Decided on September 19,2008



Deepak R. Shah, A.M. - (1.) THIS appeal by the assessee is directed against the order of the learned CIT(A)-XIII, New Delhi, dt. 30th Sept., 2004.
(2.) The only issue in appeal is against addition of Rs. 1,79,29,096 being 15 per cent of the purchase price payable to parent company by invoking provision of Section 92 of the IT Act, 1961 (the Act). 3, The appellant is a wholly-owned subsidiary of Digital Microwave (Mauritius) Ltd., incorporated in Mauritius which itself is a 100 per cent subsidiary of DMC Stratex Net Works Inc. USA (DMC, USA). During the year the turnover of the assessee was declared at Rs. 16.61 crores. The total cost of goods sold has been shown at Rs. 16.91 crores including customs duty and sales-tax. Accordingly there was gross loss of Rs. 29.57 lacs. Since there was loss in the trading operation and since the entire purchases were made from parent company, the assessee was asked to explain the reason for incurring loss in trailing operations. The assessee submitted that the purchase price includes certain abnormal expenses being additional sales-tax, additional customs duty etc. totalling to Rs. 42.22 lacs. It was also submitted that if these abnormal items are removed, there is a GP of Rs. 12.64 lacs. It was also submitted that the assessee when sold the goods was including sales-tax etc. However, the assessee was not expecting any sales-tax liability. Later on, when the assessee knew about this liability, the assessee got registration with sales-tax authorities on 26th May, 2000 and was required to pay sales-tax exceeding Rs. 199 lacs in respect of the sales. This sales-tax liability was not anticipated and hence transaction resulted into loss. It was also submitted that the assessee purchased the goods at very lucrative terms. The parent company sold the goods to the assessee by offering discount level of 44.5 per cent on the list price as against 10 per cent granted to other customers. The AO did not find the reason satisfactory. He held that if the assessee gets a discount of over 44 per cent, there cannot be any reason for suffering loss in trading transaction itself. The AO held that the additional liability of Rs. 42 lacs is part of overall liability of Rs. 199 lacs, when overall liability is calculated @ 12 per cent of the turnover. Thus the assessee is trying to explain the loss on flimsy grounds without verifying the figures. He, therefore, rejected the logic for incurring losses as the same were against the normal business prudence. The AO concluded that the transactions of purchase with non-resident parent company have been so arranged that either no profit accrues to the assessee or it results into losses. The AO held that since highly technical equipments are being supplied by parent company, 15 per cent of the value of import from the parent company is considered to be GP margin, which is often enjoyed by Indian importers from unrelated exporters. He, therefore, added a sum of Rs. 1,79,29,096 being 15 per cent of the net import from parent company amounting to Rs. 11.95 crores. The learned CIT(A) held that the explanation given for incurring gross loss is not convincing or acceptable. It is not acceptable that the company was not aware about the sales-tax liabilities. The AO has rightly invoked the provisions of Section 92. He accordingly confirmed the addition made by the AO. The assessee is in further appeal before us. 4. The learned Counsel for the assessee Dr. Rakesh Gupta submitted that the AO has made the addition by invoking provision of Section 92 of the Act. Section 92 of the Act at the relevant time provided as under: Where a business is carried on between a resident and a non-resident and it appears to the AO that, owing to the close connection between them, the course of business is so arranged that the business transacted between them produces to the resident either no profits or less than the ordinary profits which might be expected to arise in that business, the AO shall determine the amount of profits which may reasonably be deemed to have been derived therefrom and include such amount in the total income of the resident. He submitted that the sales are made in India to unrelated parties, which is not an item of dispute. He submitted that the AO questions the purchases made from the parent company. He also submitted that the reasons were properly explained to the AO. It was submitted that the order was received from the customer in the month of September, 2000. One of the terms and conditions relating to price mentioned was that the price is inclusive of all duties and taxes. It was also agreed that the price will be held firm for three years and no upward revision shall be committed during this period of three years. But if there is downward revision of prices, the assessee will pass on the benefit to the customer. The assessee received the order but subsequently found that it was liable to pay sales-tax. The cost of goods sold included not only the purchase price but the sales-tax also. This being the first year, the assessee miscalculated and hence suffered by way of losses. However, this does not prove that the transaction with the parent company was arranged in such a fashion so as to earn less than ordinary profits. He further submitted that on one hand the AO alleges higher purchase price paid whereas the customs authorities have alleged that the purchase price is less than the market price and hence additional customs duty to the extent of Rs. 28.19 lacs was slapped on the assessee. The appeal against that was preferred and the Commr. (Customs) has set aside the matter to the customs officer. However, there is no allegation by the customs that reverse is true. He also submitted that in subsequent year purchases were made from the very said persons and in the subsequent year the provisions of Section 92 were amended. As per the amended provisions of Section 92, the assessee has to prove that the transaction with associated enterprises namely, the parent company is at arm's length. The TPO specially appointed for this purpose has held that the transaction with parent company is at arm's length and no adjustments were made in regard to arm's length price with the parent company. The order in this regard is at pp. 112 and 113 of the paper book. He accordingly pleaded that there is no justification for disallowing 15 per cent of the purchase price simply because the assessee incurred loss. The liability for sales-tax is discharged and the challans for which are furnished at pp. 52 to 67 of the paper book. He further submitted that there is no justification to estimate 15 per cent as the excess purchase price made. The AO has neither given any comparative instances nor otherwise justified disallowance of 15 per cent. He accordingly pleaded that the additions be deleted. 5. The learned Departmental Representative, Smt. Abha Rani Singh on the other hand, submitted that if the assessee is undertaking only trading transaction and if it receives discount over 44 per cent from parent company, it can never result into loss even if the assessee has to pay 12 per cent sales-tax. Thus the contention that the assessee received huge discount is a make-believe story and not substantiated on the basis of figures. She further submitted that the sales-tax liability was known prior to receipt of the order from the customer. The order from customer was received in the month of September, 2000 whereas the sales-tax liability was known in the month of May, 2000 when the assessee made application for registration under local, sales-tax and Central sales-tax. As regards order of customs authorities, the same has no bearing in view of the provisions of Section 92 of the Act. She accordingly pleaded that the order of the CIT(A) be upheld. 6. We have carefully considered the relevant facts and arguments advanced. The contention advanced for justifying loss is that since the assessee incurred sales-tax liability, which was not anticipated, there is a gross loss. However, the facts are not clear from the documents presented before us. Though the assessee has filed the purchase order received from the customer, the assessee has not clarified as to when it had purchased the goods from parent company that is before* receipt of purchase order or after receipt of purchase order. It is incorrect to say that the assessee was not aware about his sales-tax liability. The sales-tax registration was made in the month of May, 2000 when it applied for on 12th May, 2000. When asked to furnish these details, the counsel for the assessee submitted that the same are not readily available. We are of the opinion that this fact is very crucial to the issue on hand. If the assessee was aware about the purchase order and was also aware about the sales-tax liability on the date of receipt of purchase order, if the purchases are made after the receipt of purchase order, there is no justification if the purchases are at a price which results into loss to the assessee. The parent company is holding 100 per cent capital i.e., in a way the assessee is 100 per cent subsidiary of parent company. Therefore, the assessee could so arrange its affairs which produces it either no profit or less than ordinary profit which may be expected to arise in this business. We therefore, set aside the matter to the file of the AO. The assessee is directed to furnish the details of purchases made from the parent company. If the purchases are later than receipt of purchase order, the AO will well be justified in invoking provisions of Section 92 of the Act. 7. However, if the purchases are prior thereto, Section 92 cannot be applied. The assessee shall be free to contend as to what should be the ordinary profits which can be expected to arise in such business and whether any adjustment can be made by invoking provisions of Section 92 or not. The matter is accordingly restored back to the file of the AO. 8. For statistical purposes the appeal is treated as allowed.;

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