TMI Blog2023 (9) TMI 879X X X X Extracts X X X X X X X X Extracts X X X X ..... came contract manufacturer for HHPL and the sales to HHPL have increased. In A.Y. 2013-14, ld. AO observed that there is no agreement between assessee and HHPL, whereas in A.Y. 2014-15, when onwards there is an agreement, AO is stating that it is an afterthought and he has rejected MOU on the ground that it is not on some stamp or legal document, which is not the requirement of the law. Nothing has been pointed out by the department that any MOU or agreement between the parties needs to be on some stamp paper which needs to be registered with any authority. Thus, this reason of the ld. AO is out rightly rejected. Here it is not a case where provision of 40A (2)(b) is applicable, because it is not a case where assessee has incurred any expenses, in respect of which payment has been made to any person specified in clause (b) of sub-section 2 of 40A. Here it is a case of sales made on a discounted price to one particular party which is a bulk sale. If assessee has stated the reasons and circumstances as to why bulk sale has been made to HHPL and later on HHPL was the only buyer of the assessee; and the assessee was running into heavy losses because of unabsorbed depreciation and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - Rs. 9,56,47,560/- 3. Besides this, additional issue of disallowance u/s. 14A r.w.r. 8D has been challenged in the A.Y. 2013-14 and A.Y. 2016-17 which CIT (A) has deleted on the ground that disallowance should be restricted to exempt income. We are taking up the appeal for the A.Y. 2013-14 and our finding given therein will apply mutatis mutandis in the appeals for A. Yrs. 2014-15 to 2018-19. 4. Brief facts qua the issue of addition on account of higher price charged with HHPL are that Assessee Company is engaged in manufacturing of thermoware products. During the year, assessee has made sales of Rs. 37,93,23,333/- to HHPL which according to the ld. AO was a related concern of the assessee, in the sense that, it is a family concern run by relative of the Directors of the assessee company. The AO s allegation is that since it is a related party, hence, assessee has sold the goods at a very high discounted rate. During the course of assessment proceedings, assessee was required to justify the lower rate charged to HHPL as compared to the products sold to the other parties. 5. The contention of the assessee was that discounted sales was due to the fact that while mak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion is also not correct as the assessees itself has computed such cost at about 15% and as it was a sick company it should not have given such a heavy discount to the HHPL at its own cost. Assessed has made an analysis of total sales fetal expenses and 5% of the same with total sales including sale to HHPL and excluding sale to HHPL) and has come to the conclusion that assessee has benefitted from the transaction. But what the assessed has done is not a correct method of comparison. The assesses has computed the % of expenses with the sale made to other portion and has applied the same to the total sales and has concluded as above. The same comparison is not correct an assessee has sold Almost 80% of material to HHPL and hence the % of expenses assessee would be making would not be as compared to the sale to direct parties An analysis of the details submitted by the assessee with respect to price charged from M/s. Hamilton Houseware Pvt. Ltd, and other parties, has been made and instances where there is a difference in the price charged from Hamilton Houseware Pvt. Ltd. has been carried out, It is seen from the details submitted by the assessee that a difference of Rs. 7,51,44,441/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee submitted an analysis of the proportion of Selling Distribution Expenses for Consumer Durable/Fast Moving Consumer Goods Companies and also the proportion of such expenses incurred by the assessee company. 9. The ld. CIT (A) following the order of the Tribunal had deleted the said addition after quoting the relevant passage of the Tribunal order, which for sake of ready reference is reproduced hereunder:- 2.3. We have heard the rival submissions and perused the material before us. We find that the assessee had sold goods to HHPL at lower rates, that it had filed explanation in that regard to the AO and the FAA, that both the authorities rejected the justification filed by it. Prima facie it may appear that the transaction entered into by the assessee with HHPL were not at arm's length. But, if the entire picture is looked at it become clear that there was justification for selling the goods at lower rates to HHPL. The assessee was suffering huge losses whereas HHPL was earning profit. By submitting the accounts of both the entities the assessee had discharged the initial onus cast upon it with regard to selling the goods at lower rates. Thereafter, the onus had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing a proceeding for reassessment under section 147(b) may be made out. Avoidance of tax liability by so arranging commercial affairs that charge of tax is distributed is not prohibited. A taxpayer may resort to a device to divert the income before it accrues or arises to him. Effectiveness of the device depends not upon considerations of morality, but on the operation of the Income- tax Act. Legislative injunction in taxing statutes may not, except on peril of penalty, be violated, but it may lawfully be circumvented. In the case under consideration the AO/FAA had failed to prove that there was any avoidance of tax liability. It was a simple and plain case of offering a discount to the buyer in lieu of reduced transportation and advertisement expenses. It was the proverbial 'Ek Haath le Ek Haath de'dealing. We would also like to refer to the matter of Sivakami Co.(supra). In that case the assessee held certain shares which were not quoted on the stock exchange. It sold the shares to two other companies which were directly or indirectly connected with it at prices considerably less than their break-up value. The Tribunal found that the consideration was not understat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as running into losses, therefore, to get a bulk contract assessee has sold the products at a large discounted price to related party. The plea taken by the assessee had incurred huge expenditure on sales promotion etc. while making the sales to related party, is not correct because sales promotion expenses to the extent of 9% as per the audited accounts. She further, submitted that such a huge variation is uncalled for in a comparable third party scenario even if sales promotion expenses are to be factored into. He further submitted that the ld. AO in the assessment order for A.Y. 2014-15 has also analysed the MOU entered between the assessee and HHPL on 04/04/2013 wherein the ld. AO on a very cogent reason has rejected the said MOU which according to ld. AO is an afterthought. She strongly relied upon the order of the AO and further submitted that, no prudent businessman will sell products as such a less price and here it is doubted more so because, it has been sold to related concern. 11. On the other hand, ld. Counsel relied upon the submissions as incorporated above in the appellate order and also referred to the various observations of the Tribunal. He further submitted th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... total sales. It is these two factors, namely, the selling and distribution expenses and the possible margins which account for the difference. 15. The ld. AO has made a point that there is no agreement to the effect that HHPL is to incur the selling and distribution expenses. The figures clearly demonstrate that qua the sales made to HHPL, the same have been incurred by HHPL. In the next year, that is, AY 2014-15, an agreement has been entered into between the assessee and HHPL whereby the assessee has become an exclusive contract manufacturer for HHPL. Even that agreement is not accepted by the ld. AO. In other words, when there is no agreement, the learned AO makes the addition saying that there is no agreement. Even when there is an agreement, he does not accept the same as genuine. This is a case of having the cake and eating it too. The ld. AO has also not pointed out any section of any law which lays down that the said MOU needs to be registered. A reading of section 17 of the Registration Act, 1908 clearly brings out that this MOU does not need registration. As regards stamp paper, would the department treat an agreement as genuine merely because it was on a stamp paper? ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 37,93,23,333 79% Sales to Others 10,01,81,564 21% Total expenses 40,57,57,292 Add: excise duty 9,31,53,300 49,89,10,592 Less: selling and dist exp (Others) 89,98,702 48,99,11,890 100% 38,70,30,393 79% 10,28,81,497 21% AY 2014-15 Total Sales 55,68,97,501 100% Sales To HHPL 46,84,91,307 84% Sales to Others 8,84,60,194 16% Total expenses 46,01,33,529 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sales To HHPL 25,98,47,908 Sales to employees 13,91,265 21. From the above, it can be seen that from A.Y. 2015-16, sales made to HHPL have been increased from 92% to practically 100%. In fact, in 2017-18 and 2018-19, only sales made arte to the employees at a discounted price. Once there was no MOU till A.Y. 2013-14, almost 80% of the sales were made to HHPL and when MOU was entered into, assessee became contract manufacturer for HHPL and the sales to HHPL have increased. In A.Y. 2013-14, ld. AO observed that there is no agreement between assessee and HHPL, whereas in A.Y. 2014-15, when onwards there is an agreement, AO is stating that it is an afterthought and he has rejected MOU on the ground that it is not on some stamp or legal document, which is not the requirement of the law. Nothing has been pointed out by the department that any MOU or agreement between the parties needs to be on some stamp paper which needs to be registered with any authority. Thus, this reason of the ld. AO is out rightly rejected. 22. First of all, here it is not a case where provision of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Thus, simply rejecting the explanation of the assessee and holding that assessee should have sold the goods at the same price as was done to the other parties in A.Y.2013-14 is uncalled for; and later on, in subsequent years, AO has simply added the difference of 25% without any cogent reasons. 24. Another one important fact is that there has to be enabling provision where sales made to a related party (which is not a related party if one goes by the definition provided in section 40A (2)(b) of the Act) at a discounted price is to be added in the absence of provision of specified domestic transaction which is not applicable in such cases nor under any other deeming provision or u/s. 40A(2)(b). The assessee cannot be forced that it should have earned higher margin or higher profit from the sales made to related parties in absence of any enabling provision. Even otherwise also, the facts and circumstances were explained by the assessee for discounted price and that, later on assessee became a contract manufacturer for HHPL, this kind of comparability analysis vis- -vis other parties has no meaning at all then. Accordingly, no addition on account of such difference could have bee ..... X X X X Extracts X X X X X X X X Extracts X X X X
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