Income Tax Appellate Tribunal - CochinM/S. Vijayalaxmicashew Co.,, Kollam vs The Acit, Kollam on 3 February, 20201\n\n       IN THE INCOME TAX APPELLATE TRIBUNAL\n              COCHIN BENCH, COCHIN\nBEFORE S/SHRI CHANDRA POOJARI, AM & GEORGE GEORGE K., JM\n\n                       ITA Nos. 37 to 39/Coch/2016\n                  Assessment Years: 2009-10 & 2010-11\n\nShri R. Pratap,                 Vs.       The Assistant Commissioner of\nSun Food Corporation,                     Income-tax, Circle-1, Kollam\nKochupilamoodu, Kollam\n[PAN:ABFPN 4423L]\n\n   (Assessee -Appellant)                    (Revenue-Respondent)\n\n                          ITA Nos.40 to 43/Coch/2016\n                Assessment Years: 2008-09, 2009-10, 2010-11 & 2011-12\n\nShri R. Prakash,                Vs.       The Assistant Commissioner of\nDhanya Foods,                             Income-tax, Circle-1, Kollam\nKochupilamoodu, Kollam.\n[PAN:ABFPN 4424P]\n\n   (Assessee -Appellant)                    (Revenue-Respondent)\n\n                       ITA Nos.44 & 45/Coch/2016\n                  Assessment Years: 2009-10 & 2010-11\n\nSmt. T.C. Usha,                 Vs.       The Assistant Commissioner of\nChetana Cashew Corporation,               Income-tax, Circle-1, Kollam\nKochupilamoodu, Kollam.\n[PAN:ACDPC 7638P]\n\n   (Assessee -Appellant)                (Revenue-Respondent)\n                      ITA Nos.46/Coch/2016\n                     Assessment Year : 2008-09\n\nShri Ravindranathan Nair,       Vs.       The Assistant Commissioner of\nM/s. Vijayalaxmi Cashew Co.,              Income-tax, Circle-1, Kollam\nKochupilamoodu, Kollam.\n[PAN:AEJPP 9867M]\n\n   (Assessee -Appellant)                    (Revenue-Respondent)\n                                                            I.T.A. Nos.37 to 49/Coch/2016\n\n                          ITA Nos.47 to 49/Coch/2016\n                    Assessment Years: 2009-10, 2010-11 & 2011-12\n\nM/s. Vijayalaxmi Cashew Co.,         Vs.       The Assistant Commissioner of\nKochupilamoodu, Kollam.                        Income-tax, Circle-1, Kollam\n[PAN:AAGFV 8028B]\n\n\n      (Assessee -Appellant)                      (Revenue-Respondent)\n\n              Assessee by        Shri T.V. Hariharan, CA\n              Revenue by         Smt. A.S. Bindhu, Sr. DR\n\n                 Date of hearing                 04/12/2019\n                 Date of pronouncement            03/02/2020\n\n\n                                ORDER\n\n\nPer CHANDRA POOJARI, AM:These appeals by different assesses are directed against the different orders of\n\nthe CIT(A), Trivandrum and pertain to different assessment years.2.    The assessees have raised common grounds of appeal which reads as follows:1) The order of the Commissioner of Income tax (Appeals) Trivandrum, is\n      against law, opposed to facts and the weight of evidence.2)(a) CIT(A) grossly erred in sustaining the huge and arbitrary addition on\n      sales to sister concerns on a selective picking of data and representing the\n      difference between cost and selling price and terming it as an apparent loss\n      under no commercial compulsion in the absence of a cogent finding by\n      Assessing Officer to this effect.(b) When the AO has failed to bring on record any defects, discrepancies or\n      irregularities in trading results or to show that profit earned by the assessee\n      was lower and thus with no material in his possession to show underselling, it\n      was apparent that transactions with sister concerns were genuine or bonafide.CIT (A) erred therefore in concluding that the transactions with sister concerns2I.T.A. Nos.37 to 49/Coch/2016\n\nwere not genuine or bonafide resulting in a loss on Sale of Cashew Kernels to\nthe sister concerns amounting to Rs.89,76,885/-.(c) Both AO and CIT (A) failed to appreciate that the appellant had only\nfollowed Arms Length Price (ALP) and hence no loss incurred; ALP being cost\n+ in the case of wholes(superior grades) and splits, butts and pieces (inferior\ngrades) at prices corresponding to wt. average market price of direct exports\nof such grades accepted by the Dept. all these years. Elsewhere he has taken\ncognizance of the fact that pricing of direct exports can be relied upon.\nPurchases of various grades of kernels by the appellant from these sister\nconcerns for export were also accepted.d) CIT(A) ought to have appreciated that ALP does not necessarily mean a\nprice above cost, maximum price or maximum profit in the range as rightly\nobserved by Hon'ble Delhi Bench of ITAT in (2007) 109 ITD 101 & (2007) 288\nITR 9(SC)3) (a) CIT (A) erred in concluding that appellant has no case as he/she failed\nto discharge his/her onus that there was no diversion of profit to sister\nconcerns to enable them to enjoy tax exemptions. He missed the vital point\nthat 80HHC giving tax incentives to appellant and sister concerns went out of\nstatute book from AY 2005-06.(b) Both AO and CIT (A) presumed every grade of kernels whether superior or\ninferior to be sold above cost of production which is well-nigh impossible. It is\na fact and which is verifiable on a comparison with peers in the industry that\nsplits, butts and pieces designated as inferior grades have a market price\nbelow cost. Accordingly a part of stock consisting of such grades was valued at\nmarket price being lower than cost which has been accepted by the Dept.\nThese compelling circumstances necessitating sale of inferior grades at market\nprice which was below cost as also timing of contracts were also elaborated\nduring assessment as well as appeal hearing with written evidence. Still CIT\n(A) concluded that appellant had not explained satisfactorily at any point of\ngiven time the business expediency for the pricing policy to sell below cost.\n(4) AO alleged that 'A' had a policy to sell below cost. This is not true since\nas is evident from his order, CIT(A) has observed that the higher grades were\nto sister concerns at prices above cost. Neither AO nor CIT(A) had established\nthat any grade kernels were at any time sold below market price. Hence, the\ndecision relied upon by CIT(A) did not apply to the appellant.\n\n(5) Allegation by AO and CIT(A) that sales to sister concerns is a planned\ndevice to reduce tax incidence in the case of the appellant with no\ncorresponding revenue yield to the recipient related units was not backed by\nany concrete evidence. They ought to have seen that both appellant and3I.T.A. Nos.37 to 49/Coch/2016\n\n      sister concerns were in the maximum tax rate slab and hence there was no\n      favour shown to sister concerns in pricing of transfers to them.\n\n      (6) In the event of an addition alleging under pricing to sister concerns,\n      corresponding addition in the purchase cost of the latter ought to have been\n      recognized and benefit given in their assessment. Thus, the whole exercise\n      becomes revenue neutral (2010) 236 CTR (SC) 113. Supreme Court decision\n      was misconstrued.(7) Having accepted the trading results filed by the appellant, no addition was\n      made by the Sales Tax Dept. either on the assessee or sister concerns in any\n      of these years.For the above and other additional grounds that may be advanced and further\n      evidence or records that may be produced at the time of hearing, the\n      appellant prays that the appeal be allowed.3.    We shall consider the facts as narrated in ITA No.37/Coch/2016 in the case of\n\nR. Pratap. As per details filed by the assessee, the Assessing Officer noticed that the\n\nassessee had sold various grades of cashew kernels to concerns owned by near\n\nrelatives at values much lower than the cost of production in the course of export.\n\nIt was, therefore, proposed to disallow the loss on sale of cashew kernels incurred\n\nby the assessee through such dealings and the loss was worked out as follows:Sr.    Name of sister   Quantity        Sale Price   Average rate   Cost       of   Cost of goods   Difference\nNo.    concern          sold (in Kg.)                of sale        production      sold            (Co. 7-4)\n                                                                                    (Col. 3x6)\n(1)    (2)              (3)             (4)          (5)            (6)             (7)             (8)1.     Prakash          96253.9         18094830     187,99062      245.7           23849583.23     5554753.23\n       Exports2.     Nut Products     47333.1         9460960      199.88042      245.7           11629742.67     2168782.67\n       Company3.     Chethana         128640.9        30353720     235.95699      245.7           31607069.13     1253349.13\n       Cashew\n       Corporation\n\n\n\nAccording to the Assessing Officer, the rate of sale to sister concerns ranged\n\nbetween Rs.187.99 per Kg. to Rs.235.96 per kg, while the cost of production was\n\nRs.245.7/- per kg. which resulted in an apparent loss to the tune of Rs.89,76,885/-.4I.T.A. Nos.37 to 49/Coch/2016\n\nTherefore, the Assessing Officer disallowed the above loss.       According to the\n\nAssessing Officer, any commercial activity must be for earning profit. The Assessing\n\nOfficer noticed that the entire sale in India had been to the concerns owned by near\n\nrelatives and the sales had been at rates lower than the cost of production. The\n\nAssessing Officer did not accept the assessee's argument that the sales were at the\n\nprevailing market rate and that there had not been any preferential treatment\n\ntowards the sister concerns.   According to the Assessing Officer, the method of\n\nfixing cost of production and sales on weighted average method is appropriate. The\n\nAssessing Officer noticed that there was no other appropriate method where all the\n\ndifferent grades of product came from the same raw material. The Assessing Officer\n\nalso rejected the argument of the assessee that the entire transaction among the\n\nconcerns of the group was revenue neutral. The Assessing Officer noticed that all\n\nthe concerns were independent units competing with each other in the open\n\nexport/local market and all concerns had their own factories and independent\n\ncustomers and they cannot therefore, be treated as sister concerns. The Assessing\n\nOfficer noticed that Mrs. Preetha Nair of Nut Products Company to whom the\n\nassessee had sold products at rates less than cost of production had declared\n\nincome below the taxable limit. Thus, the Assessing Officer found that the assessee\n\nhad adopted a pricing policy whereby cashew kernels were sold to sister concerns at\n\na price below cost of production which is a planned device to reduce tax incidence.\n\nThus, the Assessing Officer concluded that the assessee had incurred an apparent\n\nloss by resorting to the above strategy and loss of Rs.89,76,885/-was disallowed.5I.T.A. Nos.37 to 49/Coch/2016\n\nThe Assessing Officer made similar disallowance for all the assessment years in\n\nrespect of all the assesses.3.1   For the assessment year 2010-11 in the case of R.Pratap, as per details filed\n\nby the assessee, the Assessing Officer noticed that the assessee had sold various\n\ngrades of cashew kernels to concerns owned by near relatives at values much lower\n\nthan the cost of production in the course of export. It was, therefore, proposed to\n\ndisallow the loss on sale of cashew kernels incurred by the assessee through such\n\ndealings and the loss was worked out as follows:Sr.   Name of sister    Quantity sold      Sale Price         Average     Cost      of   Cost       of   Difference\nNo.   concern           (in Kg.)                              rate   of   production     goods sold      (Co. 7-4)\n                                                              sale                       (Col. 3x6)\n(1)   (2)               (3)                (4)                (5)         (6)            (7)             (8)1.    Swathy Foods            23,814.000      60,90,000       255.73      269.20         64,10,729       3,20,7292.    Prakash Exports         77,737.780    2,03,29,000       261.51      269.20         2,09,27,010     5,98,0103.    Chethana                41,504.400    1,11,54,180       268.75      269.20         1,11,72,984     18,804\n      Cashew\n      Corporation4.    Nut    Products         49,215.600    1,15,92,620       235.55      269.20         1,32,48,840     16,56,220\n      Company\n                        19,87,061.360      54,02,90,715\n\n\n\n3.2   For the assessment year 2011-12, in the case of R.Pratap, as per details filed\n\nby the assessee, the Assessing Officer noticed that the assessee had sold various\n\ngrades of cashew kernels to concerns owned by near relatives at values much lower\n\nthan the cost of production in the course of export. It was, therefore, proposed to\n\ndisallow the loss on sale of cashew kernels incurred by the assessee through such\n\ndealings and the loss was worked out as follows:6I.T.A. Nos.37 to 49/Coch/2016\n\nSr.   Name of sister      Quantity        Sale Price    Average       Cost      of   Cost       of   Difference\nNo.   concern             sold (in Kg.)                 rate  of      production     goods sold      (Co. 7-4)\n                                                        sale                         (Col. 3x6)\n(1)   (2)                 (3)             (4)           (5)           (6)            (7)             (8)1.    Vijayalakshmi                       2219497175    285           297            231157970        9660794\n      Cashew Co.          778309.6602.    Prakash Exports      41345.640        10171850    246           297             12279655        21078053.    Chethana             14628.600        4126400     282           297              4344694         218294\n      Cashew\n      Corporation4.    Nut     Products      20003.76        5276150     264           297              5941116         664966\n      Company5.    Surya Exports          521.640      128800        247           297               154927          261276.    Prathyush           1519.560        375200        247           297               451309          76109\n      Exports\n                                                                                       TOTAL         12754095\n\n\n\n3.3 For the assessment year 2008-09 in the case of R.Prakash, as per details filed\n\nby the assessee, the Assessing Officer noticed that the assessee had sold various\n\ngrades of cashew kernels to concerns owned by near relatives at values much lower\n\nthan the cost of production in the course of export. It was, therefore, proposed to\n\ndisallow the loss on sale of cashew kernels incurred by the assessee through such\n\ndealings and the loss was worked out as follows:Sr.    Name of sister     Quantity        Sale Price   Average        Cost      of   Cost       of   Difference\nNo.    concern            sold     (in                 rate of sale   production     goods sold      (Co. 7-4)\n                          Kg.)                                                       (Col. 3x6)\n(1)    (2)                (3)             (4)          (5)            (6)            (7)             (8)1.     Sunfood            275573.34       52249035     189.601197     190            52358935        109899.6\n       Corporation\n       Ltd.2.     Nut     Products     61689.6       9960590      161.463034     190            11721024        1760434\n       Company3.     Pratap Cashew            3061.8     456140      148.977726     190               581742         125602\n       Company4.     Pratyush                 249.48       40920     164.021164     190               47401.2        6481.2\n       Exports5.     Surya Exports              1701      261000     153.439153     190               323190         62190\n       TOTAL                              62967685                                                   2064606.8\n\n\n\n3.4    For the assessment year 2009-10 in the case of R.Prakash, as per details filed\n\nby the assessee, the Assessing Officer noticed that the assessee had sold various7I.T.A. Nos.37 to 49/Coch/2016\n\ngrades of cashew kernels to concerns owned by near relatives at values much lower\n\nthan the cost of production in the course of export. It was, therefore, proposed to\n\ndisallow the loss on sale of cashew kernels incurred by the assessee through such\n\ndealings and the loss was worked out as follows:Sr.   Name of sister     Quantity        Sale Price       Average        Cost      of    Cost of goods    Difference\nNo.   concern            sold     (in                     rate of sale   production      sold             (Co. 7-4)\n                         Kg.)                                                            (Col. 3x6)\n(1)   (2)                (3)             (4)              (5)            (6)             (7)              (8)1.    Sunfood            154276.3        31561690         204.57899      229              35329272.7      3767582.7\n      Corporation\n      Ltd.2.    Nut     Products    48761.98       10862580         222.76741      229             11166493.42      303913.42\n      Company3.    Chethna             118911.2       26803600         225.40854      229              27230664.8       427064.8\n      Cashew\n      Corporation4.    Pratyush              249.48          40920         164.021164     190               47401.2          6481.2\n      Exports5.    Surya Exports           1701         261000         153.439153     190               323190           62190\n      TOTAL                              62967685                                                         2064606.8\n\n\n\n3.5    For the assessment year 2010-11 in the case of R.Prakash, as per details filed\n\nby the assessee, the Assessing Officer noticed that the assessee had sold various\n\ngrades of cashew kernels to concerns owned by near relatives at values much lower\n\nthan the cost of production in the course of export. It was, therefore, proposed to\n\ndisallow the loss on sale of cashew kernels incurred by the assessee through such\n\ndealings and the loss was worked out as follows:Sr      Name of sister    Quantity         Sale Price        Average      Cost      of    Cost       of    Difference\nNo.     concern           sold     (in                       rate   of    production      goods sold       (Co. 7-4)\n                          Kg.)                               sale                         (Col. 3x6)\n(1)     (2)               (3)              (4)               (5)          (6)             (7)              (8)1.      Nut Products       54052.840        1,32,04,380      244.29       270.83          1,46,39,131       14,34,751\n        Company\n        TOTAL                              48,8037,490                                                     14,34,751\n\n\n\n3.6 For the assessment year 2011-12, in the case of R. Prakash, as per details filed\n\nby the assessee, the Assessing Officer noticed that the assessee had sold various8I.T.A. Nos.37 to 49/Coch/2016\n\ngrades of cashew kernels to concerns owned by near relatives at values much lower\n\nthan the cost of production in the course of export. It was, therefore, proposed to\n\ndisallow the loss on sale of cashew kernels incurred by the assessee through such\n\ndealings and the loss was worked out as follows:Sr.   Name of sister      Quantity        Sale Price        Average     Cost      of   Cost       of    Difference\nNo.   concern             sold (in Kg.)                     rate  of    production     goods sold       (Co. 7-4)\n                                                            sale                       (Col. 3x6)\n(1)   (2)                 (3)             (4)               (5)         (6)            (7)              (8)\n      Vijayalakshmi        881253.860     258808785         294         309            272307442        13498657\n      Cashew Co.Sunfood              57068.680       14104900         247         309             17634222            3529322\n      Corporation\n      Chethana             13471.920        3799600         282         309                 4162823          363223\n      Cashew\n      Corporation\n      Nut     Products      27034.560       6941950         257         309             83543679            1411729\n      Company\n      Surya Exports           385.560           95200       247         309                 119138           23938\n      Prathyush               453.600          112000       247         309                 140162           28162\n      Exports\n      Swathy Foods        17010             4050000         238         309             5256090          1206090\n                                                                                         TOTAL          200611213.7   For the assessment year 2009-10 in the case of T.C. Usha, as per details filed\n\nby the assessee, the Assessing Officer noticed that the assessee had sold various\n\ngrades of cashew kernels to concerns owned by near relatives at values much lower\n\nthan the cost of production in the course of export. It was, therefore, proposed to\n\ndisallow the loss on sale of cashew kernels incurred by the assessee through such\n\ndealings and the loss was worked out as follows:Sr.   Name of sister     Relation    Quantity      Sale Price     Average     Cost     of     Cost     of    Difference\nNo.   concern                        sold    (in                  rate of     production      goods sold     (Co. 7-4)\n                                     Kg.)                         sale                        (Col. 3x6)\n(1)   (2)                (3)         (4)           (5)            (6)         (7)             (8)            (9)1.    Vijayalakshmi      Husband        2313.6     470814         203         275              636240           165426\n      Cashew Co.2.    Vijayalakshmi      Husband     34166.84       6564540       192         275             9395881        12831341\n      Cashew Co.3.    Vijayalakshmi      Husband,                  134200\n      Cashew     Co.     assessee\n      (Firm)             & Others    5139.929I.T.A. Nos.37 to 49/Coch/20164.     Vijayalakshmi      Husband,                      1259.100      271            275         1413478          20178\n       Cashew      Co.    assessee\n       (Firm)             & Others5.     Sun       Food     Son           19845.00        3799880       191            275         5457375        1657495\n       Corporation6.     Prakash            Son              2885          551100       191            275         733468          182368\n       Exports7.     Nut Products       Daughter        1428           337220       236            275          392947          55727\n       Company\n       TOTAL                            65778.36        13116854                                 18029389       4912535\n\n\n\n3.8     For the assessment year 2010-11 in the case of T.C. Usha, as per details filed\n\nby the assessee, the Assessing Officer noticed that the assessee had sold various\n\ngrades of cashew kernels to concerns owned by near relatives at values much lower\n\nthan the cost of production in the course of export. It was, therefore, proposed to\n\ndisallow the loss on sale of cashew kernels incurred by the assessee through such\n\ndealings and the loss was worked out as follows:Sr.   Name of sister      Quantity         Sale Price        Average        Cost      of   Cost       of   Difference\nNo.   concern             sold (in Kg.)                      rate   of      production     goods sold      (Co. 7-4)\n                                                             sale                          (Col. 3x6)\n(1)   (2)                 (3)              (4)               (5)            (6)            (7)             (8)1.    Vijayalakshmi        82,041.320      2,13,44,440       260.17         310.83         2,55,00,903     41,56,463\n      Cashew Co.2.    Sunfood              18,438.840       53,53,590        290.34         310.83          57,31,345       3,77,755\n      Corporation\n3     Nut     Products      4,195,800       10,03,650        239.20         310.83         13,04,181        3,00,531\n      Company\n4     Pratap Cashew         3,016,440         7,83,400       259.71         310.83            9,37,600      1,54,200\n      Company       (P)\n      Ltd.5.    Prakash Exports     18,711.000       52,26,175         279.31         310.83           58,15,940      5,89,7656.    Surya Exports          272.160          75,840         278.66         310.83              84,595         8,755\n      TOTAL                                3,37,87,095                                     3,93,74,564     55,87,469\n\n\n\n3.9 For the assessment year 2008-09 in the case of Shri Ravindranathan Nair, as\n\nper details filed by the assessee, the Assessing Officer noticed that the assessee had\n\nsold various grades of cashew kernels to concerns owned by near relatives at values\n\nmuch lower than the cost of production in the course of export. It was, therefore,10I.T.A. Nos.37 to 49/Coch/2016\n\nproposed to disallow the loss on sale of cashew kernels incurred by the assessee\n\nthrough such dealings and the loss was worked out as follows:3.9.1      For the assessment year 2009-10, in the case of M/s. Vijayalaxmi Cashew\n\nCo., as per details filed by the assessee, the Assessing Officer noticed that the\n\nassessee had sold various grades of cashew kernels to concerns owned by near\n\nrelatives at values much lower than the cost of production in the course of export.It was, therefore, proposed to disallow the loss on sale of cashew kernels incurred\n\nby the assessee through such dealings and the loss was worked out as follows:Loss on sale in the course of export to sister concerns Rs.4,37,61,625/-\n\n\n3.9.2 For the assessment year 2010-11, in the case of M/s. Vijayalaxmi Cashew\n\nCo., as per details filed by the assessee, the Assessing Officer noticed that the\n\nassessee had sold various grades of cashew kernels to concerns owned by near\n\nrelatives at values much lower than the cost of production in the course of export.It was, therefore, proposed to disallow the loss on sale of cashew kernels incurred\n\nby the assessee through such dealings and the loss was worked out as follows:Sr.     Name of       sister   Quantity sold (in   Sale Price     Average          Cost     of   Cost of goods   Difference\nNo.     concern                Kg.)                               rate of sale     production    sold            (Co. 7-4)\n                                                                                                 (Col. 3x6)\n(1)     (2)                    (3)                 (4)            (5)              (6)           (7)             (8)1.      Chethna     Cashew      2,48,618,160        6,46,28,060   259.99           268.41        6,67,31,600     21,03,540\n        Corporation2.      Nut        Products     3,61,541,880       8,42,41,320    233.01           268.41        9,70,41,456     1,28,00,136\n        Company3.      Prakash Exports         4,70,020,320       11,24,49,520   239.24           268.41         12,61,58,154     1,37,08,6344.      Prathyush Exports         13,335.840          29,98,800   224.86           268.41            35,79,473        5,80,6735.      Sunfood                 6,07,086.940       16,04,89.080   264.36           268.41         16,29,48,206       24,59,126\n        Corporation Ltd.TOTAL                                      48,13,52,780                                                    3,16,52,11911I.T.A. Nos.37 to 49/Coch/2016\n\n3.9.3      For the assessment year 2011-12, in the case of M/s. Vijayalaxmi CashewCo., as per details filed by the assessee, the Assessing Officer noticed that the\n\nassessee had sold various grades of cashew kernels to concerns owned by near\n\nrelatives at values much lower than the cost of production in the course of export.It was, therefore, proposed to disallow the loss on sale of cashew kernels incurred\n\nby the assessee through such dealings and the loss was worked out as follows:Sr.   Name of       sister   Quantity sold   Sale Price        Average     Cost     of   Cost       of   Difference\nNo    concern                (in Kg.)                          rate   of   production    goods sold      (Co. 7-4)\n.                                                              sale                      (Col. 3x6)\n(1)   (2)                    (3)             (4)               (5)         (6)           (7)             (8)1.    Prakash Exports                        195037850         267.39      294.44        214767916          19730066\n                             729411.4802.    Nut        Products                     64326800         267         294.44         70819121          6492321\n      Company                240521.143.    Prathyush Exports                        3404800         247         294.44        4060162             655363\n                             13789.44\n      TOTAL                                                                                              2,68,77,7504.    On appeal, the CIT(A) observed that the onus to establish the fact that the\n\ntransaction is genuine, in view of diversion of profits to sister concerns which are\n\nenjoying tax exemptions and the seller incurring huge loss in the process, is on the\n\nassessee. According to the CIT(A), where a trader charges less than the market\n\nprice for the goods sold, the same would not render him liable to tax on the\n\ndifferential amount if the transaction is genuine. The CIT(A) observed that there\n\nwas no material available on record to show that the output price is in parity with\n\nthe obtaining price in the international market.                      The CIT(A) observed that business\n\nexpediency to sell the cashew kernels at rates much below to the domestic rates\n\nwhen the assessee is not entitled to the export benefits on sales to sister concerns12I.T.A. Nos.37 to 49/Coch/2016\n\nnor having claimed deduction under section 80HHC of the Act, has not been\n\nexplained.4.1   Before the CIT(A), the assessee argued that assessee's selling price has\n\nnothing to do with cost of production since sales made to sister concerns consisted\n\nof a mix of higher grades and inferior grades. The CIT(A) observed that while the\n\nhigher grades realized above cost, the inferior grades consisting of splits, butts and\n\npieces fetched a price below to the cost price which is akin to the international\n\nprice. According to the CIT(A), white wholes, scorched wholes, scorched wholes\n\nseconds, dessert wholes etc. were considered to be higher grade cashew kernels\n\nand similarly, splits, butts, large white pieces, scorched butts, scorched pieces,\n\nscorched pieces seconds etc. were considered to be inferior grade cashew kernels.\n\nThe CIT(A) observed that the assessee claimed to have sold both the higher grade\n\nand inferior kernels to the sister concerns and third parties in the domestic market\n\nand the assessee also claimed to have had direct exports. Before the CIT(A), the\n\nassessee filed unit wise and grade wise sales made to sister concerns and grade\n\nwise direct export details for verification. According to the CIT(A), macro analysis of\n\nsuch details revealed that sale price of cashew kernels was not static throughout the\n\nyear but varied mostly from Rs.128 per kg to Rs.310 per Kg. and the higher grade\n\nkernels of white wholes (W-180, W-210, W-240, W-320 etc) and scorched wholes\n\n(SW-180, SW-210, SW-240, SW-320 etc) were sold to sister concerns for a price\n\nmostly between Rs.163 per kg and Rs.176 per kg.        The CIT(A) observed that very\n\nrarely the higher grade kernels were sold to sister concerns for Rs.300 and above13I.T.A. Nos.37 to 49/Coch/2016\n\nper kg. It was observed that the lower grade kennels such as butts, splits and\n\npieces were mostly sold for a price between Rs.137 and Rs.147 per kg. Substantial\n\nquantity of higher grade cashew kernels were sold to sister concerns and seeing\n\nfrom the grade wise sales details filed, much of splits, butts and pieces were not\n\nsold to sister concerns.The assessee had not explained as to why higher grade\n\nkernels were sold to sister concerns at a price much below the cost price.\n\nContradicting the above, the assessee claimed to have exported directly higher\n\ngrade cashew kernels for a sale price between Rs.172 per kg and Rs.364 per kg\n\nand inferior grade   between Rs.137 per kg and Rs.150 per kg.        From this, the\n\nCIT(A) observed that the assessee had sold substantial quantity of higher grade\n\ncashew kernels at a price below the cost price without explaining the business\n\nexpediency to do so and the assessee had also not explained the reason for the\n\npricing policy adopted to sell the kernels to sister concerns to a price below Rs.364\n\nper kg. which is the maximum export price. According to the CIT(A) , the sister\n\nconcerns are entitled for deduction u/s. 80HHC of the Act and the damage caused\n\nto the revenue in the circumstances above, is nothing but outcome of a planned\n\ndevice to reduce the tax which is not tenable by law. The CIT(A) placed reliance on\n\nthe judgment of the Gujarat High Court in the case ofPatel Chemical Works vs CIT(265 ITR 273) wherein it was held that a sale to a sister concern at a price much\n\nbelow to the market price was a device for tax avoidance.4.2   According to the CIT(A), it is not disputed that the average cost of production\n\nof cashew kernels was Rs.178 per kg and the sales to sister concerns were made14I.T.A. Nos.37 to 49/Coch/2016\n\nbetween Rs.153 per kg to Rs.177 per kg. The CIT(A) observed that sales to sister\n\nconcerns for a price between Rs.153 to Rs.177 can be on arms length basis only\n\nwhen the price is closer to the export market price of the sister concerns. In the\n\nabsence of export price details of the sister concerns for verification, the CIT(A) felt\n\nthat export price to which cashew kernels were exported directly by the assessee\n\ncan be relied on.    The assessee claimed to have exported higher grade cashew\n\nkernels for a price between Rs.172 and Rs.364 and inferior grade between Rs.137\n\nand Rs.150. According to the CIT(A), had the assessee followed arms length price,\n\nhe should have sold cashew kernels to sister concerns for a higher price than he\n\nsold between Rs.153 and Rs.177. In view of the above, the CIT(A) was of the\n\nopinion that the assessee had not followed the arms length price against the\n\ncashew kernels sold to his sister concerns.        According to the CIT(A), for the\n\npurpose of assessment under theIT Act, each business entity and even if it is a\n\nsister concern, it is to be treated as a separate unit of assessment and the profit\n\nand loss is to be independently arrived at and assessed to. The CIT(A) was of the\n\nview that in the event of underselling and the sales to the sister concerns were not\n\nmade on the basis of arms length price, then addition is to be made on the basis of\n\narms length price. The CIT(A) opined that the judgments of the Supreme Court in\n\nthe case of DIT (International Taxation) vs. Morgan Stanley and Co Inc (292 ITR416), CIT vs Glaxosmithkline Asia (P) Ltd.(236 ITR 113) and CIT vs. Calcutta\n\nDiscount Company Ltd(91 ITR 8) relied on by the assessee cannot be applied to\n\nhim since the first decision is on the taxability of the     permanent establishment\n\nunder the double taxation avoidance agreement and as ruled in the second decision,15I.T.A. Nos.37 to 49/Coch/2016\n\nthe concept of revenue neutral cannot be applied to the case of the assessee since\n\nall the concerns of the assessee group were doing their business independently\n\nhaving no access with each other and the profit the assessee otherwise would have\n\nearned had he not resorted to underselling, was diverted towards the units (sister\n\nconcerns) on the lower side of tax i.e. the units which are entitled for deductionu/s\n\n80HHCof the Act.      According to the CIT(A), the third decision also cannot be\n\napplied to the case of the assessee since the transaction was carried out without\n\nfollowing arms length price and proved to be       a planned device to reduce tax\n\nincidence and hence, the transaction is not genuine and bonafide.      In view of the\n\nabove, the CIT(A) did not find any infirmity in the order of the Assessing Officer\n\nand accordingly, the addition of Rs.89,76,885/- was sustained.5.   Against this, the assessee is in appeal before us. The Ld. AR submitted that the\n\nassessee is engaged in the process of manufacture of cashew kernels from Raw\n\nCashew Nuts (RCN) which were imported as also locally procured mainly for\n\nexports. The raw nuts were subjected to various processes like drying, roasting,\n\nshelling, peeling, grading etc, and the end product was cashew kernels of various\n\ngrades like W180, W150,W210,W240, W320, W450 etc (wholes) and splits,\n\npieces/butts having different price realizations in the export market. The outturn\n\nwhich represented production yield in Kg. per bag of RCN of 80 Kg. included all\n\ngrades.5.1 The Ld. AR submitted that since the outturn came from the same raw material\n\nand the same production procedures, the average cost for each grade can only be16I.T.A. Nos.37 to 49/Coch/2016\n\narrived at by taking the average cost of production which was accepted by the AO.\n\nIt was submitted that the average cost of production of cashew kernels was arrived\n\nat on total cost basis in accordance with generally accepted accounting principles\n\n(GAAP).    According to the Ld. AR, within the domain of Export quality cashew\n\nkernels produced and exported by the assessee, there were superior grades\n\nconsisting of wholes and inferior grades consisting of (splits/pieces, butts). It was\n\ncontended that the assessee had been selling cashew kernels to firms and business\n\nconcerns owned by close relatives and the object behind such transfer was to help\n\nthem honour their export commitments on time.               Superior Grades comprising\n\n'Wholes' were generally sold at 'cost plus' having proximity with market prices of\n\ndirect exports by the assessee. However, it was submitted that grades representing\n\nsplits, butts and pieces have a market price below cost which is validated by the\n\nmonthly bulletin of international prices.        Thus, it was submitted that 'Cost Plus'\n\npricing generally followed for direct exports or exports through sister concerns\n\ncannot be automatically extended to pricing of inferior grades sold to them, a fact\n\nwhich was evident also from grade wise details of sales of wholes as well as splits,\n\npieces and butts furnished each year to the Assessing Officer during regular\n\nassessmentu/s. 143(3)of the Act and which was verifiable on a comparison with\n\npeers in industry which proved the commercial compulsion to invoice sales of such\n\ninferior grades at prices below cost.5.2   The Ld. AR submitted that specimen export invoices of such grades, contracts\n\netc were produced for verification by Assessing Officer. It was submitted that the17I.T.A. Nos.37 to 49/Coch/2016\n\nvaluation of closing stock of cashew kernels is at cost or net realizable value (NRV)\n\nwhichever is lower with inferior grades valued at market price, being below cost as\n\nper relevant Accounting Standard of ICAI which was duly disclosed in Significant\n\nAccounting Policies. The Ld. AR submitted that in compliance of noticesu/s. 143(2)and142(1), details of sales to sister concerns, grade wise, invoice wise & unit wise,\n\nshowing quantity and sales value were furnished to the AO for each Assessment\n\nyear even if not specifically called for, but were not mentioned in the assessment\n\norder. It was submitted that the Assessing Officer presumed that every Kg. of\n\nkernels irrespective of their grades should be sold at or above cost which was\n\nimpossible for the reason that splits etc. sold, had a market price below cost which\n\nproved commercial expediency. The Ld. AR submitted that Assessing Officer as well\n\nas CIT(A) ought to have been convinced beyond an iota of doubt that transactions\n\nwith sister concerns followed Arm's Length Pricing (ALP) with the prices of grades\n\ncharged to sister concerns having proximity to prices of exports to unrelated parties\n\nand were comparable. Therefore, the addition is to be deleted. For this, the Ld. AR\n\nrelied on the judgment of the Punjab & Haryana High Court in the case ofCIT vs.\n\nJyothi Industries(2011) 330 ITR 573 ( P & H ).5.3 The Ld. AR submitted that no comparable cases were brought on record by the\n\nAssessing officer to rebut the contentions of the assessee. Hence, addition solely on\n\nconjectures and surmises not backed by material data is not warranted. For this, he\n\nrelied on the following case laws:1) CIT vs. Modi Xerox Ltd.(2016) 41 DTR (All) 55,18I.T.A. Nos.37 to 49/Coch/20162) Vijay C. Kamdar vs. ITO(2007) 305 ITR (AT) (Mum) 1633) Airtech (P) Ltd. vs. DCIT(2011) 139 TTJ (Del. Trib.) 318\n\n\n5.4   The Ld. AR submitted that system of Accounting, books of account and\n\naccounting policies were accepted by the AO which implied inter alia that grade wise\n\nvaluation of stock of kernels were recognized by the Dept, which proved commercial\n\nexpediency or compelling circumstances to sell inferior grades of kernels at a\n\nmarket price below cost. This would imply that averaging cannot be done in a\n\nscenario when quality is a crucial factor.For this, he relied on the judgment of the\n\nBombay High Court in the case of Director of Income Tax (International Taxation)\n\nvs. Boston Scientific International B.V. (2013) 90 DTR (Bom.) 357. It was submitted\n\nthat the A.O. had accepted the pricing methodology of the assessee in the following\n\ntransactions(a). Direct exports i.e. sales to unrelated parties consisting of wholes and\n        splits having separate wt. average rates.(b). Purchases from these very sister concerns consisting of wholes and\n        splits.It was submitted that he ought to have applied the same yardstick in the matter of\n\npricing of sales to sister concerns for their export.   Notwithstanding the above, the\n\nAssessing Officer reached an abrupt and negative conclusion that 'A' had a policy to\n\nsell cashew kernels to sister concerns (related units) at below cost apparently under\n\n'no commercial compulsion'. The Ld. AR contended that for A.Y. 2008-09 the A.O.\n\nmade an addition of a meagre amount of Rs. 43,494/- on account of 'apparent loss'.19I.T.A. Nos.37 to 49/Coch/2016\n\n       Total Turnover                                          Rs.106.72 crores\n       Trading margin                                          Rs. 10.79 crores\n       Sales % of export to sister concerns                    Rs. 64.70 crores\n       Wt. average price                                        Rs.194 per kg.\n       Cost of production                                      Rs.178 per kg.\n       Value of sales picked out by A.O.                        Rs.2.30 crores5.5 The A.O. made the addition by observing as follows:"Loss on sale in the course of Export to Sister Concerns:As per details filed by the assessee, it was seen that the assessee has sold cashew\n\nkernels to sister concerns in the course of export as under:\n\n\n\nSl.   Name of sister     Quantity       Sale Price    Average        Cost     of   Cost      of   Difference\nNo.   coincerns          sold     (in                 rate of sale   production    goods sold     (Col.7-4).Kg.)                                                      (co. 3x6)\n1.    Prakash Exports    127619.24      22711054      177.959483     178           22716225       5170.72\n2.    Pratyush Exports   589.68         96720         164.021164     178           104963.04      8243.04\n3.    Surya              1224.72        187920        153.439153     178           218000.16      30080.16\n                                                                                                  43493.925.6   The Ld. AR submitted that the rate of sale to sister concerns ranged between\n\nRs. 153.44 per Kg. to Rs. 177.96 per Kg. , while the cost of production was Rs.178/- per Kg which resulted in an apparent loss to the tune of Rs. 43,494/-. It was\n\nproposed to disallow the above loss. The Ld. AR submitted that vide letter dated\n\n07/12/2010 a detailed reply giving the reason why the exports had been carried\n\nout through sister concerns, how the market fluctuation varied and how the\n\ndifferent grades may have to be sold at lesser value than the cost of production was\n\nfiled before the Assessing Officer. It was represented that the assessee had\n\nfollowed Arms Length Pricing corresponding to the prevailing market rate, whether\n\nit be direct export or sales in the course of export to sister concerns. It was further20I.T.A. Nos.37 to 49/Coch/2016\n\nexplained that as in earlier years the assessee had effected sales to sister concerns\n\nfor their exports and these transactions were duly supported by Form 'H'/Form I8A\n\nas the case may be.       According to the Ld. AR, in sales tax terminology they are\n\ntermed as sales in the course of export and these sales are invoiced grade wise\n\ncorresponding to the grades exported by the sister concern and relevant export\n\ncontract price. Hence, it was submitted that timing of contract is very important.\n\nThe Ld. AR submitted that being for exports, the prices changed to sister concerns\n\ngrade wise vis-a-vis exports to unrelated parties are comparable and sales to sister\n\nconcerns in the course of export are at Arms Length Price(ALP).        According to the\n\nLd. AR, for lower grades such as splits and pieces, the market price being lower\n\nthan the production cost, they cannot be sold above market price to sister concerns\n\nand, if so, they will be hit hard bySection 40A(2).Hence, it was submitted that\n\nthere was no shifting of profits in favour of sister concerns for their benefit as the\n\ntransfer price was based on ultimate export price obtaining for respective grade(s)\n\nwhich therefore, constituted ALP on the date of relevant export contract.\n\n\n\n5.7      The Ld. AR submitted that it is virtually impossible to presume that sale price\n\nremained constant throughout the year for every grade and for every kilogram so\n\nthat on the basis of average closing stock price the entire sales should be above this\n\nprice.    Hence, it was submitted that weighted average price of entire sales was not\n\nan appropriate method to conclude underselling as it had severe limitations. For\n\nthis, the Ld. AR relied on the Tribunal in the case ofVijay C. Kamdar vs. ITO(2009)\n\n305 ITR (AT) 163 (Mum) where it was held as follows:21I.T.A. Nos.37 to 49/Coch/2016(iii) that the Assessing Officer formed the belief that the assessee over\n      invoiced the purchase by relying upon the statement of K in the income-tax\n      proceedings. The disallowance was without making any further enquiry only\n      for the reason that the supplier of the assessee did not appear before him.This statement was not relied upon by the Additional Commissioner of\n      Customs and he had dropped the proceedings. These materials were not\n      sufficient to hold that the assessee had over-invoiced the purchases. There\n      were different varieties of pens available in the market whose costs differed\n      according to quality and there were different factors to determine the cost of\n      pens. Without bringing any material on record the disallowance made by the\n      Revenue authorities was not justifiable."5.8   The Ld. AR submitted that the assessing officer had made the addition in\n\nassessment year 2009-10 under 'business head ' on the pretext that there was an\n\n'apparent loss' of Rs. 89.76 lakhs on alleged policy of underselling in which event\n\nthere was an apparent gain in the books of sister concern(s). According to the ld.\n\nAR, any addition under the head "income from business" becomes revenue neutral\n\nin nature since any addition towards underselling in the hands of the assessee\n\nbecomes a corresponding deduction for purchase in the hands of sister concern(s),\n\nas held by the Supreme Court in the case ofCIT vs. Glaxo Smithkline Asia (P) Ltd.(2010) 236 CTR (SC) 113. it was argued that when this judgment was brought to\n\nhis notice by filing a copy, the Assessing Officer took a dramatic U turn to hold that\n\nunits were independent. Hence, it was submitted that the addition on account of\n\nunderpricing was not warranted. According to the ld. AR, the assessing officer\n\nrelied heavily on his order in Preetha S. Nair for A.Y. 2009-10 to hold that there was\n\nno revenue yield to the recipient sister concern and so, under pricing was done to\n\nreduce tax incidence. According to the Ld. AR, the assessing officer missed the vital\n\npoint that income was below taxable limit after b/f losses were set off during the22I.T.A. Nos.37 to 49/Coch/2016\n\ncurrent year.     Moreover, there was no finding by the department that sister\n\nconcerns benefited in any manner.5.9     The Ld. AR submitted that prior to abolition ofsection 80HHC, there was an\n\napprehension that underpricing could be done to enable sister concerns claim\n\ngreater 80HHC benefit. This is no longer the case from A.Y. 2005-06.           It was\n\nsubmitted that both assessee & sister concern(s) paid tax at maximum marginal\n\nrate. According to the Ld. AR timing of contracts is also an important parameter in\n\nthe matter of fixing transfer prices. For example when price of say W320 grade\n\ncontracted earlier was Rs. X which is less than cost or current price, assessee is\n\nbound to sell at contracted price only.        It was submitted that A.O. wrongly\n\npresumed that entire sales in India were to sister concerns. The sales were effected\n\nin the domestic market through depots, consignment agents etc.           The Ld. AR\n\nsubmitted that in the absence of a clear finding by AO to the contrary, it was only\n\nfair and reasonable to presume that the transactions with sister concerns were\n\nregarded genuine and bonafide.      The Assessing Officer relied on the judgment of\n\nthe Supreme Court in the case ofCIT vs. Calcutta Discount Company Ltd.(1973) 91\n\nITR 8, yet he stood by artificial loss to the assessee from alleged under pricing with\n\nno revenue yield to the recipient sister concern(s).5.9.1     The Ld. AR submitted that mere fact that sales were made at prices lower\n\nthan cost or even the market rates would not entitle the Income tax Department to\n\nassess the difference between the cost/market price and the price paid by the sister\n\nconcern(s) as profits of the assessee. The Ld. AR relied on the judgment of the23I.T.A. Nos.37 to 49/Coch/2016\n\nSupreme Court in the case ofCIT vs. Calcutta Discount Company Ltd.(1973) 91\n\nITR 8 approving the decision of the Madras High Court inShri Ramalinga\n\nChoodambika Mills Ltd vs. CITreported in (1955) 28 ITR 952 (Mad).The Ld. AR\n\nrelied on the judgment of the Supreme Court inCollector of Central Excise New\n\nDelhi vs. Guru Nanak Refrigeration Corporation Ltd.2003 INDLAW SC 301 which\n\napproved the decision of the Appellate Tribunal (CEGAT) to the effect that just\n\nbecause sale price was less than cost of production there was no justification to\n\nreject the valuation of goods sold for charging Central Excise Duty when the\n\ntransactions were at Arm's Length.5.9.2    The Ld. AR submitted that CIT(A) picked a single highest price from the\n\ndetails submitted to him and concluded that the transactions are not genuine and\n\nnot at ALP which was not correct. The Ld. AR relied on the decision of the Tribunal\n\nin the case of ITW India Ltd. vs. ACIT (2015) 169 TTJ (Del) 60. According to the\n\nLd. AR, this underlines the need for determination of separate wt. average pricing\n\nfor wholes and splits with suitable adjustments and for a cogent and meaningful\n\ncomparison, the same cannot be aggregated.           The Ld. AR submitted that ALP\n\ntherefore could be wt. average of direct exports and wholes and/splits, pieces and\n\nbutts respectively which can be a benchmark for comparison with suitable\n\nadjustments factoring for following circumstances:(1) The composition of grades in the sales mix even among low grades.\n\n        (2) Those grades entering into direct export not forming part of sales to\n        sister concerns and vice versa.(3) Timing of contracts & price variation even among superior grades.24I.T.A. Nos.37 to 49/Coch/2016\n\n\n        (4) Exchange rate variation.Accordingly, it was submitted that 15% allowance was considered for which a\n\nworking had been given on 21/11/2019 which can be broadly broken up as follows:10% to account for such factors as composition of grades in the sales mix,\n        quality of kernels, etc.\n\n        5% to cover Profit and indirect overheads of sister concern(s).\n\nFor this, the Ld. AR relied on the decision of the Tribunal in the case ofMerck Ltd.\n\nvs. DCIT(2016) 139 DTR (Mum Trib.) 1.5.9.3      The Ld. AR submitted that ALP is determined by taking result of a\n\ncomparable transactions in comparable circumstances and by making suitable\n\nadjustments for the differences. For this, he relied on the decision of the Tribunal in\n\nthe case ofMentor Graphics (Noida) (P) Ltd. vs. DCIT109 ITD 101 (Del.). The\n\nBench observed that ALP does not mean maximum price or maximum profit in the\n\nrange. Comparison has to be made with like entities - apples to be compared with\n\napples.5.9.4     The Ld. AR submitted that the Assessing Officer confined himself to a small\n\nsample out of total sales to related units and banking on its wt. average when a\n\npart of closing stock comprising inferior grades having a market price below cost will\n\nnot yield a fair result at all. He relied on the judgment of the Rajasthan High Court\n\nin the case of Singhal Natural Stone (P) Ltd. (2011) 243 CTR (Raj) 414. The Ld. AR\n\nsubmitted that by applying real income concept, the officer should have appreciated25I.T.A. Nos.37 to 49/Coch/2016\n\nthat only income which an assessee had earned or which had accrued to him should\n\nbe taxed. The Ld. AR relied on the judgment of the Supreme Court in the case ofCIT vs. Calcutta Discount Company Ltd.(1973) 91 ITR 8 (SC).      It was submitted\n\nthat no addition had been made by the sales tax Dept either on the assessee or\n\nsister concerns in respect of such sales which were all documented.The Ld. AR\n\nrelied on the judgment of the Madras High Court in the case ofCIT vs. Sakuntala\n\nDevi Khetan(352 ITR 484) wherein it was held that Assessing Officer has to adopt\n\nthe figures and turnover finally assessed by the Sales Tax authorities. The Ld. AR\n\ndrew our attention to the following Annexures:Annexure I - Bulletin of International Prices\n             Annexure II - Comparison chart showing overall wt. average of sales\n             Vs. Cost\n             Annexure III- wt. average chart Vs. ALP\n             Annexure IV - Comparison with peers in industry\n             Annexure V - Comparison of sales by assess to sister concerns for -\n             exports Vs. Exports by Latter.5.9.5   The Ld. AR submitted that sales mix has great relevance in the matter of\n\nwt. average, a high % of superior grades boost up the wt. average whereas a\n\nhigher % of inferior grades in the total mix has an opposite effect.   According to\n\nthe Ld. AR without examining the same and commercial compulsion for lower\n\ngrades to be sold below cost, wt. average of a selective pick up of sales to sister\n\nconcerns and its comparison with average cost of production would only lead to\n\ndistorted results and can never be a litmus test of under pricing/apparent loss. The\n\nLd. AR relied on the decisions of the Tribunal in the case ofHenkel Adhesives\n\nTechnologies India (P) Ltd. vs. DCIT(2012) 163 TTJ (Pune), 491 and in the case of26I.T.A. Nos.37 to 49/Coch/2016\n\nIntimate Fashions (India) (P) Ltd. vs. ACIT 149 TTJ (Chennai) 775. By this exercise,\n\nA.O. applied the average cost of production on the sample sales taken out of entire\n\nsales. In other words, he substituted cost for the market price realized which had no\n\nrationale.He relied on the judgment of the Delhi High Court in the case ofSatnam\n\nOverseas Ltd. & Anr vs. Addl. CIT (2010) 228 CTR (Del) 121\n\n\n5.9.6     The Ld. AR submitted that even after appreciating the key issues and\n\nsummarizing them, CIT(A) upheld the addition made by A.O. holding that assessee\n\nhad no case. The Ld. AR submitted that his abrupt conclusions emanated from\n\nfollowing his order in A.Y. 2008-09 that lay at the core of dismissing all the 13\n\nAppeals of the assessee/sister concern(s).         The CIT(A) observed that the\n\ntransactions were carried out without following Arms Length Price (ALP) and proved\n\nto be a planned device to reduce the tax incidence by diverting profits to sister\n\nconcerns(buyer) to enable them claim higher benefit throughsection 80HHCoverlooking the fact thatsection 80HHC went out of statute from A.Y. 2005-06.Hence, he concluded that the transactions were not genuine and bonafide and that\n\nthe judgment of the Supreme Court in the case ofCIT vs. Calcutta Discount\n\nCompany Ltd.91 ITR 8 cannot be applied.5.9.7    The Ld. AR submitted that though CIT(A) professed that taxation is on real\n\nprofit and not on unearned profits which is at the core of above Apex Court\n\ndecision, still he held that this decision will not apply and upheld the addition on\n\nimaginary profits on the pretext that there is no infirmity in the order of A.O. The\n\nCIT(A) brushed aside all the relevant decisions cited, copies thereof given. In so far27I.T.A. Nos.37 to 49/Coch/2016\n\nas A.O. had accepted the veracity of documents produced before him/her during\n\nassessment, the Ld. AR submitted that the CIT (A) should have deleted the addition\n\nin the absence of any incriminating evidence to prove that transactions were\n\ncolourable & sham device to avoid tax. The Ld. AR relied on the decision of the\n\nTribunal in the case ofITO vs. PKS Holdings(2017) 152 DTR (Kol.) (Trib.) 215.\n\n\n5.9.8   The Ld. AR submitted that unit wise, grade wise details of sales to sister\n\nconcerns had been furnished to A.O. for each year well before assessment and only\n\nupon being advised by CIT(A), details were again reproduced in respect of one\n\nassessee for 2008-09, 2009-10 and 2011-12, issue being common for all years and\n\nfor all assesses. However, CIT (A) remarked details were not given separately for\n\nother assessment year(s).5.9.9   The Ld. AR submitted that although the CIT(A) had maintained that the\n\nexport price at which cashew kernels were exported directly by the assessee can be\n\nrelied on to fix an ALP yet he did not peruse the specific chart prepared in this\n\nregard as per his requirements showing such a comparison which would have\n\nconvinced him that asssessee's transactions with related unit were at Arm's Length.\n\nThe Ld. AR relied on the judgment of the Delhi High Court in the case ofCIT vs.\n\nSumitomo Corporation India (P) Ltd.(2015) 127 DTR (Del) 323.He also relied on\n\nthe decision of the Tribunal in the case of Sona Okegawa Precision Forgings Ltd. vs.\n\nAddl. CIT (2012) 143 TTJ (Del) 516.    According to the Ld. AR, the CIT(A) strongly\n\nfelt that ALP means maximum price and it should be followed.To this, the Ld. AR\n\nsubmitted that observation of Delhi bench of ITAT in the case ofMentor Graphics28I.T.A. Nos.37 to 49/Coch/2016\n\n(Noida) (P) Ltd. vs. DCIT(2007) 109 ITD 101 (Del.) ought to have been appreciated\n\nin the context of determination of ALP by taking result of comparable transactions in\n\ncomparable circumstances and by making suitable adjustments for difference. The\n\nDelhi bench observed in page 144 that ALP does not mean maximum price or\n\nmaximum profit in the range. A willing buyer in an open market shall pay minimum\n\nand not maximum price for goods and services . No business man can be compelled\n\nto maximize his profit.The Ld. AR relied on the judgment of the Supreme Court in\n\nthe case ofS.A. Builders Ltd Vs. CIT288 ITR 1, quoting from the judgment of the\n\nDelhi High Court in the case ofCIT Vs. Dalmia Cements Ltd(2002) 254 ITR 377.5.9.9.1 The Ld. AR submitted that the judgment of the Supreme Court on revenue\n\nneutrality in the case ofCIT vs. Glaxo Smithkline Asia (P) Ltd.(2010) 236 CTR (SC)\n\n113 was misconstrued both by A.O. and CIT(A) taking a dramatic U turn that all\n\nunits are independent and separately assessed even while confirming addition on\n\nsale of kernels to sister concerns.6.     According to the Ld. AR, from a few sample figures extracted from the\n\nvoluminous data, the CIT(A) presumed that the assessee had sold substantial\n\nquantity of lower grade kernels at a price below cost without explaining the\n\ncommercial expediency to do so and the assessee had not explained yet the reason\n\nfor the pricing policy adopted to sell the kernels to sister concerns at a price below\n\nthe ' maximum export price' assessee had got on direct exports.29I.T.A. Nos.37 to 49/Coch/2016\n\n6.1   According to the Ld. AR, a sample consisting of inferior grades such as splits,\n\nbutts and pieces was chosen from the details furnished to the CIT(A) to conclude\n\nthat sale price was not static. It was submitted that the CIT(A) was not correct on\n\npicking out a single invoice on maximum price pertaining to direct exports, and to\n\nsay why this price was not attainable on sale of all grades. For this, the Ld. AR\n\nrelied on the decision of the Tribunal in the case of ITW India Ltd. vs. ACIT (2015)\n\n169 TTJ (Del) 60. The CIT(A) could not appreciate that superior higher grades sold\n\nto sister concerns were at cost plus and were in tandem with export market price.\n\nThe Ld. AR submitted that pricing for exports cannot be equated with that for\n\ndomestic sales. For this, he relied on the decision of the Tribunal in the case of\n\n(2011) 142 TTJ (Pune) 89.6.2   Thus, it was submitted that both A.O. and CIT(A) failed to consider the quality\n\nof kernels entering the sales before reaching an erroneous conclusion that assessee\n\ndid not follow ALP and cost was assumed to be ALP at all times leading to distorted\n\nresults. The CIT(A) placed reliance on the judgment of the Gujarat High Court in\n\nthe case ofPatel Chemical Works vs. CIT(2004) 265 ITR and 273, wherein it was\n\nheld that a sale to sister concern at a price below market price was a device for tax\n\navoidance. It was submitted that the judgment of the Supreme Court (1973) 91\n\nITR 8 approving the judgment of the Madras High Court in Choodambika Mills was\n\nnot brought before Gujarat High Court. According to the Ld. AR, the judgment of\n\nthe Gujarat High Court cited supra was rendered in a different set of facts and\n\ncircumstances and was not therefore, applicable to the present case. It was30I.T.A. Nos.37 to 49/Coch/2016\n\nsubmitted that neither Assessing Officer nor CIT(A) could establish that the\n\nassessee had at any point of time sold kernels and in particular inferior grades\n\nbelow their market price and their findings were based only on blanket comparison\n\nwith average cost which is not a litmus test to conclude under pricing.\n\n\n6.3   The Ld. AR submitted that in particular, inferior grades fetch a market price\n\nlower than cost, a fact accepted by the Assessing Officer. The Assessing Officer\n\naccepted the system of Accounting, Books of Account & Accounting Policies,\n\nvaluation of kernels, gradewise pricing for Direct Exports and purchases in the\n\ncourse of export from the sister concerns. Thus, it was submitted that it was quite\n\nparadoxical therefore that while purchases from sister concerns was accepted, sales\n\nto same sister concerns on a selective basis was held to be underpriced. When the\n\nAssessing Officer found that wt. average of entire sales to related units was above\n\naverage cost, he resorted to selective picking such method which will never\n\nestablish underpricing. According to the Ld. AR, the Assessing Officer as well as the\n\nCIT(A) expected every Kg of cashew kernels to be sold            above cost and he\n\nsubstituted 'cost' for market price realized.   The Ld. AR submitted that sale price\n\ncannot remain static. Hence, the Ld. AR submitted that addition is to be deleted for\n\nfollowing reason:1. Under pricing not proved.2. The A.O. had not pointed out any discrepancies in accounts thereby\n      accepting trading results/margin. Hence it has to be presumed that\n      transactions are genuine & bonafide and not sham. Therefore, addition under\n      conjectures & presumptions was not sustainable.31I.T.A. Nos.37 to 49/Coch/20163. Transactions were at Arm's Length Pricing. The Ld. AR relied on the\n      judgment of the Punjab & Haryana High Court in the case ofCIT vs. Jyothi\n      Industries330 ITR 573.4. No comparable cases were given by A.O. to show that profits returned by\n      'A' are low or not and commensurate with volume of business. A comparison\n      with peers in industry would have helped A.O. to come to a cogent\n      conclusion that transactions were at Arm's Length.5 Sales Tax Department had accepted the Accounts each year.6. Confirmation of abysmally low addition of Rs. 43000/- by A.O. in\n      Assessment Year 2008-09 was the basis for CIT(A) to come to an erroneous\n      conclusion of underpricing. A.O. ought to have appreciated that cost +\n      pricing is generally adopted for sales (exports) of superior grades. The\n      same principle cannot be extended to inferior grades since by virtue of their\n      nomenclature they have a market price lower than cost, a fact which is\n      verifiable from invoices, Cashew business bulletin & other literature. This\n      proved commercial expediency or compelling circumstances to sell such\n      grades below cost. ALP is worked out by taking comparable transactions\n      in     comparable circumstances and by allowing a reasonable margin for\n      various factors like timing of contracts for exports, composition of grades,\n      quality of kernels, exchange rate, a reasonable % to cover indirect\n      overheads & profit of related units. Pricing has to be identified separately for\n      wholes & splits. After all, apples have to be compared with apples. For a\n      cogent of meaningful comparison, the same cannot be aggregated.\n\n\n6.4    The Ld. AR submitted that when addition is made under sales, corresponding\n\ndeduction has to be given in purchases of sister concerns. Therefore, no addition is\n\nwarranted.    When the judgment of the Supreme Court cited supra was pointed\n\nout, the A.O. held that they were independent overlooking the fact that A.O. himself\n\nbranded it as underpricing of sales to related units (specified personsu/s. 40A(2)of\n\nthe Act). The Ld. AR submitted that the assessee as well as sister concerns were in\n\nthe maximum tax bracket and accordingly, the transactions between assessee &32I.T.A. Nos.37 to 49/Coch/2016\n\nsister concerns were again revenue neutral. Hence, it was submitted that addition\n\nwas unjustified.6.5     The Ld. AR submitted that the A.O. presumed the following:(1) 'A' had a policy to sell kernels to sister concerns below cost just banking\n      on a wt average. A.O. had no material in his possession to prove that there\n      was underpricing. A.O. did not appreciate the limitations of wt. average.\n\n\n      (2) A.O. felt that underpricing can be done to reduce tax incidence for\n      assessee with no corresponding revenue yield to sister concerns. This is\n      unsubstantiated by the judgment of the Supreme Court in the case of Calcutta\n      Discount Company 91 ITR 8 relying on Madras High Court Decision in the\n      case ofSri. Ramalinga Choodambika Mills Ltd Vs. CIT28 ITR 952. On the\n      contrary, A.O. relied heavily on his order in Preetha S. Nair for Assessment\n      Year 2009-10 to hold that there was no revenue yield to the sister concern(s).Her income from business was Rs. 2.49 crores for Financial Year 2008-09.\n      After set off of b/f losses it was below the taxable limit.6.6    The Ld. AR submitted that the A.O. should have appreciated that taxation is\n\non real income and this was the essence of the above judgment of the Supreme\n\nCourt and other judgments. Though CIT(A) endorsed this, he ignored the same and\n\non his insistence, wt. average price chart was prepared in the manner prescribed by\n\nhim which he simply ignored it. It was submitted that every year similar chart was\n\ngiven to A.O and there was no categorical finding by the Assessing Officer in any of\n\nthe assessment years in question that there was shifting of profits by the assessee\n\nin favour of his/her sister concerns.6.7   The Ld. AR submitted that the CIT(A) had an apprehension that diversion of\n\nprofits was possible to enable sister concerns only to enjoy higher 80HHC benefit.\n\nHence, he concluded that the transactions were not genuine and bonafide.33I.T.A. Nos.37 to 49/Coch/2016\n\nAccordingly, the Ld. AR submitted that the judgment of the Supreme Court in the\n\ncase of Calcutta Discount Company cited supra was not applicable and thatsection\n\n80HHCwent out of statute from assessment year 2005-06.6.8   The Ld. AR relied on the judgment of the Supreme Court in the case of\n\nCalcutta Discount Co. Ltd Vs. (1973) 91 ITR 8 (SC) endorsing Madras High Court inSri. Ramalinga Choodambika Mills Ltd Vs. CIT(1955) 28 ITR 952 and the judgment\n\nof the Supreme Court in the case ofCIT vs. Virtual Soft Systems Ltd.(2018) 404\n\nITR 409 wherein it was held that transactions are genuine & bonafide & not sham.\n\nReal income concept to be followed which CIT(A) had rightly observed.The Ld. AR\n\nrelied on the decisions of the Tribunal in the case ofITO vs. PKS Holdings(2017)\n\n152 DTR 215 (Kol) (Trib.)and in the case ofFlipkart India (P) Ltd. vs. ACIT(2018)\n\n193 TTJ (Bang.) 685.The Ld. AR relied on the judgment of the Supreme Court in\n\nthe case ofCIT & ANR vs. Glaxo Smithkline Asia (P) Ltd.(2010) 236 CTR (SC) 113\n\nand the decision of the Tribunal in the case ofDy. CIT vs. Firstsource Solutions Ltd.(2018) 168 DTR (Mumbai) (Trib.) 161 wherein it was held that exercise of addition\n\nalleging underpricing is revenue neutral.The ld. AR relied on the decision of the\n\nSupreme Court in the case ofSA Builders vs. CIT(2006) 288 ITR 1 and the decision\n\nof the Tribunal in the case ofMentor Graphics (Noida) (P) Ltd. vs. DCIT109 ITD\n\n101 (Del.) wherein it was held that no businessman can be compelled to maximize\n\nhis profits. The Ld. AR also relied on the following case laws wherein it was held\n\nthat prices of grades sold to sister concerns for their exports had a nexus with the\n\nprices of direct exports (i.e. exports to unrelated parties) and hence, the said34I.T.A. Nos.37 to 49/Coch/2016\n\ntransactions were at Arm's Length Price.         Accordingly, the addition was to be\n\ndeleted:1) CIT vs. Jyothi Industries (2011) 330 ITR 573 (P&H)2) Fabula Trading Co. (P) Ltd. vs. ITO(2010) 123 ITD 557 (Mum. Trib.)3) ITO vs. Kanchan Tara Exports(2011) 138 TTJ (JP) 592 (Jaipur Trib.)4. DIT (International Taxation) vs. Boston Scientific International B.V.\n           (2013) 90 DTR (Bom.) 357\n\n\n6.9      The Ld. AR also relied on the following case laws on selective picking of data:1) Henkel Adhesives Technologies India (P) Ltd. vs. DCIT(2014) 163 TTJ 491 (Pune Trib.)2) Intimate Fashions (India) (P) Ltd. vs. ACIT(2012) 149 TTJ (Chennai) 7753) ITW India Ltd. vs. ACIT (2015) 169 TTJ (Del) 60\n\n\n6.9.1      The Ld. AR also relied on the following case law on price not remaining\n\nstatic as per CIT(A).1) Satnam Overseas Ltd. & ANR. vs. Addl. CIT (2010) 228 CTR (Del) 121\n\n\n6.9.2     The Ld. AR also relied on the following case law on absence of comparable\n\ncases or any evidence on record.1) JLC Electromet P. Ltd. vs. Addl. CIT (2016) 178 TTJ 28 (UO) (Jaipur Trib.)2) CIT vs. Modi Xerox Ltd. (2010) 41 DTR 55 (All HC)3) Airtech (P) Ltd. vs. DCIT(2011) 139 TTJ (Del) 31835I.T.A. Nos.37 to 49/Coch/2016\n\n6.9.3 The Ld. AR relied on the decision of the Tribunal in the case ofMerck Ltd. vs.\n\nDCIT(2016) 139 DTR (Mum. Trib.) 1 wherein it was held that whole determining\n\nALP, adjustment for quality difference has to be considered.6.9.4   The Ld. AR also relied on the decision of the Tribunal in the case ofDy. CIT\n\nvs. Firstsource Solutions Ltd.(2018) 168 DTR (Mum. Trib.) 161 wherein it was held\n\nthat excessive or unreasonable payment to sister concern, the contention of\n\nassessee that both assessee and payee sister concern are liable to pay tax at the\n\nsame rate, hence no disallowanceu/s. 40A(2)is called for has merit.7. The Ld. DR relied on the order of the lower authorities.8.   We have heard the rival submissions and perused the material on record. The\n\nLd. DR reiterated the stand by the Revenue that the assessees shifted the profits to\n\nthe sister concerns, thereby reducing its tax liability.   On the other hand, the\n\nlearned AR placed reliance on the judgment of the Hon'ble Supreme Court in the\n\ncase ofCIT vs. Glaxo Smithkline Asia (P) Ltd.(2010) 236 CTR (SC) 113, wherein\n\nheld that even in the case of domestic transaction between the related persons it\n\nwas necessary to examine whether there was any motive to shift the profit making\n\nconcern to a loss making concern. It was submitted that in the present case, there\n\nwas no motive to shift profits from the hands of the present assessees to the sister\n\nconcerns and it was revenue neutral in the sense that the profits of the sister\n\nconcerns should be reduced to the extent the assessees' profits is sought to be\n\nreduced.     Prior to abolition ofsection 80HHC, there was an apprehension that36I.T.A. Nos.37 to 49/Coch/2016\n\nunderpricing     could be done to enable sister concerns claim greater 80HHC\n\nbenefit. This is no longer the case from A.Y. 2005-06. Both the assessees and sister\n\nconcern(s) paid tax at maximum marginal rate. The timing of contracts is also an\n\nimportant parameter in the matter of fixing transfer prices. For example when price\n\nof say W320 grade contracted earlier was Rs. X which is less than cost or current\n\nprice, assessee is bound to sell at contracted price only.      The    A.O. wrongly\n\npresumed that entire sales in India were to sister concerns. The sales were effected\n\nin the domestic market through depots, consignment agents etc. In the absence of\n\na clear finding by AO to the contrary, it was only fair and reasonable to presume\n\nthat the transactions with sister concerns were regarded genuine and bonafide.\n\n\n8.1   The Assessing Officer has to reject the books of account of the assessee\n\nbefore estimating the income of the assessee. The primary condition for rejecting\n\nthe book results as laid downu/s. 145of the Income Tax Act is that the Assessing\n\nOfficer should be satisfied that the books of accounts maintained by the assessees\n\nare not complete and correct. As can be seen from the findings of the Assessing\n\nOfficer in the assessment orders, the Assessing Officer has merely proceeded on a\n\nsurmise that profits of the assessees were sought to be reduced by selling their\n\nproducts to the sister concerns at a lesser price. There is no instance of falsity or\n\nincompleteness of the books of account pointed out by the Assessing Officer in the\n\nassessment orders.     The books of account were duly audited by Chartered\n\nAccountants and they reflected the true state of affairs of the assessees. The fact\n\nthat the assessees had sold their products to the sister concerns at a price lesser37I.T.A. Nos.37 to 49/Coch/2016\n\nthan the price at which the same product was sold to the third parties, in our\n\nopinion, this would not be sufficient ground to come to the conclusion that the\n\nbooks of account of the assessees are not complete and correct.         There is no\n\nevidence brought on record that over and above the price shown in the books of\n\naccount, the assessees received something more from the sister concerns or any\n\ncomparable cases were brought on record by the Assessing Officer. It is for the\n\nbusinessman to decide the price at which he has to sell its products to its\n\ncustomers.No businessman can be compelled to maximize its profits as held by the\n\nSupreme Court in the case ofS.A. Builders vs. CIT288 ITR 1. The law is well-\n\nsettled that the Revenue cannot insist on the way in which the businessman should\n\nconduct his business. The Revenue cannot compel a businessman to sell his\n\nproducts at a particular price, so that the assessee derives maximum profits so as to\n\npay higher income tax.      The calculation of cost of production on which the\n\nAssessing Officer has placed reliance, has nothing to do with the completeness and\n\ncorrectness of the books of account. This allegation is very vague and it is not\n\nsufficient to reject the book results of the assessees. Being so, we cannot uphold\n\nthe conclusion reached by the lower authorities.8.2 The transactions entered by the assessees with the sister concerns are genuine\n\nand bona fide and there is no allegation by the Assessing Officer that they are sham\n\ntransactions. The price charged by the assessees to their sister concerns are in\n\nconformity with the normal commercial practice whereby the assessees got huge\n\norders in large quantities with timely recovery of the debts. In our opinion, in the38I.T.A. Nos.37 to 49/Coch/2016\n\nabsence of specific findings by the Assessing Officer that the transactions were\n\nentered into by the parties herein with the intention to defraud Revenue, the\n\nadditions made by the A.O. cannot be sustained. This view of ours is fortified by\n\nthe judgment of the Supreme Court in the case ofCIT vs. Calcutta Discount Co. Ltd.(91 ITR 8) wherein it was held that where a trader transfers his goods to another\n\ntrader at a price less than the market price, and the transaction is a bona fide one,\n\nthe taxing authority cannot take into account the market price of those goods,\n\nignoring the real price fetched, to ascertain the profit from the transaction. The\n\nmere fact that sales were made at prices lower than cost or even the market rates\n\nwould not entitle the Income tax Department to assess the difference between the\n\ncost/market price and the price paid by the sister concern(s) as profits of the\n\nassessee.The above judgment of the Supreme Court in the case ofCIT vs.\n\nCalcutta Discount Company Ltd.(1973) 91 ITR 8 approved the decision of the\n\nMadras High Court inShri Ramalinga Choodambika Mills Ltd vs. CITreported in\n\n(1955) 28 ITR 952 (Mad).Reliance is also placed on the judgment of the Supreme\n\nCourt inCollector of Central Excise New Delhi vs. Guru Nanak Refrigeration\n\nCorporation Ltd.2003 INDLAW SC 301 which approved the decision of the Appellate\n\nTribunal (CEGAT) to the effect that just because sale price was less than cost of\n\nproduction there was no justification to reject the valuation of goods sold for\n\ncharging Central Excise Duty when the transactions were at Arm's Length.\n\n\n8.3    It is not permissible for the Assessing Officer to make additions without\n\nbringing any comparable cases on record.      In this case, no comparable cases were39I.T.A. Nos.37 to 49/Coch/2016\n\nbrought on record by the Assessing Officer to counter the price fixation by the\n\nassessee.    In our opinion, the lower authorities must have been satisfied that the\n\nprice charged to the various grades by the assessees for their sales to sister\n\nconcerns have proximity to the price of export to unrelated parties and indeed the\n\nAssessing Officer failed to compare the assessees' price pattern with other\n\ncomparable cases and he cannot arbitrarily make addition on the basis of\n\nguesswork.    The Assessing Officer cannot disturb the sales pricing pattern of\n\ntransaction between the sister concerns, unless it was shown to be perverse.This\n\nview of ours is fortified by the judgment of the Punjab & Haryana High Court in the\n\ncase ofCIT vs. Jyothi Industries330 ITR 573.8.3.1   The addition made on conjectures and surmises cannot be sustained. All\n\nthe goods sold by the assessee are not of same quality.       There were different\n\ngrades of kernels and also pieces and butts. Therefore, uniform rate cannot be\n\napplied and the rates at which the sister concerns sold in the export market cannot\n\nbe the basis for determining the sale value of the assessee's products.          The\n\nAssessing Officer computed the cost of production per kg. and observed that the\n\nassessee sold the goods below the cost of production per kg. and thereafter\n\ncompared it with price at which the sister concerns sold the goods . There were no\n\ncomparable cases brought on record by the Assessing Officer.        This is the only\n\nevidence on the basis of which the Assessing Officer had formed the belief of\n\nshifting of profit and observed that there was understatement of sale price. These\n\nmaterial are not sufficient to hold that the assessee had under-invoiced the sale40I.T.A. Nos.37 to 49/Coch/2016\n\nprice. We, accordingly, do not find any reason to agree with the finding of the\n\nlower authorities.In these cases, there were different varieties of grades of kernels\n\nsold by the assessee and there are different factors which influence the finalization\n\nof sale price. Without bringing any material on record, the Assessing Officer is not\n\njustified in making addition on account of lower sale price. This view of ours is\n\nfortified by the order of Tribunal in the case of Vijay C. Kamdar 305 ITR (AT) 163\n\n(Mum.). As held by the Jaipur Bench of the Tribunal in the case ofITO vs. Kanchan\n\nTara Exports138 TTJ 592, had the Assessing Officer given due rebate on account of\n\nquality and size of kernels, there could not have been any addition made by the\n\nAssessing Officer. Even while arriving at the sale price, the Assessing Officer has to\n\ngive due weightage of the employees cost, administrative cost, interest cost,\n\nworking capital cost, debt recovery cost, quality factor which has not been done by\n\nthe Assessing Officer.   Had he given due weightage to these factors, then the sale\n\nprice charged by the assessees could be appropriate.8.3.2 The CIT(A) picked a single highest price from the details submitted to him\n\nand concluded that the transactions are not genuine and not at Arms Length Price\n\nwhich was not correct. Reliance is placed on the decision of the Tribunal in the case\n\nof ITW India Ltd. vs. ACIT (2015) 169 TTJ (Del) 60, wherein held that to arrive at a\n\nfair rate of adjustment, it is appropriate to adopt quality adjustment of 10% with\n\nregard to particle size and bulk density test, as the product imported by the\n\nassessee is demonstrably superior to the locally manufactured drugs. This\n\nunderlines the need for determination of separate wt. average pricing for wholes41I.T.A. Nos.37 to 49/Coch/2016\n\nand splits with suitable adjustments and for a cogent and meaningful comparison,\n\nthe same cannot be aggregated. The ALP therefore could be wt. average of direct\n\nexports and wholes and/splits, pieces and butts respectively which can be a\n\nbenchmark for comparison with suitable adjustments factoring for following\n\ncircumstances:(1) The composition of grades in the sales mix even among low grades.\n\n      (2) Those grades entering into direct export not forming part of sales to\n      sister concerns and vice versa.(3) Timing of contracts & price variation even among superior grades.\n\n      (4) Exchange rate variation.Accordingly, at least 10% allowance to account for such factors as composition of\n\ngrades in the sales mix, quality of kernels, etc. and 5% allowance to cover Profit\n\nand indirect overheads of sister concern(s), if considered, then no addition is\n\nwarranted. For this, reliance is placed on the decision of the Tribunal in the case ofMerck Ltd. vs. DCIT(2016) 139 DTR (Mum Trib.) 1.8.4 Further, as held by the Madras High Court in the case ofCIT vs. Anandha\n\nMetals Corporation273 ITR 262 when the return of the assessee accepted by the\n\nCommercial Taxes Department is binding on the Income Tax authorities, the\n\nAssessing Officer is not justified to reject the value of the closing stock declared by\n\nthe assessees which was accepted by the Commercial Taxes Department and\n\nconsequently, no addition could be made in respect of unexplained differences\n\nbetween closing stock as noted in the seized documents and the value determined42I.T.A. Nos.37 to 49/Coch/2016\n\nby the assessee. By applying the above ratio, we are of the opinion that there is\n\nno finding by the I.T. Department that the assesseees' returns were rejected by the\n\nCommercial Taxes Department and it was duly accepted by the Commercial Taxes\n\nDepartment and in the accepted accounts, the I.T. Department cannot find any\n\ndifference so as to make the additions. In our opinion, before rejection of books of\n\naccount, the Assessing Officer should prove that the books of account produced by\n\nthe assessees are not reliable and that once the books of account were audited and\n\nwere subject to scrutiny by other statutory authorities, simple rejection of the same\n\nby the Assessing Officer without any reason is not acceptable.\n\n\n8.5   The Assessing Officer is not entitled to make a pure guesswork and make an\n\nassessment without any reference to the evidences and material at all. There must\n\nbe something more than suspicion to support the assessment.              A suspicion\n\nhowever, strong may not take the place of proof. The conclusions which are based\n\non surmises and conjectures, cannot take the place of proof.          Therefore, the\n\nassessments made by the Assessing Officer which are pre-dominantly influenced by\n\nsuspicion cannot be upheld. In our opinion, mere surmises and conjectures that the\n\nassessees had underpriced the sales value cannot be the basis for a pre-determined\n\napproach without bringing any third party transactions on record by the Assessing\n\nOfficer. The available documentary evidences in the form of purchase invoice, sales\n\ninvoice, various bills and vouchers have not been found defective by the Assessing\n\nOfficer at any point of time. When the quantitative details certified by the statutory\n\nauthorities which are also part of the record subject to scrutiny by the Assessing43I.T.A. Nos.37 to 49/Coch/2016\n\nOfficer have not been rejected by him, then the Assessing Officer cannot presume\n\nthat the assesses had suppressed the profits. It is not the case of the Assessing\n\nOfficer that there were any material defects noticed at the time of examination of\n\nthe books of account and also that there was no change in the method of\n\naccounting adopted by the assessees from what was regularly adopted.\n\nAccordingly, we are of the opinion that the Assessing Officer cannot blow hot and\n\ncold at the same time and onus clearly lies on the Assessing Officer to prove that\n\nthe books of account maintained by the assessees suffers any defects. In the\n\nabsence of any documentary evidence indicating any lapse on the part of the\n\nassessees in maintenance of books of account which were subjected to audit by the\n\nstatutory authorities, we are of the opinion that the additions made by the\n\nAssessing Officer to the profits of the assessees only on the basis of surmises and\n\nconjectures of low profits on account of higher cost of production and sales price\n\ncharged by the assessees' sister concerns cannot stand the test of law leave alone\n\nthe Assessing Officer's own logic . Accordingly, we are of the opinion that the basis\n\nadopted by the Assessing Officer for making additions towards lower profits cannot\n\nbe sustained.   As such, the additions made on this count are deleted in all the\n\nassessment years. This ground of appeals of the assessees for all the assessment\n\nyears is allowed.8.6    The system of Accounting, books of account and accounting policies were\n\naccepted by the AO which implied inter alia that grade wise valuation of stock of\n\nkernels were recognized by the Dept, which proved commercial expediency or44I.T.A. Nos.37 to 49/Coch/2016\n\ncompelling circumstances to sell inferior grades of kernels at a market price below\n\ncost. This would imply that averaging cannot be done in a scenario when quality is a\n\ncrucial factor. For this, reliance is placed on the judgment of the Bombay High\n\nCourt in the case of Director of Income Tax (International Taxation) vs. Boston\n\nScientific International B.V. (2013) 90 DTR (Bom.) 357. The A.O. had accepted the\n\npricing methodology of the assessee in the following transactions(a). Direct exports i.e. sales to unrelated parties consisting of wholes and\n        splits having separate wt. average rates.(b). Purchases from these very sister concerns consisting of wholes and\n        splits.The Assessing Officer ought to have applied the same yardstick in the matter of\n\npricing of sales to sister concerns for their export. In the course of export and the\n\nsales are invoiced grade wise corresponding to the grades exported by the sister\n\nconcern and relevant export contract price. Hence, the timing of contract is very\n\nimportant. Being for exports, the prices charged to sister concerns grade wise vis-\n\na-vis exports to unrelated parties are comparable and sales to sister concerns in the\n\ncourse of export are at Arms Length Price(ALP).       For lower grades such as splits\n\nand pieces, the market price being lower than the production cost, they cannot be\n\nsold above market price to sister concerns and, if so, they will be hit hard bySection\n\n40A(2). Hence, there was no shifting of profits in favour of sister concerns for their\n\nbenefit as the transfer price was based on ultimate export price obtaining for\n\nrespective grade(s) which therefore, constituted ALP on the date of relevant export\n\ncontract.45I.T.A. Nos.37 to 49/Coch/2016\n\n\n8.7   It cannot stand to reason that the sale price of cashew kernels remained\n\nconstant throughout the year so that the basis of sale price could be arrived at. The\n\nsale price has fluctuation due to demand and supply and market conditions. It does\n\nnot remain at constant level. This view is fortified by the judgment of the Delhi\n\nHigh Court in the case ofSatnam Overseas Ltd. vs. Addl. CIT 329 ITR 237 (Del.),\n\nwherein held that where it cannot stand to reason that the price of sale of paddy /\n\nrise / pulses remained constant throughout the year so that on the basis of an\n\naverage price of closing stock, the sale price for the entire year comprising of 12\n\nmonths, 48 weeks and 365 days can be ascertained in that the same would have\n\nremained fixed throughout this period. Even assuming that this logic is correct, it\n\nwas surely an exercise which the A.O. could have done on the basis of material\n\nwhich he is now presently seeking to do because when the very same materials\n\nwere available with him in the relevant assessment years and merely because the\n\nA.O. feels that he has failed to do what he ought to have done cannot be a valid\n\nground for seeking initiation of reassessmentu/s 147r.w.s. 148 of the Act.\n\n\n\n8.8    In view of the above discussion, in our opinion, it is virtually impossible to\n\npresume that sale price remained constant throughout the year for every grade and\n\nfor every kilogram so that on the basis of average closing stock price the entire\n\nsales should be above this price.   Hence, the application of weighted average price\n\nof entire sales was not an appropriate method to conclude underselling as it had\n\nsevere limitations.This view of ours is also supported by the order of the Tribunal46I.T.A. Nos.37 to 49/Coch/2016\n\nin the case ofVijay C. Kamdar vs. ITO(2009) 305 ITR (AT) 163 (Mum) where it was\n\nheld as follows:(iii) that the Assessing Officer formed the belief that the assessee over invoiced\n      the purchase by relying upon the statement of K in the income-tax proceedings.The disallowance was without making any further enquiry only for the reason that\n      the supplier of the assessee did not appear before him. This statement was not\n      relied upon by the Additional Commissioner of Customs and he had dropped the\n      proceedings. These materials were not sufficient to hold that the assessee had\n      over-invoiced the purchases. There were different varieties of pens available in\n      the market whose costs differed according to quality and there were different\n      factors to determine the cost of pens. Without bringing any material on record the\n      disallowance made by the Revenue authorities was not justifiable."\n\n8.9      The assessing officer had made the addition in assessment year 2009-10\n\nunder 'business head ' on the pretext that there was an 'apparent loss' of Rs. 89.76\n\nlakhs on alleged policy of underselling in which event there was an apparent gain in\n\nthe books of sister concern(s). Any addition under the head "income from business"becomes revenue neutral in nature since any addition towards underselling in the\n\nhands of the assessee becomes a corresponding deduction for purchase in the\n\nhands of sister concern(s), as held by the Supreme Court in the case ofCIT vs.\n\nGlaxo Smithkline Asia (P) Ltd.(2010) 236 CTR (SC) 113. When this judgment was\n\nbrought to his notice by filing a copy, the Assessing Officer took a dramatic U turn\n\nto hold that units were independent. This action of the A.O. is unjustified. Hence,\n\nthe addition on account of underpricing was not warranted. The assessing officer\n\nrelied heavily on his order in Preetha S. Nair for A.Y. 2009-10 to hold that there was\n\nno revenue yield to the recipient sister concern and so, under pricing was done to\n\nreduce tax incidence. The assessing officer missed the vital point that income was\n\nbelow taxable limit after b/f losses were set off during the current year. Moreover,\n\nthere was no finding by the lower authorities that sister concerns benefited in any47I.T.A. Nos.37 to 49/Coch/2016\n\nmanner. Being so, in our opinion, these cannot be any additions towards low selling\n\nprice charged to sister concerns. These grounds of appeals are allowed in all the\n\nappeals of the assessees.9.    The   next ground in ITA No. 40/Coch/2016 in the case of R. Prakash is with\n\nregard to charging of interestu/s. 244Aof the Act.10. The facts of the case are the assessee was in receipt of interest amounting to\n\nRs.3,84,680/- for the AYs 2006-07 & 2007-08 undersection 244Aof the Act but did\n\nnot offer the same for tax in the year in which it was received i.e. during the\n\nassessment year under consideration. The same was not offered for tax because of\n\nthe accounting policy the assessee was following as per which on refund received\n\nwould be offered for tax only at the time of finalizing the assessment.      As the\n\ninterest is to be assessed in the year of accrual or receipt, the Assessing Officer\n\nbrought to tax the said interest on refund as income from other sources.11.   On appeal, the CIT(A) observed that the interest on Income tax refund\n\nassessable under the head other sources is to be taxed in the year in which the\n\nright to such refund had been recognized by an order or the date on which it is\n\nactually received. The matter came up for consideration before the ITAT, Chennai\n\nin the case of DCIT vs. Seshasayee Papers and Bonds Ltd. (2 ITR (Trib.) 417)\n\nwherein it was decided that it has to be taxed in the year of actual receipt. Having\n\nreceived the interest on refund during the FY 2007-08, the CIT(A) observed that\n\nthe assessee should have offered the same for tax immediately then without48I.T.A. Nos.37 to 49/Coch/2016\n\nfollowing the accounting policy which has no legal sanctity.   The CIT(A) confirmed\n\nthe Assessing Officer's action in bringing to tax interest under income from other\n\nsources.12.   Against this, the assessee is in appeal before us. The Ld. AR submitted that\n\nthe CIT(A) was not correct in confirming the addition on account of interestu/s.\n\n244Aas per 143(1), an intimation disregarding the consistent policy followed by\n\nthe assessee in the past to treat the same as income on regular assessment. The\n\nLd. AR submitted that the department had accepted the same in earlier years\n\n(2013) (153 TTJ (Mum) 257) and (2012) 349 ITR 309 (Mum).13. The Ld. DR relied on the order of the lower authorities.14.   We have heard the rival submissions and perused the material on record. We\n\ndo not find any infirmity in the finding of the CIT(A) that the interest on Income tax\n\nrefund assessable under the head other sources is to be taxed in the year in which\n\nthe right to such refund had been recognized by an order or the date on which it is\n\nactually received by placing reliance on the decision of the Tribunal in the case of\n\nDCIT vs. Seshasayee Papers and Bonds Ltd. (2 ITR (Chennai Trib.) 417) wherein it\n\nwas decided that it has to be taxed in the year of actual receipt. Being so, we\n\ndismiss this ground of appeal of the assessee in ITA No. 40/Coch/2016.49I.T.A. Nos.37 to 49/Coch/201615.   In the result, the appeals of the assessees in ITA Nos. 37 to 39/Coch/2016,\n\n41 to 43/Coch/2016, 44 & 45/Coch/2016, 46/Coch/2016 and 47 to 49/Coch/2016\n\nare allowed. The appeal of the assessee in ITA No.40/Coch/2016 is partly allowed.Order pronounced in the open court on 03rd February, 2020.Sd/-                                         Sd/-\n(GEORGE GEORGE K.)                            (CHANDRA POOJARI)\nJUDICIAL MEMBER                              ACCOUNTANT MEMBER\n\nPlace: Kochi\nDated: 03rd February, 2020\n\nGJ / Devadas G\nCopy to:1. Shri R. Pratap, Sun Food Corporation, Kochupilamoodu, Kollam2. Shri R. Prakash, Dhanya Foods, Kochupilamoodu, Kollam.3. Smt. T.C. Usha, Chetana Cashew Corporation, Kochupilamoodu, Kollam.4. Shri Ravindranathan Nair, M/s. Vijayalaxmi Cashew Co., Kochupilamoodu, Kollam.5. M/s. Vijayalaxmi Cashew Co., Kochupilamoodu, Kollam.6. The Assistant Commissioner of Income-tax, Circle-1, Kollam.7. The Commissioner of Income-tax (Appeals), Trivandrum.8. The Pr. Commissioner of Income-tax, Trivandrum.9. D.R., I.T.A.T., Cochin Bench, Cochin.10. Guard File.By Order\n\n\n                                              (ASSISTANT REGISTRAR)\n                                                   I.T.A.T., Cochin50