepted the international transaction. It was submitted that there is an agreement with Heubach GMBH and they are promoting the sales of the company outside India. The assessee does not have any establishment outside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ration etc.. The AO mistook the entire commission of Rs. 2,32,04,000/- as being paid to the afore-stated two foreign parties. Thus, the sales commission to the tune of Rs. 57,39,163/- was never verified by the AO as the assessee never submitted complete details of sales commission, despite being called upon by the AO to explain the same. The ld. CIT(A) gave relief on account of sales commission to the tune of Rs. 57,39,163/- without calling remand report from the AO, as additional evidences were filed by the assessee w.r.t. the aforesaid sales commission paid by the assessee which were not forwarded by ld. CIT(A) to the AO for comments/remand report. Thus, there is a breach of Rule 46A of the Income-tax Rules, 1962, and the matter needs to be restored back to ld CIT(A) for adjudicating again sales commission to the tune of Rs. 57,39,163/-. Rule 46A is not an empty formality. Thus, ground of appeal raised by Revenue so far as allowability of sales commission to the tune of Rs. 57,39,163/- by ld. CIT(A) which was earlier disallowed by the AO, is allowed for statistical purposes 5.2 So far as sales commission to the tune of Rs. 1,48,14,014/- paid by the assessee to the foreign entity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e have gone through the documentary evidences filed by the assessee before the AO which are placed in the paper book, and we have observed that the assessee has duly provided the copy of the agreement between the assessee and Darlington Enteprises as well some of the debit notes raised by the said party. These debit notes clearly demonstrate the sales effected through Darlington Enterprises Limited and the sales commission charged by Darlington Enterprises Limited. The AO never asked /show caused the assessee to produce any further documents to prove rendering of services, nor found any defect in these debit notes dehors the books of accounts and other records maintained by the assessee. The assessee has discharged its primary burden by placing all relevant documents, and it was for the AO to have made further necessary enquiries/investigations such as issuing summons to the Directors/sales manager etc. of the assessee to record their statement but the AO did not made any further enquiries. The books of accounts were also not rejected by the AO, and also no specific defect is pointed out by the AO except that the assessee failed to provide documentary evidence to prove rendering of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11 61.16 iii. Closing Stock 152150 7733 50.82 As such it is seen that the average value per Kg of closing stock of Aluminum Hydroxide is Rs. 50.82 per kg, which is observed to be lower than the opening stock which is Rs. 56..51 per kg. While the average value of Sales which is worked out at Rs. 61.16 per Kg. As such you are requested to explain as to why the value of the closing stock of Aluminum Hydroxide be not adopted at minimum of opening value of stock at Rs. 56.51 and accordingly [152150 X 5.69 1.E (56.51-50.82) Rs. 8,65,735/-] an addition of Rs. 8,65,735/- be not paid on account of undervaluation of closing stock of Aluminum Hydroxide. 6.3 In response to SCN issued by the AO, the assessee submitted before the AO as under:- 4. Vide Para No.8 your office has mentioned that the average value per KG of closing stock of finished goods of Aluminum Hydroxide ( ATH ) is Rs. 50.82 which is lower that the value of Rs. 56.51 per kgs of opening stock. Your office has therefore asked us to explain as to why the value of closing stock of ATH should not be taken at Rs. 56.51 and accordingly why an addition of Rs. 8,65,735/- be not made on account of undervaluation of closing stock of ATH. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g stock of Aluminum Hydroxide. 8. Your office may further appreciate that the books of account of the Assessee has been audited under the Companies Act, 1956 as well as under the Act. The Auditor in his Auditor's Report has also accepted the valuation of inventories done as per AS-2, by stating the annual accounts comply with the accounting standards referred under the Companies Act, 1956. We therefore submit that no adjustment can be made in valuation of closing stock as explained in the above Para since the valuation is done us per applicable accounting standard. In case your office requires any further information or documents, we shall be pleased to submit the same on hearing from your kind office to do so. 6.4 The AO rejected the contention of the assessee, by holding as under:- 5.33 It is pertinent to note that the assessee is basically harping on pushing its claim to be right more so that the accounts of the Assessee has been audited under the Companies Act, 1956 as well as under the Act, and that the Auditor in his Auditor's Report has also accepted the valuation of inventories done as per AS-2, by stating that the annual accounts comply with the accounting standard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and for furnishing of inaccurate particulars. Undervaluation of finished stock of Beta Blue: 7. The AO asked assessee to furnish inventory of Opening stock of Finished goods, WIP, Raw Material Packing material as well as closing stock inventory of Finished goods WIP, Raw Material Packing material and Packing Material and it was observed by the AO that finished stock of Beta Blue 15.3 has been valued at Rs. 245.70 PER KG less as compared to opening WIP of Blue-15.3 which has been valued at Rs. 2069.58. The AO issued SCN to the assessee to explain the same as under:- As regards list of 2291.11 lakhs, 60750 Kg of Beta Blue-15.3 has been valued at Rs. 167.85 laks which works out to Rs. 276.30 per Kg. However the Finished stock of Beta Blue-15.3 has been valued at Rs. 245.70 PER KG (622629 Kg valued at Rs, 1529.78 lakhs), whereas opening WIP of Blue-15.3 has been valued at Rs. 2069.58. Please explain why the value of Finished stock of Beta Blue be not adopted at Rs. 276.30 per Kg (minimum) (though the overheads expenses in regards to WIP is generally adopted at half of that adopted for Finished stock), and an amount of Rs. 1,90,52,447/- [(276.30 - 245.70 ) X 622629] be not added to tot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge value of WIP is stated to be at Rs. 258.39, per Kg while the average value of closing stock of finished stock is Rs. 233.66 per kg. However the fact remains that the Finished stock has been valued at lesser price than the WIP, which was the basic query. 5.44 The explanation of the assessee company, when perused, it is gathered that the same is on account of the fact that 1. While computing RMC cost, for inclusion in WIP, the Assessee has considered the latest month moving average cost. 2. while computing the RMC for inclusion in Finished Goods, the Assessee has considered weighted average cost of entire year. 5.45 It is therefore clear from the above that two different method i.e FIFO as well as Weighted Average Method has been adopted, resulting in adopting two different rates of RMC for valuation of WIP and that of Finished stock. The result of the same is that there is an illogical result of the finished stock being valued at a cost lesser than the WIP. 5.46 It is therefore imperative that whatever method adopted by assessee, if the same was adopted in respect of valuation of both WIP and Finished stock, such anomaly would not have arisen. 5.47 Further it is once again pointe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ck of Red Pigment 122, which was valued at Rs. 1273.49 per kg. The AO asked the assessee to explain the same by issuing show cause notice, as under:- Finished stock of Pigment Red 254 consisting of 12292 Kgs has been valued at Rs 134.33 lakhs (1092.87/- per Kg) while Pigment Red 122 consisting of 9808 Kgs has been valued at Rs 124.90 lakhs (Rs. 1273.49 per Kg). However the opening stock of Pigment Red has been valued at Rs 1960.00 per Kgs. Please explain why the value of Finished stock of Pigment Red 254 Pigment Red 122 be not valued at Rs. 1960.00 and an amount of Rs. 1,73,92,052/- {[(1960- 1092.87 ) X 12292 = 1,06,58,762/-] + [(1960-1273.49) X 9808 = 6733290/-1} be not added to total income. 8.2 The assessee replied to the show cause notice before the AO, as under:- 12. Vide Para No.10(iii) your office has stated that closing stock of finished stock of Red Pigment-254 has been valued at Rs. 1092.87 per kg and Red Pigment-122 has been valued at Rs. 1273.49 per kgs Your office has also stated that the opening stock of Red Pigment has been value at Rs. 1960.00 per kgs. Your office has therefore proposed to value closing stock of such Red Pigments at Rs. 1960 per kgs. In respect of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ention of the assessee by holding as under:- 5.53 On perusal of the assessee's reply it is seen that according to the assessee, there appears to be mistake in working of value of Red Pigment 122, by the undersign, which according to the assessee, the opening stock of finished goods should be 674.45/- and since the closing stock is worked out at 1092.87 per kg, the same is higher than the opening stock. However by assessee's own working the opening stock of Red Pigment 254, has decreased from Rs. 1434.03/- per kg to Rs. 1092..83/- per Kg. The reason extended by assessee is that the RMC cost included in closing stock of such finished goods is higher as compare to RMC cost included in opening stock. However the allocation of overhead included in closing stock is lower as compared to overhead included in opening stock. This is on account of decrease in fixed overhead absorption rate of fixed overhead due to increase in production of Red production by 28%. During the F.Y. 2008-09, the Assessee has produced 536,784 kgs of quantity of Red whereas the production of Red has been increased to 687,295 kgs of quantity of Red in F.Y. 2009-10. In view of the same the fixed overhead is al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e average value per Kg of closing stock of Red is Rs. 554.60 per Kg, which is observed to be lower than the opening stock which is Rs. 715.07 per kg. While the average value of Sales which is worked out at Rs. 607.58 per Kg. As such you are requested to explain as to why the value of the closing stock of Red be not adopted at minimum of opening value of stock at Rs. 715.07 and accordingly (121711 X 160.47 I.E (715.07-554.60)= Rs. 1,95,30,964/-] an addition of Rs. 1,95,30,964/- be not made on account of undervaluation of closing stock of Red . 9.2 The assessee replied to the aforesaid show cause notice, by submitting as under:- 15. Vide Para No.9 your office has invited our kind attention to Note No.7.b to Schedule 21 of the Audited Accounts wherein the quantitative and value detail of closing stock of Red is given. Your office has stated that the average value of opening stock of Red is Rs. 715.07 per kgs whereas the same is Rs. 554.60 per kgs for closing stock. Your office has therefore asked us to show cause as to why the value of closing stock of Red be not adopted at minimum of opening stock at Rs. 715.07 per kgs and accordingly why the addition of Rs. 1,95,30,964/- be not made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... athered that there are in all six types of grades. The Annexure -7, furnished the working of closing stock of each varies of Red Pigment as on 31/03/2010, as also of the preceding year i.e. 31/03/2009. The closing stock of all except three ie. Red Pigment 254, Red Pigment-2 and Violet has been valued at lesser rate than that of Opening stock. However the undervaluation of closing stock of Red Pigment 254 has already been discussed in para-5.4 above, and addition on that account has been considered. For the reasons as spelt out above in para 5.4, undervaluation of Red-2 Pigment is worked out to Rs. 5,38,388/- (Rs. 324.75/- Rs. 309.20/- X 34623Kg). 5.64 Also it is seen that Violet grade of Red pigment had been valued at Rs. 1424.58/- per Kg as per NRV, which is lesser than NRV value of the preceding year which was Rs. 1538.87/-. It is pertinent to note that in the Anriexure-7, no working of adoption of Raw Material Cost, Packing material cost as also Overhead expenses in respect of this Grade has been furnished. The difference of Rs. 1,73,606/- (Rs. 1538.87/- Rs. 1424.58/-X 1519 Kg) is also added to the total income As such the total addition works out to Rs. 7,11,994/-, Penalty proc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k as on 31.03.2010 and accordingly has made additions. In the written submission filed during the appellate proceedings, the appellant's AR has pointed out several discrepancies in the working of the AO and the process adopted by him. This submission was forwarded to the AO for his comments. But as can be seen from the remand report reproduced above, the AO has not made any comment regarding such claims and has relied upon the observations made by him in the assessment order. Now, all the additions are discussed item wise as in following paragraphs: 6.4. The addition of ₹ 8,65,735/- on account of under valuation of Aluminum Hydroxide. This addition has been made by the AO by observing that the average value per kg of closing stock was 50.82 per kg which was lower than the value of opening stock of 56.51 per kg. The average value of sales has been worked out by the AO at 61.16 per kg. Accordingly, the AO had show caused the appellant as to why the value of closing stock should not be adopted at the rate of opening value of 56.51 per kg. The appellant claimed before the AO that it was following the methods prescribed by accounting standards for valuation of inventories and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per the accounting procedures and proper records for the same has been maintained by it and has also been placed before the AO. It has also been able to explain the difference in sale price of ATH sold via two different invoices. The valuation has been done on the basis of weighted average method which is one of the approved methods of valuation of closing stock. Hence, it is held that the addition made by the AO by increasing the value of closing stock of ATH is not proper and is accordingly, directed to be deleted. 6.5. Addition of ₹ 1,58,28,535/- on account of revaluation of Beta Blue Again the AO has made addition because of the fact that the average value of work-in-progress was 276.30 per kg whereas, the closing stock of the finished goods had been valued at ₹ 245.70 per kg. The appellant had explained before the AO that while computing the raw material cost for inclusion in WIP, the latest monthly moving average cost was considered, whereas, for RMC for inclusion in finished goods, the weighted average cost of the entire year was considered. It was also stated that the average value of closing WIP was ₹ 258.39 and not 276.30 as stated by the AO in his show ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 282.64 while the cost is ₹ 233.66. Hence, the lower of the two values i.e. 233.66 have been considered for valuing the closing stock. As already stated, the AO has not made any further comment on these arguments in the remand report. 6.5.2. The submissions made by the appellant during the appellate proceedings are acceptable. The appellant is following weighted average method for both the finished goods as well as work-in-progress. The finished goods have been rightly valued by taking weighted average of entire year where as the work-in- progress has been rightly valued by taking weighted average of the last month on account of the fact that it constituted of the raw materials acquired at the end of the year. Moreover, if the appellant had adopted weighted average method for the entire year for purpose of valuation of WIP also, then the cost of production of WIP could have been lower than 258.39 and would have been in the vicinity of cost of production of finished goods adopted at 233.66. Under such circumstances, the value of closing stock would have been lower that what has been disclosed by the appellant resulting into lower profit for the year under consideration. Hence, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing stock is lower than the opening stock. Since, the appellant has maintained complete records of stock and has provided the valuation of the closing stuck as per the accounting standards, hence, the addition made by the AO is only based upon the fact that the rate of valuation of closing stock is lower than that of opening stock, cannot be upheld. Hence, this addition is also directed to be deleted including the disallowance of 1,73,606/- on account of lower value of net realizable value of violet grade of Red Pigment as compared to the earlier year. 6.6.2. Thus, the entire addition made by the AO by revaluing the closing stock is directed to be deleted. 11. Now, it is a turn of Revenue to be aggrieved by the decision of ld. CIT(A) and Revenue has filed an appeal with Tribunal. The Ld. DR submitted that it is the valuation of stock which is a matter of dispute between the assessee and the Revenue. He drew our attention to the assessment order of the AO. The ld. DR would reply on the assessment order passed by the AO. 11.2. The ld. counsel for the assessee drew our attention to the appellate order passed by ld. CIT(A) and submitted that the assessee has consistently followed FIFO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shed goods holding for different products varies from 1-3 months. AS-2 clearly stipulates that formula used in determining the cost of an item of inventory needs to be selected with a view to providing the fairest possible approximation to the cost incurred in bringing the item to its present location and condition. The FIFO formula assumes that the items of inventory which were purchased or produced first are consumed or sold first, and consequently the items remaining in inventory at the end of the period are those most recently purchased or produced. Under the weighted average cost formula, the cost of each item is determined from the weighted average of the cost of similar items at the beginning of a period and the cost of similar items purchased or produced during the period. The average may be calculated on a periodic basis, or as each additional shipment is received, depending upon the circumstances of the enterprise. Thus, in view of prescription by AS-2, it requires to be determined the fairest possible approximation to the cost incurred in bringing the items to its present location and condition. The assessee need to explain this aspect of reasons for adopting yearly cost ..... X X X X Extracts X X X X X X X X Extracts X X X X
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