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TMI Blog2023 (2) TMI 553X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 ["CIT(A)"], Bangalore under section 250 of the Act on the following grounds: On the facts and circumstances of the case and in law, the Honorable CIT(A) erred in upholding the order of the learned Deputy Commissioner of Income Tax- Circle 12(1), New Delhi ("learned AO") which has been passed after taking into account the order of the learned Additional Commissioner of Income tax (Transfer Pricing Officer - I), New Delhi ("learned TPO") whereby the learned TPO and the learned AO have : A) Grounds of appeal relating to Transfer pricing (`TP') adjustment 1. Erred in making an addition of INR 12,59,12,420 to the total income of the Appellant on account of adjustment in the arm's length price with respect to the international transactions of the Appellant. International transaction relating to Export of Finished Goods to Associated Enterprise VAE") 2. Erred in making an upward TP adjustment of INR 7,75,62,042 to the international transaction of Export of Finished goods to AE. 3. Erred in not considering various submissions, workings and evidences furnished by the Appellant to justify the commercial expediency behind export of goods. 4. Erred in considering ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lting in denial of substantial justice. 16. Erred in levying interest under the provisions of Income Tax Act, 1961. Further, the Appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at, the time of hearing, of the appeal." ITA No. 2068/Bang/2017 (AY: 2005-06) "Based on the facts and circumstances of the case and in law, Herbalife International India Private Limited ("Herbalife India" or the "Company" or the "Appellant") respectfully craves leave to prefer an appeal under section 253 of the Income-tax Act, 1961 ("the Act") against the order dated 29 August 2017 passed by Commissioner of Income-tax (Appeals) , Circle - 3 ["CIT(A)"], Bangalore under section 250 of the Act on the following grounds: On the facts and circumstances of the case and in law, the Honorable CIT(A) erred in upholding the order of the learned Assistant Commissioner of Income tax, Circle - 11(4), Bangalore ("learned AO") which has been passed after taking into account the order of the learned Additional Director of Income tax, Transfer Pricing- I. Bangalore ("learned TPO") whereby the learned TPO and learned AO have: A) Grounds o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 998 and started its manufacturing activity in the Indian market through third party contract manufacturers. It is submitted that the in its initial years of operations, it manufactured certain products which did not prove to be viable in the Indian domestic market. Considering that the Herbalife products have low shelf life and are perishable in nature, some products were written off in the AY 2002-03 In cases where the rework/reuse was perceived to be possible so as to be fit for human consumption. The same were reworked and sold to its AE, Herbalife International of America Inc., US, in the AY 2003-04. 2.2 It is again submitted that the assessee had a policy of accumulating finished goods inventory equivalent to 16 weeks' sale in anticipation of the growing demand of products. However, during FY 2001-02, the sales slumped significantly as opposed to the anticipated sales. On account of this decline, there was a huge stock pile up and to add to that the assessee was facing serious logistics issues relating to storage and warehousing the huge inventory. 2.3 It is submitted that during a normal quality control testing, foul smell was detected as emanating from these products. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ile doing so, assessee had aggregated its other international transaction and computed its margin at entity level of 12% with comparables margins of 4% and concluded that the international transaction for A.Y. 2003-04 at arms length. 2.7 The Ld.TPO distributed the manner of computing the margin. The Ld.TPO was of the view that the products sold to AE were also sold to unrelated parties, the controlled prices were available in an internal CIP. The Ld.TPO thus computed the margin by using CUP as the most appropriate method. It was also observed by the Ld.TPO that assessee did not submit invoices of sales with unrelated party however the assessee had compared the per unit sale price of the obsolete stock sold with the per unit manufacturing cost of production and arrived at the gross profit of products sold to unrelated parties at 77% and the net realisable value was arrived by reducing the GP% i.e. 77% from the per unit sale price of the products by further discounting at 46%. This above method under CUP was rejected by the Ld.TPO as arbitrary. The Ld.TPO determined the discount of products at 50% of the MRP and computed the TP adjustment by proposing the shortfall at Rs.7,75,62,041 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ventory was to be allowed in the year under consideration or not. The CIT(A) as well as AO have just given remarks that the matter can only be considered in AY 2003-04. Nowhere is it stated that any such allowance needs to be given to the appellant in AY 2003- 04 without any verification. Considering above, these additional grounds of appeal are not admitted." Aggrieved by the order of Ld.CIT(A), assessee is in appeal before this Tribunal. 4. Ground no. 1 raised by assessee is general in nature and therefore do not require adjudication. 5. Ground nos. 2-5 is in respect of the export of finished goods to the associated enterprises wherein an upward TP adjustment was made. The Ld.AR submitted that the products reproduced in para 2.3 sold to the AE was one time export and did not constitute and a regular business activity of the assessee. 5.1 The Ld.AR submitted that the above sale transaction constituted only 5% of the total revenue of the assessee which also forms part of the closing stock list for the year under consideration. He submitted that due to low / no demand in the Indian market huge stock piled up in AY 2002-03 considering the perishable nature to these products, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is a made up story. It was submitted by the Ld.DR that the products that are not saleable in India cannot anyway cross the boundaries of India as it requires necessary approvals being food products for consumption and certificate of quality assurance has to be submitted. The Ld.DR supported the transfer pricing addition in respect of the international transaction of export of finished goods to the AE. We have perused the submissions advanced by both sides in the light of records placed before us. 5.7 We appreciate the argument advanced by the Ld.DR however there are various documents filed by the assessee in support of the products that are submitted to be remodified and was made to be fit for consumption. However, such modification did not fit into the strict criteria of verification as per the FDA norms and therefore stood rejected and destroyed. We note that these details and evidences filed by assessee the summary of which are reproduced hereinabove in a tabulated form has not been considered by the Ld.AO/TPO. It is also admitted fact that margin of assessee at 12% was compared with the comparables being 4% for the year under consideration and therefore some value has bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnational transaction and is also subjected to TP provisions of sec.92CA, however, the AO made an alternative addition by invoking the provisions of sec.40A(2) of the Act. The AO allowed only 2% of the turnover amounting to Rs.1,02,62,530/- and the balance of Rs.4,81,97,802/- has been disallowed under section 40A(2) of the Act. There is no dispute that the transaction has been reported by the assessee as international transaction which was also accepted by the AO and the TPO as an international transaction. Thus, once a particular transaction is admitted as international transaction then the same falls in the ambit of the provisions of X chapter of the Act which are specific provisions to deal with such transactions between the assessee and its AE. Therefore, once the transaction is undisputedly subject matter of Chapter X of the IT Act, then the other general provisions of the Act cannot be applied simultaneously. The AO, having considered the transaction being international transaction and making a reference to the TPO for determination of the ALP cannot go back to the provisions of sec.40A(2) for determining the reasonableness of the price paid by the assessee. Our attention was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nitely does not fall under any of the categories of persons under clause (b) of sub-sec.(2) of sec.40A. The AO has not carried out any exercise to bring on record that Cisco India has got substantial interest in the business or profession of the assessee or that it falls in any of the categories of persons. In view of the same, we are of the opinion that the disallowance u/s 40A(2)(b) of the Act is not called for. 11.1 As regards the alternative contention of the learned counsel for the assessee that the transaction between the assessee and Cisco India Ltd., being an international transaction, the same has already been referred to the TPO for determination of the ALP and therefore it cannot be considered for disallowance u/s 40A of the Act, since we have already held that the provisions of sec.40A are not attracted, we do not see the need to adjudicate this contention of the assessee. " 10.6 In the case in hand, when the AO has not conducted any inquiry or brought out any material on record to prove that payment made by the assessee is excessive and unreasonable making an adhoc disallowance by invoking the provisions of sec.40A(2) of the Act is not justified. Accordingly by f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2003 04 as no claim was made before the AO. Relevant extract of CIT(A) order is re-produced below '(Refer page 8-9 of the paper book): "Vide letter dt 26.10.2016, the appellant has raised more additional grounds of appeal. The same relate to allowing of write off of inventory during the year under consideration. The appellant has prayed for the admission of the same. On perusal of record it is observed that these grounds are not arising out of the order of the Assessing Officer (AO). These issues were never raised by the appellant before the AO. Further these are not legal issues. It would require fresh investigation into facts as to whether the write off of inventory was to be allowed in the year under consideration or not. The CIT(A) as well as AO have just given remarks that the matter can only be considered in A Y 2003-04. Nowhere is it stated that any such allowance needs to be given to the appellant in A Y 2003-04 without any verification. Considering above, these additional grounds of appeal are not admitted." 7.5 The Tribunal for A.Y. 2002-03 in assessee's own case while considering this issue observed as under: "The AO also observed that the inventories were writ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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