PHARMALAB ENGINEERING INDIA P.LTD,MUMBAI vs. ASST CIT 10(3), MUMBAI

The grounds of appeal raised by the assessee company in the memo of appeal filed with the Income Tax Appellate Tribunal, Mumbai (hereinafter called “the Tribunal”) read as under:-

The brief facts of the case are that the assessee company is engaged in the business of manufacturing of equipments/machineries which are used by Pharmaceuticals and allied industries.

The A.O. observed from the Profit and Loss Account for the previous year relevant to the assessment year 2007-08 that the assessee company has sales of Rs.20.58 crores and gross profit of Rs.6.55 crores , whereas for the previous year relevant to the assessment year 2008-09, the assessee has sales of Rs.19.01 crores and gross profit of Rs.2.6 crores. The gross profit ratio of the assessment year 2007-08 worked out to be 31.82% , while for the assessment year 2008-09, it worked out to be 13.67% and hence there was a drastic fall in GP ratio for assessment year 2008-09 vis-à-vis for assessment year 2007-08. The details were called by the AO from the assessee to enquire about this drastic fall in GP ratio. The assessee submitted details and the AO observed from the details submitted by the assessee that out of sales of Rs.19.01 crores, the sales to the tune of Rs.9.67 crores were made to the sister concern M/s Pharmalab India Private Ltd.. The assessee was called upon to submit complete details of transactions with sister concern for the entire year to verify that the same were made at arms length price. The assessee submitted details on which the AO observed from purchase and sale register that the assessee has shown sale price inclusive of excise duty, ITA 999/Mum/2014 3 freight and transport charges with respect to the sales made to sister concern whereas, in respect of the sales made to outside parties , the assessee has only shown the sales figure exclusive of excise duty, freight and transport charges to show that the assessee has sold at a higher price to its sister concern and at a lower price to outside parties. Thus, from the details submitted by the assessee, the AO observed that the assessee has sold items to its sister concern at a discount of around 30-50% as compared to outside parties. It was also observed by the AO that the assessee has manipulated the sales prices in the last quarter of the previous years to nullify the profits made in first three quarters. The assessee has made sales of Rs.7.22 crores in the last quarter to its sister concern to make the stock NIL while purchases are Rs.72.02 lacs during the last quarter of the previous year. The assessee has booked sales of Rs.7.22 crores to sister concern excluding Rs.13 lacs as sale of ‘spares’ without giving description about the details of the spares it constituted. Thus it was observed by the AO that a net loss of Rs 41 lacs was shown for the entire assessment year by manipulating the sales made to sister concern.

Aggrieved by the assessment order dated 10.12.2010 passed by the AO u/s 143(3)(ii) of the Act, the assessee filed first appeal before the learned CIT(A).

The learned CIT(A) called for remand report from the AO. The AO submitted remand report and accepted that the invoices raised to the sister concerns does not included excise duty and sales tax(for exports), whereas the invoice to outsiders included excise duty and sales tax as also sales to outsider contained additional specifications. It was submitted by the AO in remand report that the gross profit arrived at by the AO was 31.82% while the assessee submitted chart arriving at gross profit at 18.79%.The assessee had contended that the assessee is a manufacturing concern and manufacturing cost also include material, labour charges, carriage inward, power and fuel, as against only material cost taken by the AO while computing gross profit during assessment proceedings. It was also verified by the AO in remand report proceedings and found to be correct by the AO , whereby it was observed by the AO in remand report proceedings that the AO has taken only material cost in his computation of gross profit margin in the assessment proceedings and hence gross profit margin is higher. The AO in remand report proceedings submitted that with respect to issue regarding the inclusion of other cost as described above for arriving at the gross profit, the same may be decided by learned CIT(A) as per merits of the case.

Aggrieved by the appellate orders dated 23.12.2013 passed by the learned CIT(A) , the assessee filed second appeal with the Tribunal.

The learned counsel for the assessee reiterated the submissions as made before the authorities below. It was submitted that the learned CIT(A) has made additions of Rs.1,38,47,120/- to the income of the assessee by making addition of gross profit margin of 11.06% on sales of manufactured products made to outsider whereby gross profit margin of the impugned assessment year was calculated at 20.76% on sales of manufactured products made to outsider of Rs.12.52 crores , which is then compared to gross profit margin rate of 31.82% of immediately preceding assessment year and thus addition was arrived at of gross profit margin of 11.06% being the difference between gross profit margin on manufactured products for the impugned assessment year under appeal vis-a-vis preceding year . The AO made additions of Rs.3,45,63,127/- to the income of the assessee by estimating gross profit margin of 31.82% on total sales of the instant assessment year under appeal ITA 999/Mum/2014 9 based on the gross profit margin of 31.82% of preceding assessment year. The learned counsel drew our attention to the orders of the authorities below. It was submitted that the learned CIT(A) called the remand report from AO which is placed at paper book filed with the Tribunal at page 44-46. It was submitted that while computing gross profit margin, the AO erred in not included manufacturing costs like labour charges, power and fuel,carriage inward etc.. It was submitted that sales to sister concern was made without excise duty and sales tax (against ‘H’ form) as the same were meant for export purposes, while for outsider the sales were effected including sales tax and excise duty. It was the main reason that prices variation was coming and it was commented in the assessment orders that the sale to sister concern is at lower price than price at which the manufactured products were sold to outsider. It was submitted that in remand report proceedings, the AO accepted this contention of the assessee. He drew our attentions to the invoices placed in paper book at page 13-17. It was accepted by the AO in remand report that there is no discrepancies and while computing gross profit margin the AO has not included other manufacturing costs such as labour, carriage inwards, power and fuel. It was submitted that no discrepancy has been noted in the audited books of accounts. The learned counsel relied upon the decision of Hon’ble Delhi High Court in the case of CIT v. Poonam Rani (2010) 326 ITR 223(Del. HC).

The learned DR on the other hand relied upon the decision of learned CIT(A) and submitted that the additions made by learned CIT(A) be sustained. It is not brought on record that the Revenue is in appeal before the Tribunal against the relief’s granted by the AO.

We have considered the rival contentions and perused the material on record including case laws relied upon. We have observed that the assessee is a company engaged in the business of manufacturing of ITA 999/Mum/2014 10 equipments/machineries which are used by Pharmaceuticals and allied industries. The AO has made additions on the grounds that the gross profit margin earned during the year being lower than the gross profit margin of immediately preceding year and the additions were made to the income of the assessee by applying the gross profit margin of 31.82% to the sales of the previous year relevant to the assessment year under appeal , based on gross profit margin earned during the preceding year. The assessee contended that in respect of some items, the sale price to outside parties is inclusive of accessories being supplied along with the manufactured products as well is inclusive of installation and commissioning whereas in the case of sister concern, the installation and commissioning was carried on by the sister concern itself. The AO rejected the contentions during assessment proceedings as the same were not based upon documentary evidences , while the assessee had duly submitted all the details before the authorities below. No particular defect was pointed out by the AO in the remand report proceedings with respect to this contention of the assessee. The submissions made before the AO with this regards are placed in paper book page 18-22. It was also explained by the assessee that the sale price to the sister concern was lower because excise duty and sales tax(against H form) was not included in the sale price for manufactured products as the products were procured by the sister concern which were meant for exports. This contention of the assessee was accepted by the AO in remand report proceedings . It was also accepted by the AO in remand report proceedings that the AO in the assessment proceedings while computing the gross profit margin has not included the other manufacturing costs such as labour, power and fuel , carriage inwards etc. and only material costs were considered by the AO in arriving at gross profit margin while framing assessment u/s 143(3) of the Act. With respect to the sale of spares components to sister concern of Rs.6.49 crores at cost owing to assessee merger , the same were accepted of being sold at cost by learned CIT(A) and consequent relief was given by ITA 999/Mum/2014 11 learned CIT(A) in the first appellate proceedings vide orders dated 23.12.2013 and the Revenue is not in appeal before the Tribunal against the said relief granted by the learned CIT(A) . It was also observed by the AO while framing assessment that the assessee booked sales commission of Rs 99 lacs on sales of Rs 19.01 crores during the previous year relevant to the impugned assessment year, while in the immediately preceding assessment year the sales commission was only Rs.1.08 lacs on sales of Rs.20.58 crores. A separate addition was made by the AO of Rs. 99 lacs in the assessment order for the impugned assessment year under appeal.The learned CIT(A) deleted the said addition after calling remand report from the AO whereby the AO accepted that the commissions expenses were duly verified. It is not brought on record by the Revenue that the second appeal has been filed with the Tribunal by the Revenue challenging the relief granted by the learned CIT(A) in his appellate orders. In our considered view, merely because gross profit margin is lower in the instant assessment year under appeal vis-à-vis preceding assessment year cannot be a ground of additions to the income of the assessee unless the Revenue points out particular defect or discrepancies in the books of accounts maintained by the assessee. The assessee is maintaining books of accounts which are audited. The assessee has duly met all the adverse reservations of the AO in remand report/appellate proceedings before learned CIT(A) as set out above. No cogent material has been brought on record to prove that the assessee has manipulated its accounts to suppress profits. Therefore, there are no reasons or justification in law to reject the explanation given by the assessee to support its contentions. Mere fall in the gross profit ratio , in the absence of any cogent reasons could not be a ground to hold that the proper income could not be deduced from the audited accounts maintained by the assessee and the book results ought to be rejected, and consequently gross profit margin rate of preceding years be applied to the sales of the instant assessment year under appeal. There is no averments that there is an deliberate attempt to inflate cost of material or ITA 999/Mum/2014 12 other expenses on the part of the assessee or to suppress sale price of products sold by the assessee. The allegations of the AO were duly met by the assessee in remand report/appellate proceedings as set out above. The Revenue is not in appeal before the Tribunal with respect to the relief’s granted by the learned CIT(A). Our view is consistent with the decision of Hon’ble Delhi High Court in the case of CIT v. Smt Poonam Rani (2010) 326 ITR 223(Del.HC). In our considered view, the additions made by the learned AO as sustained/confirmed by the learned CIT(A) to the tune of Rs.1,38,47,120/- is not sustainable in law and we order deletion of the same. We order accordingly.

In the result, the appeal filed by the assessee in ITA N0. 999/Mum/2014 for the assessment year 2008-09 is allowed .