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Income Tax Appellate Tribunal, ‘D‘ BENCH
Before: SHRI AMIT SHUKLA & MS. PADMAVATHY S
Assessee by Shri Hiro Rai Revenue by Ms. Mahita Nair Date of Hearing 27/04/2023 Date of 27/04/2023 Pronouncement आदेश / O R D E R PER AMIT SHUKLA (J.M): All the aforesaid appeals have been filed by the Revenue against separate impugned orders of even date, 19/09/2022 passed by NFAC, Delhi for the quantum of assessment passed u/s.143(3) for the A.Y.2013-14.
In all the years, the main issue revolves around deletion of addition relating to lower price charged from M/s. Hamilton Housewares Pvt. Ltd. (hereinafter referred to as HHPL) as compared from the other parties. In various assessment years, additions on this account are as under:-
AY 2013-14 - Rs.7,51,44,441/- AY 2014-15 - Rs.2,03,30,560/- AY 2015-16 - Rs.14,51,27,465/- AY 2016-17 - Rs.9,90,68,577/- AY 2017-18 - Rs.6,61,95,594/- AY 2018-19 - Rs.9,56,47,560/-
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.
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 3 M/s. MPL Plastics Limited 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.
The contention of the assessee was that discounted sales was due to the fact that while making the sales to HHPL, assessee did not have to incur transportation cost, sales promotional activities or marketing of the product or any sales promotion expenses. It was also brought on record that assessee had entered into MOU with HHPL in subsequent year( i.e., from A.Y 2014-15), wherein certain terms and conditions were agreed upon which has been summarized in the impugned CIT (A) order in the following manner:-
“1. The assessee and HHPL have an arrangement wherein the assessee will be an exclusive contract manufacturer of HHPL 2 The assessee will transfer the manufactured goods to HHPL at a transfer price mutually decided by both the parties. 3. Also, the assessee cannot make direct sales to third party without consent of HHPL. The sales to other parties will be at the instruction of HHPL specifying the price and terms of delivery to the assessee.
4 M/s. MPL Plastics Limited 4. If the price for direct sales is higher than the transfer price agreed with HHPL the differential amount of the same will be reimbursed by the assessee to HHPL by way of credit note.”
The ld. AO noted that average discounted rate on the sales effected to M/s. HHPL was around 16.53%. He further noted that out of total sales of Rs.47.95 Crores, sales made to M/s.HHPL were Rs.37.93 Crores which constituted 79%. The assessee had also submitted that if freight and transportation, commission and discount, advertisement, sales promotional activities are taken into account which comes to 15% of the total turnover and hence, sales made to M/s. HHPL is at ALP and hence, no disallowance needs to be made. However, the ld. AO rejected the assessee’s contention holding that assessee has failed to submit any documentary evidences and it is not understandable as to why HHPL will bear the freight cost which other parties are not bearing. He also noted that assessee is a sick company registered with BIFR, so it is not in a position to incur huge expenses for brand promotion as well as increase its reach of distribution by incurring heavy freight and transportation cost. No agreement for such arrangement with M/s. HHPL has been filed to support the claim of the assessee that it will bear the cost of transportation, nor any bills / invoices have been filed. He also noted that analysis made by the assessee is not correct. The relevant finding of the AO reads as under:-
“Further, the contention is also not correct as the assesses 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 5 M/s. MPL Plastics Limited 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/- has evaded taxation because of under invoicing to related parties. This amount of Rs.7,51,44,441/- has to be added to the total income of the assessee as per the discussion above. As the assessee has failed to satisfactorily explain the difference in the price charged from Hamilton Houseware Pvt. Ltd, and other parties.”
Before the ld. CIT (A), one important fact which was stated that ld. AO has relied upon the earlier assessment orders for A.Y. 2008-09 and 2009-10 on similar issue which has now been decided by the Tribunal in favour of the assessee and additions have been deleted on identical issues. Apart from that, it was submitted that the difference in the pricing is due to the fact that the arrangement with HHPL was that, HHPL will bear the transportation cost and carry out the advertisement and sales promotional activities for the products. The products dealt by the assessee company are differentiated on the basis of the Brand
6 M/s. MPL Plastics Limited Value of the products. There has to be a visibility of the products through effective marketing efforts. All these activities require heavy ongoing expenditure. As the assessee company was sick company registered with BIFR, it was not in a position to incur huge expenses for brand promotion as well as increase its reach of distribution by incurring heavy freight and transportation costs and creating a big distribution network of its own. In view of the these reasons, it had entered into an arrangement with HHPL, wherein the goods were to be supplied at a discounted rate, which will take care of the expenses it had agreed to incur on freight, transportation, advertisement and sales promotion of the products sold to them by the assessee company. This effectively avoided the assessee company to make provision for huge cash flow, which would have further strained its resources as it was already defaulting on payments of interest and principal amounts to the banks and financial institutions and would have incurred further losses on account of additional interest burden.
It was also submitted that the assessee company has incurred Rs.75.61 lacs (1.96% of total sales) towards Freight & Transportation Cost, Rs.14.38 lacs (0.37% of total sales) on Advertisement & Sales Promotion and Marketing Expenses. Normally for a consumer products company such costs form approximately 15% of the Sales. To justify its contention, assessee submitted an analysis of the proportion of Selling & Distribution Expenses for Consumer Durable/Fast Moving
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 shifted to the AO and he had to demonstrate as to how the payment was excessive or unreasonable. Apart from the presumption, based on the relationship between HHPL and the assessee-company, there was no other material before both the revenue authorities to come to the conclusion that the sale price charged by the assessee from HHPL was not reasonable. It is a fact that the assessee had incurred negligible expenses under the heads transportation and advertisement, i.e.1.04% and 0.74% of the sales respectively. Whereas, HHPL had incurred substantial expenditure on account of those two heads. The assessee was suffering losses and it decided to charge lesser price in lieu of certain expenses incurred by the purchaser then the decision cannot be challenged by anybody. Revenue authorities are not entitled to step in to the shoes of the 8 M/s. MPL Plastics Limited assessee and decide the issue as to how to run its business and which expenses to incur or not to incur. They have not doubted the transaction i.e. selling of goods to HHPL and receiving of lower price. Their objection is about discount allowed to the buyer. In our opinion, if an assessee files a plausible explanation for charging lesser or higher rates as compared to the normal market rates,it has to be seen from a point of view of a businessman. In the case of A Raman & Co.(supra), the assessee firm was found to have affected sales of goods to its partners i.e. Manager of the two HUF.s. The AO alleged that the assessee had sold the goods to the families, that the families had earned substantial profit on the resale of the goods over and above the margin of profit earned by the assessee, that the creation of the family business was merely a subterfuge of the partners of the assessee to divert the profits. Deciding the matter the Hon'ble Apex Court has laid down a basic principle and has held as under :- "The law does not oblige a trader to make the maximum profit that he can out of his trading transactions. Income which accrues to a trader is taxable in his hands: income which he could have, but has not earned, is not made taxable as income accrued to him. By adopting a device, if it is made to appear that income which belonged to the assessee had been earned by some other person, that income may be brought to tax in the hands of the assessee, and if the income has escaped tax in a previous assessment, a case for commencing 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."
9 M/s. MPL Plastics Limited 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 understated and that the real and main object of the respondent in selling the shares was to safeguard the shares from being taken over by the Government in settlement of tax dues. The question was whether the provisions of the first proviso to section 12B(2) of the Indian Income-tax Act, 1922, could be invoked and the break-up value substituted in the place of the declared price and the respondent assessed to tax on capital gains on that basis. Dismissing the appeal filed by the Department, the Hon'ble Apex Court held as follow: ......since the Tribunal had found that the consideration was not understated and there was no evidence direct or inferential to show that the consideration actually received by the respondent was more than what was disclosed or declared by the respondent, the proviso to section 12B(2) could not be invoked. ......Though the legislation in question is to remedy a social evil and should be read broadly and should be so read that the object is fulfilled, yet the onus of establishing a condition of taxability must be fulfilled by the Revenue.....Unless there is evidence that more than what was stated was received, no higher price can be taken to be the basis for computation of capital gains." Following the above judgment, we hold that the AO/FAA had not brought on record any evidence to prove that higher price 10 M/s. MPL Plastics Limited was received by the assessee than what was stated in the books of accounts. We would also like to mention that both the authorities have emphasised that by charging lesser price the assessee had helped the buyer to claim higher 80IB deduction. But, they have ignored the basic fact that deduction under that section is available only for manufactured goods. Thus, the one of the reasons for rejecting the claim of the assessee has no basis at all. We would also like to mention that the facts of Lakewood (supra) are totally different from the facts of the case under consideration. In that matter the assessee had sold flats to Directors and share holders and there was vast difference in the market price and the sale price. It was not a case of charging lesser price for shifting burden of certain expenses to the buyer.
Before us, the ld. CIT DR submitted that nowhere assessee could give proper justification as to why such a huge discounted price on sales have been given to a related concern. Merely stating that assessee was 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 11 M/s. MPL Plastics Limited 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.
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 that even assuming without admitting that sales made to HHPL less than market rate but there is no provision under the Act which permits the department to make such an addition. The assessee can be charged to tax only in respect of the profits he has made and not what he should have made. He further clarified that even on the sales made to HHPL, assessee has earned profit margin and it is not a case that assessee has not earned the profit. It was on this background and considering the various judgments of the Jurisdictional High Court, this Tribunal has deleted the identical additions made for the same reasons for A.Y.2008-09 to 2010-11. He also pointed out that in A.Y.2011-12 and 2012-13, no such additions have been made despite scrutiny assessment has been passed.
He further submitted that there is no reason why the assessee should resort to this alleged under-invoicing. The assessee has huge unabsorbed losses and depreciation of about Rs. 40 crores. Therefore, even after the making of the said addition, the assessed income is still NIL.
12 M/s. MPL Plastics Limited 13. On the other hand, HHPL has made huge profits on which it has paid tax. There is therefore, no tax advantage at all on account of the alleged under- invoicing. It is also worth noting that HHPL mainly belongs to the nephew of the directors of the assessee and does not fall within the provisions of section 40a(2) It was submitted that in the orders for the subsequent years, the learned AO had made the additions but missed allowing the unabsorbed losses and depreciation. The same have been allowed by the ld. CIT (A)
It was also submitted by him that the total selling and distribution expenses incurred by the assessee this year are only Rs.89,98,702. The assessee is manufacturing thermoware which obviously requires huge amount of advertisement as also freight and transportation charges. These expenses are a very small percentage of the total sales of Rs. 47.95 crores this year and it is therefore obvious that these pertain only to the sales made to the others, that is, non HHPL sales. Further, it is also important to note that the prices one could charge from a number of individual buyers could be much higher as compared to the price charged from a bulk buyer to whom about 80% (this year) are sold. The total sales this year are 47.94 crores out of which 37.93 crores are to HHPL, which is about 80% of the total sales. It is these two factors, namely, the selling and distribution expenses and the possible margins which account for the difference.
13 M/s. MPL Plastics Limited 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?
In fact, from the AY 2014-15, as per the MOU, the assessee is an exclusive contract manufacturer for HHPL. As per the MOU, any price recovered by the assessee from sale to others in excess of the price charged to HHPL is to be reimbursed to HHPL. This has in fact been reimbursed. Therefore, from the AY 2014-15, there is no difference in prices as far as the assessee is concerned. Accordingly, there can be no question of any addition to be made on account of the alleged difference between the price charged to the others and HHPL.
14 M/s. MPL Plastics Limited 17. During the course of hearing assessee was directed to give the percentage of sales made to HHPL in the years after AY 2013- 14, the percentages of sale to HHPL which were are as follows:
AY 2014-15: 84% AY 2015-16: 92% AY 2016-17: 98%
In AY 2017-18, the sales to HHPL are Rs. 25,98,47,908. The sales to employees are a minor amount of Rs. 13,91,265. There are no sales to others. Similarly, in the AY 2018-19, the sales to HHPL are Rs. 22,31,77,642. The sales to employees are a minor amount of Rs. 14,82,587.
Thus he submitted that, looking to the above percentages, the comparison of the sale price to HHPL vis a vis the sale price to others would not be appropriate or proper. In fact, in the last two years, there are no sales to others
We have heard rival submissions and perused the relevant findings given in the impugned orders. The impugned issue involved is, whether the sales made to M/s. HHPL at a lower price than the sales made to the third parties can be added as undisclosed sales or suppressed income. It is also important to note here that from A.Y.2014-15, assessee has become almost full-fledged contract manufacturer for the HHPL for manufacturing and supplying of the products. According to the AO, the assessee sold goods to HHPL at discount of 16.53% as compared to the price at which goods have been sold to others.
15 M/s. MPL Plastics Limited From the perusal of the figure of total sales, the sales made to HHPL and sales made to others it is seen that over the period of time from A.Y.2013-14 to 2018-19, most of the sales have been made to HHPL which is evident from the following figures:-
AY 2013-14 Total Sales 47,95,04,897 100% Sales To HHPL 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 Add: excise duty 10,81,06,297 56,82,39,826 Less: selling and dist exp (Others) 93,83,800 55,88,56,026 100% 46,94,39,062 84% 8,94,16,964 16% Total expenses 44,13,47,388 Add: excise duty 11,11,12,660 55,24,60,048 Less: selling and dist exp (Others) 1,11,92,531 54,12,67,517 100% 49,79,66,115 92% 4,33,01,402 8% AY 2016-17 Total Sales 38,92,93,349 100% Sales To HHPL 38,15,98,979 98% Sales to Others 76,94,370 2% Total expenses 29,10,50,148 Add: excise duty 7,75,80,664 36,86,30,812 Less: selling and dist exp (Others) 57,35,196 36,28,95,616 100% 35,56,37,704 98% 72,57,912 2%
AY 2017-18 Sales To HHPL 25,98,47,908 Sales to employees 13,91,265
From the above, it can be seen that from A.Y.2015-16, sales made to HHPL have been increased from 92% to practically
17 M/s. MPL Plastics Limited 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.
First of all, 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 brought forward losses and even matter was referred to BIFR, then on these circumstances if the assessee has sold at a discounted price, we fail to understand why such discounted sale price is doubted. If the assessee to 18 M/s. MPL Plastics Limited survive its business had decided to be a contract manufacturer of HHPL in subsequent years and in this year had made major supply to HHPL on a thin profit margin and in order to save various costs like transportation cost, advertisement and sales promotion cost etc. which is there in the case of sales made to the third parties, we do not find any reason to compare the sale price with the other parties to hold that assessee has to charge same price with the party who is major purchaser of the goods, when there is no deeming provision to tax the sale price or any kind of statutory SAAR provision.
In any case, any prudent businessman will give heavy discount to a party who has made bulk purchase which is almost ranging from 80%-98%. The department cannot force the assessee that it should have not give discount or should have sold on a higher profit. The transaction with the third parties is very miniscule and in subsequent period has even evaporated; and assessee’s explanation and reason for selling at a higher price due to various costs which it had to incur on such sales cannot be rejected while making the sales to the third parties. All the sales promotion expenses, transportation as well as advertisement expenses are not to be incurred or are very less in case of sales made to HHPL. The assessee has given a working that normally for the consumer products the cost relating to these expenses are 15% of the sales. The assessee also has given analysis of the savings made by the assessee company by selling the products to HHPL at a discounted price before the ld. CIT (A), which has not be found to be faulted with. Thus, simply rejecting
19 M/s. MPL Plastics Limited 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.
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-à-vis ‘other parties’ has no meaning at all then. Accordingly, no addition on account of such difference could have been made.
In any case, the similar issue has already been decided in favour of the assessee by the Tribunal as incorporated above and therefore, on the same reasoning, we do not find any reason to deviate from such finding. Accordingly, the additions deleted by the ld. CIT (A) is confirmed and the grounds raised by the Revenue is dismissed.
20 M/s. MPL Plastics Limited 26. In so far as disallowance u/s.14A is concerned, admittedly, the ld. CIT(A) has restricted the disallowance to the exempt of income which issue now is covered by the following decisions of the Hon’ble Jurisdictional High Court:-
429 ITR 319 (Bom) Pr. CIT v Ajit Ramakant Phatarpekar 421 ITR 125 (Bom) PV HSBC Invest Direct (India) Ltd
27. Thus, on this issue also, the grounds raised by the Revenue for A.Y.2013-14 to 2016-17 are dismissed.
In the result, all the appeals of the Revenue are dismissed.
Order pronounced on 27th April, 2023