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2016 (4) TMI 663 - ITAT DELHI

2016 (4) TMI 663 - ITAT DELHI - TMI - Determination of Arm's Length Price - whether the goods so exported were part of the slow moving old stock? - Held that:- There is absolutely no doubt that the toning down of inventory which was written down in valuation of stock has been based on the retail pricing method.

TPO, on the one hand, accepting these goods as slow moving, on the other, he expects the assessee to earn margin at the same rate at which the normal goods of the assessee are .....

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s the duty of the TPO to arrive at the ALP of this international transaction. TPO cannot use this figure of 22.64% itself as at arm's length. In effect, the sale invoices of the assessee to its AE can be compared with the sale of invoices of the AE to the independent party. The goods sold are exactly the same, as the goods were dispatched from the warehouse of the assessee to the ultimate buyer who is an independent entity. The time gap between the sale of the assessee and the sale of the AE are .....

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hrough the AE as well. The goods sold are exactly the same, as the goods were dispatched from the warehouse of the assessee to the ultimate buyer who is an independent entity. The time gap between the sale of the assessee and the sale of the AE are negligible because it has happened within the same month. The gross profit earned by the assessee is in India. TPO had not disputed the classification of the goods as slow moving or as old stock. Therefore, the CIT(A) has rightly held in favour of the .....

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2,87,51,769/- made on account of adjustment proposed by TPO in order u/s 92CA(3) of the I.T. Act, as: (a) The Ld. CIT(A) has not been able to substantiate that the goods so exported were part of the slow moving old stock, whereas the TPO has clearly held that the assessee company could not produce anything on record which could substantiate that the goods so exported were part of the slow moving old goods. (b) Having held that the rejection of Quotes of the other companies by the TPO to be reas .....

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s A G Germany has set up on the subsidiary company in the name and style of M/s Adidas India Pvt. Ltd after obtaining due approval. M/s Adidas India Pvt. Ltd. provided license technology to the assessee company i.e. M/s Adidas India Trading Pvt. Ltd. As per the agreement M/s Adidas India Pvt. Ltd. was to provide exclusive non-transferable rights to manufacture distribute and sale the license products in India, Nepal and Bhutan on payment of royalty at 5% of the sales effected. As per the agreeme .....

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ional transactions. The adjustment on this account therefore calculates to ₹ 2,87,51,769/-. 4. The Ld. DR submitted that the Transfer Pricing Officer has clearly mentioned that there was nothing on record to show that the said articles sold to the overseas associate was old and slow moving inventory and a specific query was made to the assessee on 22.09.2008 mentioning the same. In reply to the same the assessee produced two invoices vide its submission dated 29.09.2008. These two invoices .....

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ious argument as to what would constitute the old stock. In this regard, the representative of the assessee has submitted that the fashion trend of the assessee company changes every six months. As such there is a fresh stock arrival after every six months and the ones that are replaced are termed old. These stocks are then tried and sold at the factory outlets at discounted price and the ones that still remain unsold are consigned to the warehouse and dumped. It is this inventory that is termed .....

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the "highest quote principle basis" defies logic. Moreover, there is no submission on record to prove that the two quotes were even used to end up in a negotiation process. However, it is seen that the inventory exported to the overseas AE is not the same that has been further sold to SIMO. This is established from the contents of the articles recorded in the invoice of sale to the AE and the invoice of sale to SIMO. This proves that the same articles have not been sold to any third pa .....

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the cost of these alleged rejected goods and this will not make any business sense. The claim of sale of rejected goods Ex-Singapore which has a high cost of inventory holding, cannot be believed for the following reasons 1. The sale invoice did not contain sale or resale of rejected goods. 2. It is against prudent business practice due to huge ware housing charges. The claim is not supported by any credible evidence. The purported sale to the third party does not corroborate economic prudence a .....

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balance sheet is net of gross margins and covers incidental costs. As such the value of the closing stock which has been toned down by ₹ 4.67 crores contains no element of profit which the assessee should have earned in terms of market outgo. The gross percentage earned by the assessee has been found at Annexure-XIII of the Tax Audit Report. The gross profit margin posted by the assessee in this year is 22.64% which the assessee should have earned over and above the cost of the inventory. .....

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s chosen an equivalent platform in its TP study, the alternate recourse to a different geographical terrain is neither correct nor would lead to any credible determination of Arm's Length Price. In light of the above observations of the TPO, the arm's length price of sale of goods to aSIS is determined at ₹ 5,73,67,313 in place of ₹ 2,86,15,544 which is the book value of the international transactions. The adjustment on this account therefore was correctly calculated to ͅ .....

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alue of the inventory is to be depreciated at variable rates over a one year period. A closer look shows that there exists a close out date for an inventory and it starts getting depreciated even before the close out date and continues progressively at regular intervals of three months. The Ld. AR further stated that the inventory was valued at standard cost. In this light the provisions of AS-2 which defines the valuation of inventories was required to be visited. The Accounting Standard (AS-2) .....

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tuation > Retail method is generally used in retail business, when it is difficult to ascertain cost of individual item. It is applicable when items of inventories are rapidly changing items and have similar margins and for which it is impracticable to use other costing method. Under this method, the cost of inventory is determined by reducing from the sale value of inventories the approximate value of gross margin. The percentage used takes into consideration the inventory that has been mark .....

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inclined towards retail costing that has been discussed in the discussion above. In view of the foregoing, there is absolutely no doubt that the toning down of inventory which was written down in valuation of stock has been based on the retail pricing method. The above was demonstrated by the Note 13 of the Schedule 19 of the notes to accounts. Note 13 of Schedule 19 of notes to accounts of the assessee company values the stock of the goods and in the footnote to the same it reads as under:- &qu .....

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, less estimated cost of completion and estimated cost necessary to make the sale. Net realizable value is estimated on the basis of most reliable evidence at the time of valuation. Such net realizable value is reduced by the Gross Margins' and is arrived at the figure that is reflected in the balance sheet. Estimation of net realizable value also takes into account the purpose for which the inventory is held. Estimation of net realizable value is made at each balance sheet date. 8. The Ld. .....

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sked as to what amount out of this stock pertained to its sale to its overseas Associated Enterprise. The assessee has not been able to submit any detail. However, the figurative details furnished on record shows that the assessee has sold the stock which totally pertains to the toned downed value. It was contended that the assessee submitted before the Assessing Officer that the overseas subsidiary has further sold the stock to an independent third party SIMO. The margin of profit earned is les .....

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very nature of slow moving and old stock is that the assessee is not able to sell them in the market at the market price. This is a kind of 'depress sale or clearance sale'. Therefore, to expect the assessee to earn the same margin on such goods is unreasonable and not based on appreciation of circumstances of the assessee. TPO, on the one hand, accepting these goods as slow moving, on the other, he expects the assessee to earn margin at the same rate at which the normal goods of the ass .....

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