DCIT, New Delhi v. M/s. Tianjin Tianshi Biological Dev. Co. Ltd., New Delhi

ITA 1117/DEL/2014 | 2009-2010
Pronouncement Date: 28-11-2014 | Result: Partly Allowed

Appeal Details

RSA Number 111720114 RSA 2014
Assessee PAN AABCT4203A
Bench Delhi
Appeal Number ITA 1117/DEL/2014
Duration Of Justice 9 month(s) 1 day(s)
Appellant DCIT, New Delhi
Respondent M/s. Tianjin Tianshi Biological Dev. Co. Ltd., New Delhi
Appeal Type Income Tax Appeal
Pronouncement Date 28-11-2014
Appeal Filed By Department
Order Result Partly Allowed
Bench Allotted I
Tribunal Order Date 28-11-2014
Date Of Final Hearing 29-09-2014
Next Hearing Date 29-09-2014
Assessment Year 2009-2010
Appeal Filed On 27-02-2014
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: I NEW DELHI BEFORE SHRI T. S. KAPOOR ACCOUNTANT MEMBER AND SHRI C. M. GARG JUDICIAL MEMBER I.T.A .NO.-1110/DEL/2014 (ASSESSMENT YEAR-2009-10) M/S TIANJIN TIANSHI BIOLOGICAL VS. DCIT DEVELOPMENT COMPANY LTD. CIRCLE-2(2) 10 COMMUNITY CENTRE BASANT LOK INTERNATIONAL TA XATION VASANT VIHAR NEW DELHI. NEW DELHI-110057 PAN: AABCT4203A I.T.A .NO.-1117/DEL/2014 (ASSESSMENT YEAR-2009-10) DDIT INTL. TAXATION VS. M/S TIANJIN TIANSHI BIOLOGICAL CIRCLE-2 (2) DEVELOPMENT COMPANY LTD. NEW DELHI. 43 HOUSING SOCIETY SOUTH EXTENSION PART-1 NEW DELHI. PAN: AABCT4203A (APPELLANT) (RESPONDENT) ASSESSEE BY:-SH. HEMANT KUMAR ARORA CA. SH. JEETAN NAGPAL FCA. & SH. S.D. KAPILA ADV. & SH. R.R. MAURYA ADV. REVENUE BY:-SH. SANJEEV VERMA CIT DR. SH. VIVEK KUMAR SR.DR. ORDER PER C. M. GARG JM THE ABOVE CAPTIONED APPEALS HAVE BEEN PREFERRED BY THE ASSESSEE AND THE REVENUE AGAINST THE COMMON ORDER OF THE ASSESSING O FFICER DATED 13.01.20014 2 PASSED U/S 143(3) READ WITH SECTION 144C(1) OF THE INCOME TAX ACT 1961 (FOR SHORT THE ACT) IN PURSUANCE TO THE DIRECTIONS OF DISPUTE RESOLUTION PANEL (DRP) VIDE ITS ORDER DATED 31.12.2013 PASSED U/S 14 4C(5) OF THE ACT FOR AY 2009-10. ASSESSEES APPEAL ITA NO. 1110/DEL/2014 3. THE ASSESSEE HAS RAISED FOLLOWING GROUNDS IN THI S APPEAL: 1. THE LD. AO ERRED ASSESSING THE TOTAL INCOME OF TIANJIN TIANSHI BIOLOGICAL DEVELOPMENT COMPANY LIMITED (THE APPELLANT) AT RS.50 60 71 388 AS AGAINST THE RETURNED INCOME OF RS.7 92 82 894/-. 2. THE AO/DRP ERRED IN MAKING ADDITION OF RS.42 67 87 494/- BEING THE DIFFERENCE BETWEEN THE VALUE OF MRP DECLARED TO CUSTOM AUTHORITIES AND THE VALUE OF MAXIMUM RETAIL PRICE (MRP) ALTERED BY THE ASSESSEE ON ACCOUNT OF PRODUCTS SOLD BY IT TO THE I NDIAN AE. 2.1 THE LD. AO AND DRP HAVE FAILED TO APPRECIATE T HAT THE CONCEPT OF MRP IS A LEGAL FICTION SPECIFICALLY CREA TED FOR THE PURPOSE OF SECTION 4A OF THE EXCISE ACT READ WITH SECTION 3 OF THE CUSTOM ACT AND STANDARD WEIGHT & MEASURES AC T AND THAT MRP HAS NO APPLICATION UNDER THE INCOME-TAX AC T TO A TRANSACTION LIKE THE PRESENT ONE WHERE THE ASSESSEE RECEIVED CONTRACTED CONSIDERATION FOR THE ADMITTEDLY WHOLES ALE SALES TO ITS INDIAN GROUP ENTITY I.E. TIANJIN TIANSHI IN DIAN PRIVATE LTD. (PARA 2.1 OF ASSESSMENT ORDER) EVEN THOUGH IT MAY HAVE TO PAY IMPORT DUTY ON THE BASIS OF MRP. 2.2 THAT THE OBSERVATION OF THE LD. DRP THAT THE AC CEPTANCE OF ALP BY THE TPO RELATES TO THE IMPORT PRICE OF G OODS BY THE ASSESSEES BRANCH OFFICE IN INDIA AND DOES NOT RELA TE TO THE PRICE OF GOODS AT WHICH THE SAID GOODS HAVE BEEN SU BSEQUENTLY SOLD BY THE ASSESSEES INDIAN BRANCH OFFICE OF TIAN JIN INDIA. AS SUCH THE ABOVE DETERMINATION OF ALP IS OF NO RELEV ANCE IN DECIDING THE ISSUE OF SUPPRESSED SALES BY THE ASSES SEE IS CONTRARY TO THE TPOS ORDER AS WELL AS THE REMAND R EPORT SUBMITTED BY HER TO THE DRP. 3 2.3 THE LD. DRP ERRED IN LAW IN INCREASING THE QUA NTUM OF SALES AS PER ACCOUNTS TO TIANJIN INDIA BY FURTHER A DDING THE DIFFERENCE BETWEEN THE MRP DECLARED EARLIER AND ALT ERED MRP DESPITE THE FACT IT DOES NOT QUESTION THE CLEAR FIN DING OF FACT BY THE TPO IN PARA 3 OF HIS REMAND REPORT DT. 18.11.20 13 WHICH CLEARLY STATES THAT: THE ASSESSEE SELLS ITS PRODU CTS TO TIANJIN TIANSHI INDIA PRIVATE LIMITED WHICH IS ITS AE. BOT H THE ASSESSEE NOR TIANJIN TIANSHI INDIA IS A RETAILER BU T ARE ONLY THE SECOND AND THIRD RUNG RESPECTIVELY IN THE DISTRIBUT ION CHAIN AND THEREFORE THEY THEMSELVES DO NOT SELL THE PRODUCTS AT MRP. THE ASSESSEE HAS PAID THE DIFFERENTIAL CUSTOMS DUTY AFT ER THE DRI SEARCH. THE ISSUE WHICH HAS BEEN RAISED BY LD. DRP IS WHETHER AFTER TAKING INTO DISCOUNT THE DIFFERENCE IN CUSTOM DUTY IF PAID ORIGINALLY THE TRANSACTION WOULD BE AT ARMS LENGTH . 2.4 THE LD. AO/DRP HAVE FAILED TO APPRECIATE THAT MRP (WHETHER ORIGINALLY DECLARED OR THE ALTERED ONE) OF THE PRODUCTS SOLD BY THE ASSESSEE TO TIANJIN INDIA HAS NO NEXUS WITH AND DOES NOT IMPACT THE ACTUAL PRICE CHARGED FROM TIANJIN IN DIA. 3. THE LD. DRP ERRED IN NOT ALLOWING THE ADDITIONAL CUSTOM DUTY OF RS.2.58 CRORES PAYABLE ON THE BASIS OF ALTERED MRP OF IMPORTED PRODUCTS AS THE TPO CONSIDERED THIS LIABILITY AS PART OF OPERATIONAL EXPENDITURE THIS YEAR FOR THE PURPOSE DETERMINING T HE RATIO OF OPERATIONAL PROFIT TO SALES UNDER TNM METH OD FOR COMPUTING THE ARMS LENGTH PRICE OF THE NET MAR GIN EARNED ON SALES TO TIANJIN INDIA. 4. THE LD. AO ERRED IN REJECTING THE BOOKS OF ACCOU NT DESPITE THE FACT THAT AS PER THE DIRECTION OF THE D RP THE ASSESSEE PRODUCED THE BOOKS BILLS AND VOUCHERS ETC . BEFORE THE AO DURING THE REMAND PROCEEDINGS. 5. THE LD. DRP ERRED IN REFUSING TO ADMIT THE ADDIT IONAL EVIDENCE. 6. THE LD. AO HAS ERRED IN LAW AND FACTS AND CIRCUMSTANCES OF THE CASE IN INITIATING PENALTY PROCEEDINGS UNDER SECTION 271(1)(C) R.W.S. 274 OF T HE ACT. 4. AT THE OUTSET THE LD. COUNSEL FOR THE ASSESSEE S UBMITTED THAT THE ASSESSEE DO NOT WANT TO PRESS GROUND NO. 3 HENCE GROUND NO . 3 OF THE ASSESSEE IS DISMISSED AS NOT PRESSED. 4 5. BRIEFLY FACTS GIVING RISE TO THIS APPEAL AS PER WRITTEN SYNOPSIS OF THE ASSESSEE ARE SUMMARIZED AS UNDER: (I). TIANJIN TIANSHI BIOLOGICAL DEVELOPMENT COMPAN Y LIMITED IS A COMPANY INCORPORATED UNDER THE LAWS OF PEOPLE S REPUBLIC OF CHINA. THE ASSESSEE SET UP ITS BRANCH OFFICE IN INDIA FOR THE FIRST TIME IN THE YEAR 2000. THE PRIN CIPAL BUSINESS OF THE ASSESSEE IS THAT OF WHOLESALE OF FO OD SUPPLEMENTS AND HEALTH CARE EQUIPMENTS WHICH IT IM PORTS INTO INDIA FROM THE HEAD OFFICE IN CHINA/GROUP COMP ANIES. IT PRIMARILY SELLS THE SAME ON WHOLESALE BASIS TO T IANJIN TIANSHI INDIA PRIVATE LIMITED [ IN SHORT TIANJIN I NDIA]. TIANJIN INDIA IS AN ASSOCIATED ENTERPRISE [AE] OF T HE ASSESSEE WITHIN THE MEANING OF SECTION 92A OF THE A CT. THE FOOD SUPPLEMENTS ETC. ARE IMPORTED INTO INDIA IN RETAIL PACKAGING. THE IMPORTS IN THE ORIGINAL PACKAGES ARE PRIMARILY SOLD IN BULK TO TIANJIN INDIA. THEREFORE THE ASSESSEE IS A WHOLE SALE DISTRIBUTOR OF THE PRODUCT S IMPORTED BY IT WITHOUT ANY VALUE ADDITION. (II). AN ADDITION OF RS.426 787 494 HAS BEEN MADE B Y THE AO ON ACCOUNT OF ALLEGED SUPPRESSED SALES BASED ON THE INFORMATION RECEIVED BY HIM FROM THE ASSISTANT DIRE CTOR O/O DRI (CUSTOMS) ZONAL UNIT CHENNAI. SIMULTANEOUS SEA RCHES WERE CONDUCTED BY THE DIRECTOR OF REVENUE INTELLIGE NCE (UNDER THE CUSTOMS LAW) ON THE OFFICE/WAREHOUSE PRE MISES OF THE ASSESSEE AND TIANJIN INDIA ON 5.9.11 AND A S HOW CAUSE NOTICE DATED 14.3.12 WAS ISSUED TO THE ASSESS EE. THE ALLEGATIONS AGAINST THE ASSESSEE PRIMARILY ARE THAT IT HAS MIS-DECLARED THE RETAIL SALE PRICE. (III). AS ALLEGATIONS OF THE REVENUE THE ASSESSEE W RONGLY MENTIONED THE RSP OF THE IMPORTED GOODS BY SUPPRE SSING THE ACTUAL MAXIMUM RETAIL PRICE [MRP] AND HAS MIS - CLASSIFIED THE DIETARY SUPPLEMENTS AS MEDICAMENTS U NDER THE CUSTOMS TARIFF CODE IN CERTAIN BILLS OF ENTRY FOR T HE PURPOSE OF COMPUTING THE CUSTOM DUTY PAYABLE. THE ASSESSEE ADMITTED THE ALLEGATIONS BEFORE THE COMMIS SIONER OF CUSTOMS AND PAID THE ADDITIONAL CUSTOM DUTY ALON GWITH INTEREST IN RESPECT OF IMPORTS. THEREAFTER THE ASSE SSEE PREFERRED AN APPLICATION WITH THE CUSTOMS AND CENTR AL EXCISE SETTLEMENT COMMISSION [THE CCE SETTLEMENT COMMISSION OR THE DATE CCESC] AND THE CCESC PASS ED 5 THE FINAL ORDER NO. 3/2013-CUSTOM DATED 21.2.13 IN THE REGARD. (IV). AS PER STAND AND SUBMISSIONS OF THE ASSESSEE THE ASSESSEE SELLS ITS GOODS PRIMARILY TO TIANJIN INDIA ON WHOL ESALE BASIS. THE AO REFERRED THE ASSESSEES CASE TO THE T RANSFER PRICING OFFICER [TPO] FOR VERIFICATION OF THE ARM S LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS ENTERED INT O BY THE ASSESSEE WITH ITS AES. THE TPO VIDE AN ORDER DATE D 18.1.13 HAS ACCEPTED ALL INTERNATIONAL TRANSACTIONS WITH THE AES INCLUDING THE ONE RELATING TO SALE OF FOOD SUPPLEMENTS HEALTH EQUIPMENTS AND BUSINESS KITS (W HICH IS THE SUBJECT MATTER OF PRESENT DISPUTE) AMOUNTING TO RS.313 413 859 TO HAVE BEEN MADE AT ARMS LENGTH PR ICE. (V). BASED ON THE INFORMATION OBTAINED BY THE AO FR OM THE ASSISTANT DIRECTOR DRI ZONAL UNIT THE CONTENTS O F THE SCN AND THE ORDER OF THE SETTLEMENT COMMISSION THE AO ARRIVED AT AN INFERENCE THAT THE ASSESSEE HAD SUPPRESSED TH E VALUE OF ITS ACTUAL SALES. (VI). THE LD. AO HAS ALSO ALLEGED THAT THE BOOKS OF ACCOUNTS WERE CALLED FOR EXAMINATION BY HIM ON 25.3.2013 26.3.13 AND 28.3.13 AND THAT THE ASSESSEE FAILED TO PRODUCE THE SAME. ACCORDINGLY THE BOOKS OF ACCOUNT HAVE BEEN REJECTE D AND THE CLAIM OF EXPENSES IS DISALLOWED TO THE EXTENT O F 10% OF THE TOTAL EXPENSES. A DISALLOWANCE OF RS.9 265 306 WAS MADE BY THE AO IN THE DRAFT ASSESSMENT ORDER PASSED TO BE MADE ON THIS ACCOUNT. (VII). BEING AGGRIEVED BY THE DRAFT ASSESSMENT ORDE R THE ASSESSEE SUBMITTED OBJECTIONS TO THE DRP U/S 144C OF THE ACT . THE DRP REMANDED THE MATTER BACK TO THE FILE OF THE AO DIRECTING HIM TO PROVIDE THE ASSESSEE WITH AN OPPOR TUNITY TO PRODUCE BOOKS OF ACCOUNTS AND OTHER RELEVANT BILLS AND VOUCHERS. FURTHER TPO WAS ASKED TO RE-EXAMINE THE A LP OF INTERNATIONAL TRANSACTIONS IN LIGHT OF THE DECLARAT ION OF THE ASSESSEE BEFORE THE CUSTOMS AUTHORITIES. (VIII). THE AO AND THE TPO SUBMITTED THEIR REMAND R EPORTS. BASED THEREON THE DRP ACCEPTED THE ASSESSEES OBJE CTIONS TO AD-HOC ADDITION OF RS.92.65 LACS OUT OF TOTAL EX PENSES CLAIMED BY THE ASSESSEE BUT REJECTED THE ASSESSEE O BJECTION ON ADDITION OF THE MRP AS ITS SALES VALUE TO TIANJ IN INDIA AND MADE AN ADDITION OF RS.42.67 CRORES BY HOLDING THAT THE BOOK RESULT OF ASSESSEE REGARDING SALES ARE UNRELIA BLE HENCE THE SAME ARE REJECTED AND THE DRP COMPUTED THE AMOU NT OF 6 SUPPRESSED SALE OF 42.67 CRORES BY MULTIPLYING THE DIFFERENTIAL MRP TO THE QUANTITY OF GOODS SOLD AS P ER FINANCIAL STATEMENT OF THE ASSESSEE. THE AO IN PURS UANCE TO THE ABOVE ORDER OF THE DRP PASSED IMPUGNED ASSESSM ENT ORDER VIDE DATE 13.01.2014. (IX). THE AGGRIEVED ASSESSEE HAS PREPARED ITA NO.1110/DEL/2014 AGAINST THE IMPUGNED ADDITION OF RS.42.67 CRORES AND THE REVENUE HAS ALSO PREFERRED ITA NO.1117/DEL/2014BEING AGGRIEVED BY THE SECOND PART OF THE ORDER OF THE DRP WHICH DELETED THE AD HOC DISALLOWA NCE OF 10% OF EXPENSES CLAIMED BY THE ASSESSEE. GROUND NO. 3 6. IN THE VERY BEGINNING OF THE ARGUMENTS THE LD. COUNSEL APPEARING FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE DOES NOT WANT TO PRESS GROUND NO.3 HENCE THE SAME IS DISMISSED AS NOT PRESSED. GROUND NO.4 7. APROPOS GROUND NO.4 LD. COUNSEL FOR THE ASSESSE E SUBMITTED THAT THE AO WAS NOT JUSTIFIED IN REJECTING THE BOOKS OF ACCOUNT S OF THE ASSESSEE DESPITE THE FACT THAT AS PER DIRECTION OF THE DRP THE ASSESSEE PRODUCED BOOKS OF ACCOUNTS REQUIRED BILLS AND VOUCHERS ETC. BEFORE THE AO DURI NG THE REMAND PROCEEDINGS. LD. COUNSEL POINTED OUT THAT THE AO HAS NO SUFFICIE NT CAUSE FOR REJECTING THE BOOKS OF ACCOUNTS OF THE ASSESSEE. 8. LD. DR REPLIED THAT ADMITTEDLY THE ASSESSEE PRO DUCED BOOKS OF ACCOUNTS DURING REMAND PROCEEDINGS BEFORE THE AO. THE DR FU RTHER SUBMITTED THAT DURING THE VERIFICATION OF BOOKS OF ACCOUNTS IT WA S FOUND THAT THE ASSESSEE HAS NOT ACCOUNTED CUSTOM DUTY PAID ON REVISED MRP AS RE VEALED BY THE ASSESSEE BEFORE THE DIRECTORATE OF REVENUE INTELLIGENCE (DRI ). THE DR HAS ALSO DRAWN 7 OUR ATTENTION TOWARDS REMAND REPORT DATED 26.11.201 3 AND SUBMITTED THAT THE ASSESSEE HAD NO REASON WHICH PREVENTED THE ASSESSEE TO PRODUCE THE BOOKS OF ACCOUNTS AT THE TIME OF DRAFT ASSESSMENT PROCEEDING S AND THE GENUINENESS OF THE EXPENDITURE INCURRED BY THE ASSESSEE COULD NOT BE V ERIFIED BY THE AO DUE TO SHORT SPAN OF TIME DURING REMAND PROCEEDINGS. 9. LD. COUNSEL FOR THE ASSESSEE SUBMITTED THE REJOI NDER TO ABOVE AVERMENT OF THE DR AND CONTENDED THAT WHEN DRP FOUND IT APPROPR IATE TO ALLOW THE ASSESSEE TO PRODUCE BOOKS OF ACCOUNTS AND OTHER RELATED BILL S AND VOUCHERS BEFORE THE AO THEN DURING THE REMAND PROCEEDINGS THE AO IS B OUND TO ALLOW THE ASSESSEE TO PRODUCE THE BOOKS OF ACCOUNTS OF THE ASSESSEE AN D OTHER RELATED BILLS AND VOUCHERS. LD. COUNSEL ALSO CONTENDED THAT MERELY B ECAUSE THE ASSESSEE HAD NOT ACCOUNTED THE ADDITIONAL CUSTOM DUTY PAID ON REVISE D MRP AND THE AO HAD SHORT SPAN OF TIME FOR VERIFICATION CANNOT BE THE BASIS FOR REJECTION OF BOOKS OF ACCOUNTS OF THE ASSESSEE. 10. ON CAREFUL CONSIDERATION OF ABOVE SUBMISSIONS WE NOTE THAT AS PER SECTION 145(3) OF THE ACT WHERE THE AO IS NOT SATIS FIED ABOUT THE CORRECTNESS OR COMPLETENESS OF THE ACCOUNT OF THE ASSESSEE OR WHE RE THE METHOD OF ACCOUNTING PROVIDED IN SUB-SECTION (1) OF SECTION 145 OF THE A CT OR ACCOUNTING STANDARD AS NOTIFIED IN SUB-SECTION (2) OF SECTION 145 OF THE A CT HAVE NOT BEEN REGULARLY FOLLOWED BY THE ASSESSEE THE AO MAY MAKE AN ASSESS MENT IN THE MANNER AS PROVIDED IN SECTION 144 OF THE ACT. THUS ACCORDIN G TO STATUTORY PROVISIONS OF SECTION 145(3) THE AO HAS TO RECORD HIS DISSATISF ACTION ABOUT THE CORRECTNESS 8 AND COMPLETENESS OF THE ACCOUNTS OF THE ASSESSEE BE FORE REJECTING BOOKS OF ACCOUNTS. IN THE PECULIAR FACTS AND CIRCUMSTANCES OF THE PRESENT CASE WE OBSERVE THAT THE DRP ALLOWED THE ASSESSEE TO PRODUC E BOOKS OF ACCOUNTS AND OTHER RELATED BOOKS AND VOUCHERS BEFORE THE AO HEN CE THE AO IS DUTY BOUND TO ACCEPT THE SAME DURING THE REMAND PROCEEDINGS AND M ERELY BECAUSE THE ASSESSEE HAD NOT ACCOUNTED THE ADDITIONAL CUSTOM DUTY PAID A ND THE AO HAD SHORT SPAN OF TIME FOR VERIFICATION OF BOOKS OF ACCOUNTS AND R ELATED BILLS AND VOUCHERS THE BOOKS OF ACCOUNTS OF THE ASSESSEE CANNOT BE REJECTE D. WE ALSO HOLD THAT WHEN THE DRP IS ALLOWING THE ASSESSEE SUBMISSION OF BOOK S OF ACCOUNTS THEN IT IS NOT OPEN FOR THE AO TO EXAMINE THE SUFFICIENT CAUSE WHI CH PREVENTED THE ASSESSEE TO SUBMIT BOOKS OF ACOUTNS DURING DRAFT ASSESSMENT PRO CEEDINGS. FINALLY WE ARE INCLINED TO HOLD THAT THE ACTION OF THE AO REJECTIN G THE BOOKS OF ACCOUNTS OF THE ASSESSEE IS NOT BASED ON JUSTIFIED AND LEGAL REASON ING HENCE GROUND NO. 4 OF THE ASSESSEE IS ALLOWED. GROUND NO.5 11. APROPOS GROUND NO.5 LD. COUNSEL OF THE ASSESSE E SUBMITTED THAT THE DRP ERRED IN REFUSING TO ADMIT ADDITIONAL EVIDENCE SUBM ITTED BY THE ASSESSEE. LD. DR VEHEMENTLY REPLIED AND CONTENDED THAT FROM THE I MPUGNED ORDER OF THE DRP THERE IS NO MENTION OF DENIAL OR REFUSING TO A DMIT ADDITIONAL EVIDENCE. THE DR ALSO CONTENDED THAT THE DRP ALLOWED THE ASSE SSEE TO SUBMIT ITS BOOKS OF ACCOUNTS AND OTHER RELATED BILLS AND VOUCHERS BEFOR E THE AO DURING REMAND 9 PROCEEDINGS WHICH IS A CONSCIOUS SUPPORT BY THE DRP TO THE ASSESSEE ADHERING TO THE PRINCIPLES OF NATURAL JUSTICE. 12. ON CAREFUL CONSIDERATION OF ABOVE AND PERUSAL O F THE IMPUGNED ORDER OF THE DRP WE OBSERVE THAT THE DRP HAS ALLOWED THE AS SESSEE TO SUBMIT ITS BOOKS OF ACCOUNTS AND OTHER RELEVANT BILLS AND VOUCHERS B EFORE THE AO DURING REMAND PROCEEDINGS HENCE WE ARE UNABLE TO ACCEPT THIS CO NTENTION OF THE ASSESSEE THAT THE DRP REFUSED OR DECLINED TO ADMIT THE ADDITIONAL EVIDENCE. ACCORDINGLY GROUND NO.5 OF THE ASSESSEE BEING DEVOID OF MERITS IS DISMISSED. GROUND NO. 1 & 2 2.1 2.2 2.3 & 2.4 OF THE ASSESS EE 13. WE HAVE HEARD ARGUMENT OF BOTH THE SIDES AND CA REFULLY PERUSED THE MATERIAL PLACED ON RECORD INTER ALIA ORDER OF THE D RP IMPUGNED ORDER OF THE AO AND WRITTEN SYNOPSIS AND ARGUMENTS FILED BY THE ASS ESSEE AND THE REVENUE. 14. THE LD. COUNSEL FOR THE ASSESSEE HAS SUBMITTED WRITTEN SYNOPSIS ON BEHALF OF THE ASSESSEE AS WELL AS HE HAS ARGUED THE CASE O F THE ASSESSEE IN DETAIL AND ADDRESSED ALL THE ISSUES AND ANGELS PERTAINING TO T HE IMPUGNED ADDITION OF RS.42.67 CRORES. FOR THE SAKE OF PROPER ADJUDICATIO N ON THE ALL ISSUES RAISED BY THE ASSESSEE AND CONTENTIONS OF THE REVENUE THE AR GUMENTS OF THE ASSESSEE AS PER WRITTEN SYNOPSIS OF THE ASSESSEE MAY BE SUMMARI ZED AS FOLLOWS: 15. THE LD. COUNSEL EXPLAINED THE BUSINESS MODEL OF TIANJIN GROUP. TIANJIN CHINA BEING THE HQ IN CHINA HAS SET UP BRANCH OFFIC ES IN INDIA. THE BRANCH OFFICES DEAL IN HEALTH/FOOD SUPPLEMENTS AND HEALTH EQUIPMENTS AND SELL THEIR 10 PRODUCTS THROUGH A MULTI LEVEL MARKETING MODE. THE ASSESSEE HAS THREE BRANCHES IN INDIA AND THE BUSINESS COMMENCED IN IND IA IN THE YEAR 2000. THE CONCEPT OF MAXIMUM RETAIL PRICE (IN SHORT MRP) WAS EXPLAINED IN DETAIL HAVING REGARD TO EXCISE LAWS AND CUSTOMS LAW. ACCOR DING TO THE LD. AR THE CONCEPT OF MRP IS A LEGAL FICTION CREATED BY SECTIO N 4A OF THE EXCISE ACT AND SECTION 3 OF THE CUSTOMS ACT FOR THE PURPOSE OF VAL UATION OF IMPORTED GOODS ON WHICH CUSTOMS DUTY IS LEVIED. THE LD. COUNSEL FURTH ER ELABORATED THE CONTENTIONS THAT HOW THE CONCEPT OF MRP IS APPLIED WHILE CHARGI NG EXCISE DUTY AND CUSTOMS DUTY AND THEREAFTER HOW PRICES ARE CHARGED AT DIFFERENT STAGES OF THE DISTRIBUTION CHAIN AND THE MRP COMES INTO PLAY ONLY AT RETAIL END OF THE DISTRIBUTION CHAIN WHICH IS OBVIOUSLY THE ULTIMATE CUSTOMER. THE ASSESSEE I.E. THE BRANCH OFFICE OF THE TIANJIN CHINA IMPORTS GOOD S FROM THE TIANJIN CHINA I.E. HQ AND THEN SELLS IT TO ITS 100% SUBSIDIARY IN IND IA I.E. TIANJIN INDIA. TIANJIN INDIA FURTHER SELLS IT TO DISTRIBUTORS AND FRANCHIS EE WHO IN TURN SELL IT TO FINAL CONSUMERS AT MRP OR AT A PRICE WHICH COULD BE LESSE R THAN THE MRP. THE LD. AR FURTHER EXPLAINED THAT THERE IS ALWAYS A SCOPE F OR DISCOUNT ON MRP AND CITED SOME EXAMPLES. HE SAID THAT AT EACH DISTRIBUTION CH AIN THE PRICES ARE NEGOTIATED IN ACCORDANCE WITH THE MRP AND STATED THAT IT IS AN ADMITTED FACT THAT THE ASSESSEE HAD ALTERED THE MRP FOR CUSTOMS VALUATION PURPOSES. 16. THE LD. COUNSEL ALSO SUBMITTED THAT THE ASSESSE E HAD MADE IMPORTS OF RS.9.64 CRORES AND SOLD THE SAME FOR RS.31.34 CRORE S TO TIANJIN INDIA WHICH IN TURN HAD SOLD THE SAME GOODS FOR RS.72.00 CRORES TO THE DISTRIBUTORS. ON BEHALF 11 OF THE ASSESSEE THE LD. COUNSEL EXPLAINED THAT SALE S WERE BEING ACCOUNTED FOR IN DIFFERENT HANDS OF THE SUPPLY CHAIN AND FURTHER DRE W OUR ATTENTION TO A CHART SHOWING THE FIGURES OF PURCHASE AND SALE AND EXPLAI NED THAT IF THE AOS CONTENTION IS ACCEPTED THAT THE ASSESSEE EFFECTED S ALE OF RS.74.00 CRORES THEN IN THAT CASE TIANJIN INDIA AUTOMATICALLY GOES INTO LOS S BECAUSE IT IS SELLING THE SAME GOODS AT RS.72.00 CRORES WHICH WOULD LEAD TO AN UNA CCEPTABLE ABSURDITY. THE LD. COUNSEL SUBMITTED A CHART WHICH IS PART OF THE WRIT TEN SUBMISSIONS TO EXPLAIN THE FIGURES RELATING TO IMPORT BY INDIAN BRANCH OF TIAN JIN CHINA (HO) SALE AND PURCHASE EFFECTED BY INDIAN BRANCH OF THE ASSESSEE TO TIANJIN INDIA AND BY TIANJIN INDIA TO ITS DISTRIBUTORS AND FRANCHISEE. T HE LD. COUNSEL EXPLAINED THAT SALE MADE BY BRANCH OFFICE OF THE ASSESSEE TO TIANJ IN INDIA WAS RS.31.34 CRORES WHICH WAS ALSO PRECISELY THE VALUE OF PURCHASE IN T HE CASE OF TIANJIN INDIA WHICH WAS ACCEPTED BY THE SAME TPO/AO AND DRP. THE LD. COUNSEL ALSO CONTENDED THE FACT THAT IN THE CASE OF TIANJIN INDI A THE TPO EARLIER HAD APPLIED THE TNMM AND MADE AN ADJUSTMENT OF RS.16 CRORES TO THE PURCHASES MADE FROM TIANJIN CHINA I.E. ASSESSEE MEANING THEREBY THAT T IANJIN INDIAS PURCHASES FROM THE ASSESSEE TIANJIN CHINA (HQ) WERE ONLY RS.15 CR ORES AND SUBSEQUENTLY THE DRP ACCEPTED THE OBJECTIONS FILED BY TIANJIN INDIA AND DIRECTED THE TPO TO APPLY RPM METHOD AFTER WHICH THE PURCHASE WERE ACC EPTED AT RS.31.34 CRORES AS DECLARED BY TIANJIN INDIA. THE LD. COUNSEL MADE A MENTION ABOUT THE TPO ORDER IN ASSESSEES CASE AND STATED THAT THE TPO HA S ACCEPTED THE INTERNATIONAL TRANSACTION MADE BY THE ASSESSEE TO BE IN CONFORMIT Y WITH THE ARMS LENGTH PRINCIPLE (PAGE 298 PAPER BOOK-II OF ASSESSEE). 12 17. THE LD. COUNSEL ALSO SOUGHT OUR ATTENTION TO TH E FACT THAT THE DRP HAD CALLED FOR A REMAND REPORT FROM THE AO AND TPO AND READ THE CONTENTS OF THE LETTER OF THE DRP CALLING FOR REMAND REPORT. THE LD . COUNSEL FURTHER SUBMITTED THAT THE AO REFERRED THE MATTER TO THE TPO FOR FRES H CONSIDERATION OF THE ALP. READING FROM THE TPOS REMAND REPORT ADDRESSED TO T HE DRP THE LD. COUNSEL STRESS ON PARAS 1 2 & 3 THEREOF AND STRENUOUSLY C ONTENDED THAT NEITHER THE ASSESSEE NOR TIANJIN TIANSHI INDIA IS A RETAILER BU T THEY ARE ONLY THE SECOND AND THIRD ENTITY RESPECTIVELY IN THE DISTRIBUTION CHAIN AND THEREFORE THEY DO NOT SELL THE PRODUCTS AT MRP TO THE ULTIMATE CONSUMER. THE L D. COUNSEL FURTHER EXPLAINED THAT THE TPO TREATED THE HO IN CHIANA THE MANUFACT URER AS THE FIRST ENTITY IN SALE CHAIN THE IMPORTER I.E. BD AS THE SECOND ENT ITY THE SOLE DISTRIBUTOR (TIANJIN INDIA) AS THIRD ENTITY AND THE RETAILERS (SMALL DIS TRIBUTORS AND FRANCHISE) AS FOURTH STAGE ENTITIES IN THE SUPPLY CHAIN AND READ THE CON CLUDING PARAGRAPH OF THE TPOS REMAND REPORT DATED 18.1.2013 (PAPER BOOK PAG E 260) WHEREIN THE TPO HAS STATED THAT EVEN AFTER TAKING INTO ACCOUNT THE ADDITIONAL CUSTOMS DUTY THE OP/SALES OF THE ASSESSEE IS MORE THAN THAT OF COMPA RABLE AND THEREFORE THE INTERNATIONAL TRANSACTIONS ARE AT ARMS LENGTH PRIC E. THE LD. COUNSEL MAINLY CONTENDED THAT THE TPO HAS TAKEN INTO CONSIDERATION BOTH THE PURCHASES AND SALE AND NOT JUST SALES AS THE RATIO WHICH HAS BEEN TAK EN IS OP/SALES AND ALSO INVITED OUR ATTENTION TO THE DRP DIRECTIONS AND ARGUED THAT THE DRP HAD ERRED IN STATING THAT TPO HAS ONLY DEALT WITH THE PURCHASE PRICE OF THE ASSESSEE AND NOT SALE ACTUAL PROCEED OF SALES. THE LD. COUNSEL ALSO CONTE NDED THAT THE TPO REMAND REPORT CLEARLY STATED THAT OP/SALES COMES DOWN AFTE R TAKING INTO ACCOUNT THE 13 ADDITIONAL CUSTOMS DUTY OF RS.2.58 CRORES THEREBY SUGGESTING THAT THE INTERNATIONAL TRANSACTION INVOLVING SALES WAS DULY CONSIDERED BY THE TPO AND THE SAME WAS HELD TO BE AT ARMS LENGTH AND DRP WAS WRONG IN STATING OTHERWISE THAT THE REPORT OF THE TPO HAS NO RELEVAN CE AND IN REJECTING THE TPO REPORT. THE LD. COUNSEL ARGUED THAT THESE OBSERVATI ONS OF THE DRP DESERVE TO BE REJECTED. 18. ACCORDING THE LD. COUNSEL OF THE ASSESSEE THE A O ERRED IN SUBSTITUTING THE ACTUAL VALUE OF SALES MADE BY THE ASSESSEE TO TIANJ IN INDIA WITH A HYPOTHETICAL VALUE BY SUBSTITUTING THE ACTUAL SALE PRICE WITH TH E MRP DECLARED BY THE ASSESSEE BEFORE CUSTOMS AUTHORITIES WHICH WAS RELE VANT ONLY FOR LEVY OF CUSTOMS DUTY MAKING AN ADDITION OF RS.42.67 CRORES . 19. IT WAS FURTHER SUBMITTED THAT THE LD. AO/DRP HA VE ERRED IN LAW IN DISREGARDING THE ARMS LENGTH PRICE OF SALE OF GOOD S TO TIANJIN INDIA AS DETERMINED BY THE TPO AND IN INCREASING THE SALE PR ICE. THE LD. COUNSEL ALSO SUBMITTED THAT KEEPING IN VIEW THE FACT THAT THE IM PUGNED SALES IS INDISPUTABLY INTERNATIONAL TRANSACTION THE SAME SQUARELY COVERE D BY THE PROVISIONS OF SECTION 92(1) OF THE ACT WHICH READS AS UNDER: 92. (1) ANY INCOME ARISING FROM AN INTERNATIONAL TRANSACTION SHALL BE COMPUTED HAVING REGARD TO THE ARMS LENGTH PRICE. 20. THE LD. COUNSEL ALSO DRAWN OUR ATTENTION TOWARD S SECTION 92CA(4) OF THE ACT (W.E.F. 1.6.2007) WHICH READS THUS: (4) ON RECEIPT OF THE ORDER UNDER SUB-SECTION (3) THE ASSESSING OFFICER SHALL PROCEED TO COMPUTE THE TOTA L INCOME OF THE ASSESSEE UNDER SUB-SECTION (4) OF SECTION 92C I N CONFORMITY WITH THE ARMS LENGTH PRICE AS SO DETERMINED BY THE TRANSFER PRICING OFFICER. 14 21. THE LD. AR RELIED ON THE DECISION IN AZTEC SOFT WARE CASE (107 ITD 141) WHEREIN THE SPECIAL BENCH OF THE ITAT BANGALORE HAS HELD THUS: NOW THE WORDS HAVING REGARD TO HAVE BEEN REPLAC ED BY THE WORDS IN CONFORMITY WITH. SO NOW THE ASSESSING OF FICER AFTER INTRODUCTION OF SUB-SECTION (4) ABOVE IS REQUIRED T O PASS THE ASSESSMENT ORDER IN CONFORMITY WITH THE ORDER OF TH E TRANSFER PRICING OFFICER DETERMINING THE ARMS LENGTH PRICE. NOW THE ORDER OF THE TPO HAS BEEN EXPRESSLY MADE BINDING ON THE ASSESSING OFFICER. FROM THE ABOVE IT IS CLEAR THAT THERE WAS A LACUNA IN THE ACT AS APPROPRIATE LANGUAGE WAS NOT U SED EARLIER. THIS HAS BEEN MODIFIED AND WITH EFFECT FROM JUNE 1 2007 THE ORDER OF THE TPO IS BINDING ON THE ASSESSING OFFICE R WHO NOW HAS NO CHOICE BUT TO PASS AN ORDER IN CONFORMITY WI TH THE ORDER OF THE TPO. 22. THEREAFTER THE LD. COUNSEL SUBMITTED AN ALTERNA TE ARGUMENT WITH THE AID OF A CHART (AT PAGE 535-537 IN PAPER BOOK V) THAT ON LY SOME OF THE PRODUCTS WERE INVOLVED IN THE CASE WHERE MRP WAS ALTERED. THE LIS T OF SUCH PRODUCTS WAS PROVIDED AS A PART OF CHART. THE LD. COUNSEL FURTHE R SUBMITTED THAT THERE IS NO DISPUTE WITH REGARD TO THE QUANTITY SOLD BY THE ASS ESSEE TO TIANJIN INDIA AND THE DISPUTE WAS ABOUT THE VALUATION OF THE SALE PRICE A ND THE MRP WAS ALTERED ONLY ON RETAIL PRODUCTS WHICH ARE SUBJECT TO MRP. THE LD . COUNSEL FURTHER EXPLAINED THAT THE CALCULATION MADE BY DRI FOR THE FINANCIAL YEAR 2008-09 (RELEVANT TO AY 2009-10) AND CONTENDED THAT FOR THE PRODUCTS ON WH ICH MRP WAS ALTERED THE TOTAL REVISED MRP WORKED OUT BY DRI WAS RS.40.90 CR ORES AND THE EARLIER REPORTED MRP OF SUCH PRODUCTS WAS RS.13.86 CRORES. ACCORDINGLY THE VARIANCE IN MRP WAS ONLY ABOUT RS.27 CRORES AND THE UNDECLAR ED SALES WORKED OUT BY THE AO WAS RS.42.67 CRORES WHICH WAS MUCH MORE THAN THE MRP WORKED OUT BY THE DRI. THE PRECISE CONTENTION WAS THAT THE AO HAD ARBITRARILY APPLIED THE 15 DIFFERENTIAL OF MRP OF THREE MOST EXPENSIVE PRODUCT S TO COMPARE 8 83 618 UNITS OF 83 KIND OF PRODUCTS EVEN THOUGH ALL PRODUCTS WER E NOT IN DISPUTE WITH THE CUSTOMS. THE LD. COUNSEL PLACED ABOVE ARGUMENT WITH OUT PREJUDICE TO THE STAND EARLIER STAND OF THE ASSESSEE THAT MRP HAD NO RELEV ANCE FOR INCOME TAX PURPOSES. 23. THE LD. COUNSEL POINTED OUT THAT THE DRP HAD RE MANDED THE MATTER TO THE AO WITH DIRECTIONS TO AFFORD THE ASSESSEE ANOTHER O PPORTUNITY TO PRODUCE BOOKS OF ACCOUNTS. DURING REMAND PROCEEDINGS THE ASSESSE E DID PRODUCE BOOKS OF ACCOUNTS BEFORE THE AO AND HE WAS COMPLETELY SATISF IED WITH THE BOOKS OF ACCOUNTS (PAPER BOOK PAGE 415-416). ACCORDING TO TH E LD. COUNSEL THERE HAS BEEN BIAS AGAINST THE ASSESSEE WHICH IS EVIDENT FRO M THE FACT THAT THE AO PREPARED TWO CONTRADICTORY REMAND REPORTS IN THIS C ASE WHICH WAS DISCOVERED BY THE CHARTERED ACCOUNTANT OF THE ASSESSEE DURING THE COURSE OF INSPECTION OF ASSESSMENT RECORD. THE LD. COUNSEL HAS DRAWN OUR AT TENTION TOWARDS PAPER BOOK PAGE NO. 415 & 416 AND SUBMITTED THAT IN THE FIRST REMAND REPORT THE AO MENTIONS THAT HE HAD EXAMINED THE BOOKS OF ACCOUNTS ON TEST CHECK BASIS AND FOUND NOTHING ADVERSE. THEN HE HAS FURTHER DRAWN O UR ATTENTION TOWARDS PAPER BOOK PAGE 430-433 AND CONTENDED THAT THE SECOND REM AND REPORT WAS PREPARED AND ACTUALLY SENT TO THE DRP WHICH IS COMPLETELY DI FFERENT FROM THE FIRST REPORT AND IN THE SECOND REMAND REPORT THE AO HAD COMPLETELY TAKEN A U-TURN AND GONE AGAINST THE ASSESSEE WHEREIN THE AO STATED THAT ASSESSEE DID NOT PRODUCE BOOKS OF ACCOUNT EVEN AFTER REPEATED OPPORTUNITIES DURING DRAFT ASSESSMENT PROCEEDINGS A ND THEREFORE ADDITIONAL EVIDENCES DESERVE TO BE REJECTED. THE INITIAL REMAND REPORT DATED 22.10.2013 IS AVAILABLE ON PAGES 16 41 5 TO 416 OF PAPER BOOK-IV AND SECOND REMAND REPORT IS AVAILABLE AT PAGES 430- 430 OF THE SAME PAPER BOOK. 24. LD. COUNSEL FURTHER SUBMITTED THAT THE DRP ERRE D IN LAW IN INCREASING THE QUANTUM OF SALES AS PER ACCOUNTS TO TIANJIN INDIA B Y FURTHER ADDING THE DIFFERENCE BETWEEN THE MRP DECLARED EARLIER AND ALT ERED MRP DESPITE THE FACT THAT THE DRP HAS NOT RAISED ANY DISPUTE TO THE FIND ING OF FACT BY THE TPO IN PARA 3 OF HIS REMAND REPORT DATED 18.11.2013 WHEREIN IT HAS BEEN HELD THAT AFTER TAKING INTO ACCOUNT THE DIFFERENCE IN CUSTOM DUTY I F PAID ORIGINALLY TO TRANSACTION WOULD BE AT ARMS LENGTH. LD. COUNSEL VEHEMENTLY CONTENDED THAT THE AO AND DRP HAVE FAILED TO APPRECIATE THAT THE M RP WHETHER ORIGINALLY DECLARED OR THE ALTERED ONE OF THE PRODUCTS SOLD BY THE ASSESSEE TO TIANJIN INDIA HAS NO NEXUS AND IMPACT THE ACTUAL PRICE CHARGED F ROM TIANSHI INDIA. 25. ON THE ISSUE OF MRP LD. DR REPLIED THAT THE ULTIMATE SALES EFFECTED BY TIANJIN INDIA TO THE ULTIMATE CUSTOMER WAS MADE ON MRP WHICH WAS ALTERED BY THE ASSESSEE IN INDIA AND THEREFORE THE MRP IS RE LEVANT AND HAS IMPACT ON THE ACTUAL PRICE CHARGED BY THE ASSESSEE FROM TIANSHI I NDIA. LD. DR FAIRLY ACCEPTED THAT THE TPO IN PARA 3 OF HIS REMAND REPORT DATED 1 8.11.2013 HAS CONCLUDED THAT AFTER TAKING INTO CONSIDERATION THE DIFFERENCE IN C USTOM DUTY IF PAID ORIGINALLY THE TRANSACTION WOULD BE AT ARMS LENGTH. 26. APROPOS THESE GROUNDS LD. COUNSEL APPEARING FOR THE ASSESSEE POINTED OUT UNDISPUTED FACTS AND THE LD. DR HAS FAIRLY ACCEPTED THE SAME AS UNDISPUTED WHICH MAY BE SUMMARISED AS UNDER:- 17 I) M/S TIANJIN TIANSHI BIOLOGICAL DEVELOPMENT COMPANY LTD. IS A COMPANY INCORPORATED UNDER THE LAWS OF PEOPLES REP UBLIC OF CHINA WHICH IS PRIMARILY ENGAGED IN THE MANUFACTURING AND SALE OF FOOD SUPPLEMENTS AND HEALTH CARE EQUIPMENTS. NON-RESIDE NT COMPANY OPERATES AND MARKETS ITS PRODUCTS IN THE INDIAN MAR KET THROUGH ITS BRANCH OFFICE IN INDIA WHICH STARTED OPERATIONS IN THE YEAR 2000. THE SAID BRANCH OFFICE IS INDEPENDENTLY A PE UNDER INDO CHINA TAX TREATY WHOSE INCOME FROM BUSINESS IN INDIA IS OFFERED TO T AX. THE ASSESSEE SELLS THE GOODS IMPORTED BY IT EXCLUSIVELY TO ITS S UBSIDIARY I.E. TIANJIN TIANSHI INDIA PRIVATE LIMITED. THE ASSESSEE COMPAN Y GROUP DOES NOT UNDERTAKE ANY RETAIL SELLING AND FOLLOWS THE MARKET ING MODEL OF MULTI LEVEL MARKETING MODEL AND THERE ARE NO RETAIL OUTLE TS FOR SALE OF ASSESSEES PRODUCTS IN INDIA. THE NETWORK MARKETIN G IS BASED ON WORD OF MOUTH AND INDEPENDENT CANVASSING BY DISTRIBUTORS OF THE ASSESSEE COMPANY. ABOUT THE FUNCTIONAL MARKETING MODEL OF T HE ASSESSEE THE REVENUE AUTHORITIES HAVE NOT DISPUTED THE FLOW OF S ALES OF GOODS FROM ASSESSEE COMPANY TO ITS INDIA BRANCH OFFICE INDIA BRANCH OFFICE TO ITS WHOLLY OWNED SUBSIDY WHOLLY OWNED SUBSIDY TO FRANC HISEES AND DISTRIBUTORS AND FRANCHISEES AND DISTRIBUTORS TO UL TIMATE CUSTOMER. FRANCHISEES AND DISTRIBUTORS PURCHASE THE PRODUCTS FROM TIANSHI INDIA AND RESELL THE ULTIMATE TO THE CUSTOMERS DIRECTLY. THE FRANCHISEES AND DISTRIBUTORS ARE ENTITLED TO PROFIT MARGIN ON RETAI L SALE AND ALSO UPON VARIOUS TYPES OF COMMISSION ON SALE. THIS MODEL HA S BEEN CARVED OUT 18 BY THE ASSESSEE COMPANY FOR THE PURPOSE OF SAVINGS ON EXPENDITURE AND THE HEAVY ADVERTISEMENT SHOW ROOM AND SALES IN COST INCLUDING OTHER RELATED DIRECT SELLING EXPENSES. FOR THE YEA R UNDER CONSIDERATION THE ASSESSEE COMPANY THROUGH ITS BRANCH OFFICE HAD BOOKED SALE OF RS. 31 44 97 241 AS PER PROFIT AND LOSS ACCOUNT (PAGE N O. 95 OF PAPER BOOK VOLUME 1) INCLUDING EXPORT SALE OF RS.23 80.720 AND INLAND SALES OF RS.31 21 16 521 IN INDIA WAS MADE BY THE ASSESSEE T O TIANJIN TIANSHI INDIA PRIVATE LIMITED WHICH IS 100% SUBSIDIARY OF T HE ASSESSEE COMPANY AND ALSO ITS SOLE DISTRIBUTOR IN INDIA. TI ANJIN INDIA IS ASSESSEES ASSOCIATED ENTERPRISE AS PER PROVISIONS OF SECTION 92A OF THE ACT. II) THAT THE SAID SALES TRANSACTION IS SUBJECT TO TRANS FER PRICING PROVISIONS AS CONTAINED IN CHAPTER I OF THE ACT AND THE SALES MADE BY THE ASSESSEE TO TIANSHI INDIA IS AN INTERNATIONAL TRANSACTION AS DEFINED IN SECTION 92B OF THE ACT. III) LD. COUNSEL OF THE ASSESSEE SUBMITTED THAT THE AO/D RP ERRED IN MAKING ADDITION BEING THE DIFFERENCE BETWEEN THE VA LUE OF MRP DECLARED TO CUSTOM AUTHORITIES AND THE VALUE OF MR P ALTERED BY IT ON ACCOUNT OF PRODUCTS SOLD BY IT TO THE INDIAN AE. L D. COUNSEL CONTENDED THAT THE AO AND THE DRP HAD FAILED TO APP RECIATE THAT THE CONCEPT OF MRP IS A LEGAL FICTION BEING CREATED FOR THE PURPOSE OF SECTION 4A OF THE EXCISE ACT R/W SECTION 3 OF THE C USTOMS AND RELEVANT PROVISIONS OF THE STANDARD WEIGHTS AND MEASURE ACT AND THE MRP HAS 19 NO APPLICATION UNDER THE INCOME TAX ACT TO THE IMPU GNED TRANSACTION WHERE THE ASSESSEE RECEIVES CONTRACTED CONSIDERED E VEN THOUGH IT MAY HAVE TO PAY IMPORT DUTY ON THE BASIS OF MAXIMUM RET AIL PRICE (MRP). LD. COUNSEL FURTHER CONTENDED THAT THE OBSERVATIONS OF THE DRP THAT THE ACCEPTANCE OF ALP BY THE TPO RELATES TO THE IMP ORT PRICE OF THE GOODS BY THE ASSESSEE BRANCH OFFICE IN INDIA AND DO ES NOT RELATE TO THE PRICE OF GOODS AT WHICH THE SAID GOODS HAVE BEEN SU BSEQUENTLY SOLD BY THE ASSESSEES INDIA BRANCH OF TIANJIN INDIA BECAU SE THE SAID DETERMINATION OF ALP IS OF NO RELEVANCE IN DECIDING THE ISSUE OF SUPPRESSED SALES BY THE ASESSEE AND THESE OBSERVATI ONS OF THE DRP ARE CONTRARY TO THE ORDER OF THE TPO AS WELL AS REMAND REPORT SUBMITTED BY THE TPO BEFORE THE DRP. 27. ON CAREFUL CONSIDERATION OF ABOVE WE RESPECTFU LLY NOTE THE RATIO OF THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF KJMS MOHD. 19 7 ITR 196(SC) AND COCA COLA EXPORT CORPORATION 231 ITR 200 (SC) WHEREIN IT HAS BEEN HELD THAT WHERE THE MEANING OF SPECIFIC TERMS USED HAS BEEN LEGISLATED WITH A DIFFERENT OBJECT IN THE OTHER STATUTORY PROV ISIONS THEN THE SAME CANNOT BE BLINDLY IMPORTED TO THE INCOME TAX ACT IN THE PRESE NT CASE. THE REVENUE AUTHORITIES PICKED UP MRP WHICH WAS USED BY CUSTOM AND EXCISE DEPARTMENT FOR THE PURPOSE OF LEVY OF ADDITIONAL CUSTOM DUTY O N THE ASSESSEE BUT THE SAME CANNOT BE USED FOR THE PURPOSE OF DETERMINATION OF AMOUNT OF SALE EFFECTED BY THE ASSESSEE IN INDIA THROUGH ITS 100% OWNED SUBSID IARY. THE MRP MAY BE 20 USEFUL FOR THE PURPOSE OF ESTIMATION OF SALES EFFEC TED BY THE FANCHISEES AND DISTRIBUTORS TO THE ULTIMATE CUSTOMERS BUT THE MRP CANNOT BE ACCEPTED TO ESTIMATE THE AMOUNT OF SALES EFFECTED BY THE ASSESS EE IN INDIA THROUGH ITS BRANCH OFFICE OR THROUGH ITS 100% OWNED SUBSIDIARY TIANJIN INDIA. HENCE THE ACTION OF THE REVENUE AUTHORITIES IN THIS REGARD IS NOT SUSTA INABLE. 28. LD. COUNSEL FOR THE ASSESSEE REITERATED THE BUS INESS MODEL OF THE TIANJIN GROUP WITH THE TIANSHI IN CHINA BEING ITS HEADQUART ERS IN CHINA HAS SET UP BRANCH OFFICES IN INDIA THE BRANCH OFFICE DEALS IN HEALTH/FOOD SUPPLEMENTS AND HEALTH EQUIPMENTS AND FURTHER SELL THEIR PRODUCTS T HROUGH MULTI LEVEL MARKETING MODEL. LD. COUNSEL FURTHER ACCEPTED THAT THE ASSES SEE I.E. BRANCH OFFICE OF THE ASSESSEE COMPANY IMPORT GOODS FROM TIANJIN CHINA AN D THEN SELLS IT TO ITS 100% SUBSIDIARY IN INDIA I.E. TIANJIN INDIA. 29. THE TIANJIN INDIA FURTHER SELLS IT TO DISTRIBUT ORS WHO IN TURN SELL IT TO CUSTOMERS AT MRP OR AT A PRICE WHICH COULD BE LESSE R THAN THE MRP. LD. COUNSEL FURTHER SUBMITTED THAT THERE IS ALWAYS A SC OPE OF DISCOUNT ON MRP AS AT EACH DISTRIBUTION CHAIN THE PRICES ARE NEGOTIABLE I N ACCORDANCE WITH THE MRP. LD. COUNSEL FURTHER STATED THAT IN THE SAID FLOW OF SALES FROM TIANJIN CHINA TO ULTIMATE CUSTOMER THE ASSESSEE COMPANY HAD MADE IM PORTS OF RS.9.64 CRORE AND SOLD THE SAME TO TIANJIN INDIA SOLE ALL INDIA DIS TRIBUTOR AT RS.31.34 CRORES AS THE TPO/AO ACCEPTED THE PURCHASE PRICE OF RS. 31.34 CRORE IN THE CASE OF TIANJIN INDIA. LD. COUNSEL FURTHER CONTENDED THAT IF THE AO ACCEPTED THAT THE ASSESSEES SALE WAS OF RS. 74 CRORE THEN TIANJIN I NDIA AUTOMATICALLY GOES INTO 21 LOSS BECAUSE AS PER REVENUE AUTHORITIES TIANJIN IN DIA IS SELLING THE GOODS AT RS.72 CRORE WHICH WOULD LEAD TO AN ABSURDITY. LD. COUNSEL VEHEMENTLY CONTENDED THAT THE VALUE OF PURCHASE IN THE CASE OF TIANJIN INDIA WAS ACCEPTED BY THE SAME TPO AND DRP. LD. COUNSEL SUBMITTED THA T IN THE CASE OF TIANJIN INDIA THE TPO APPLIED TNMM AND MADE ADJUSTMENT OF RS. 16 CRORE TO THE PURCHASES MADE FROM THE ASSESSEE. IF THE ORDER OF THE TPO IS BEING GIVEN EFFECT THEN IT WOULD RESULT THAT PURCHASES FROM THE ASSESS EE WERE ONLY OF RS. 15 CRORE AND THEREFORE THE DRP ACCEPTED THE OBJECTIONS FILE D BY TIANJIN INDIA AND DIRECTED THE TPO TO APPLY RPM METHOD AFTER WHICH PU RCHASES WERE ACCEPTED IN TOTO AT RS. 31.34 CRORE AS DECLARED BY TIANJIN INDI A. LD. COUNSEL HAS DRAWN OUR ATTENTION TOWARDS PAGE 262 TO 295 AND SUBMITTED THA T FINALLY IN THE CASE OF TIANJIN INDIA THE TPO HAS ACCEPTED THE INTERNATION AL TRANSACTION MADE BY THE ASSESSEE WITH TIANJIN INDIA TO BE IN CONFORMITY WIT H THE ALP. 30. LD. COUNSEL HAS FURTHER DRAWN OUR ATTENTION TOW ARDS THE FACT THAT THE DRP HAD CALLED A REMAND REPORT FROM THE TPO AND THE AO REFERRED THE MATTER TO THE TPO FOR FRESH CONSIDERATION OF THE ALP. LD. COUNSE L HAS DRAWN OUR ATTENTION TOWARDS REMAND REPORT OF THE TPO AND SUBMITTED THAT THE TPO HAS CONCLUDED THAT NEITHER THE ASSESSEE NOR THE TIANJIN INDIA ARE THE RETAILER BUT ARE ONLY SECOND AND THIRD RESPECTIVELY IN THE DISTRIBUTION CHAIN AN D THEREFORE THEY THEMSELVES DO NOT SELL THE PRODUCTS AT MRP. 31. REPLYING TO THE ABOVE CONTENTIONS THE DR SUPPO RTED THE ORDERS OF THE AUTHORITIES BELOW AND SUBMITTED THAT THE ALP IS OF NO RELEVANCE IN DECIDING THE 22 ISSUES OF SALES EFFECTED BY THE ASSSSEE IN INDIA. LD. DR HAS DRAWN OUR ATTENTION TO PARA 4.4.1 OF THE DRP AND SUBMITTED THAT IN SPIT E OF REPEATED REQUEST THE ASSESSEE DID NOT PRODUCE BOOKS OF ACCOUNTS BEFORE T HE AO DURING DRAFT ASSESSMENT PROCEEDINGS. HE FURTHER CONTENDED THAT THE ASSESSEE TOOK A STAND THAT THE BOOKS WERE MAINTAINED ON COMPUTER TELESYS TEM THEN WHY THE ASSESSEE COULD NOT PRODUCE THE SAME DESPITE SUFFICIENT AND R EPEATED OPPORTUNITIES BEING PROVIDED BY THE AO DURING THE DRAFT ASSESSMENT PROC EEDINGS. 32. THE DR FURTHER CONTENDED THAT THE AO HAS ALSO M ENTIONED IN THE REMAND REPORT THAT THE CUSTOM DUTY PAID ON THE REVISED MRP IN PURSUANCE TO THE DRI SEARCH HAS NOT BEEN ACCOUNTED BY THE ASSESSEE WHICH SHOWS THE ABSENCE OF DUE DILIGENCE IN RECORDING THE TRANSACTION EFFECTED BY THE ASSESSEE. LD. DR FURTHER SUBMITTED THAT THE AO AND DRP RIGHTLY OBSERVED THAT THE ASSESSEE FAILED TO SUBSTANTIATE THE FACT THAT THE DIFFERENTIAL MRP IN RESPECT OF ZINC CAPSULES CELL REJUVENATION CAPSULES CHEWABLE CALCIUM DID NOT RES ULT IN EXTRA PROFIT TO THE ASSESSEE. THE DR FURTHER CONTENDED THAT THE ASSESS EE HAS FAILED TO DEMONSTRATE AS TO HOW ABOVE INCREASE IN SALE PRICE HAS NOT RESU LTED IN ANY EXTRA PROFIT TO IT AND IF THERE WAS NO EXTRA PROFIT FOR THE ASSESSEE THEN WHAT WAS THE NEED TO INDULGE IN SUCH LARGE SCALE OF MRP STICKER IT WAS FOUND DURING THE DRI SEARCH OPERATION. 33. LD. DR ALSO CONTENDED THAT THE ASSESSEE HAS ADM ITTED TO THE LARGE SCALE SUPPRESSION OF MRP BEFORE THE CUSTOM AUTHORITIES AN D HAS PAID HUGE AMOUNT OF FINE AND PENALTY FOR THE SAME AND THEREFORE THE D RP WAS RIGHT IN AGREEING THAT 23 THE CONCLUSION OF THE AO THAT THE BOOK RESULTS OF T HE ASSESSEE REGARDING SALE ARE UNVERIFIABLE. THE DR FURTHER CONTENDED THAT THE AO HAD NO OPTION BUT TO COMPUTE THE AMOUNT OF SUPPRESSED SALE BY MULTIPLYIN G THE AVERAGE OF DIFFERENTIAL MRP TO THE QUANTUM OF GOODS SOLD AS PE R ASSESSEES FINANCIAL STATEMENTS. THE DR SUPPORTING THE ACTION OF THE AU THORITIES BELOW SUBMITTED THAT THE PROPOSED ACTION OF THE AO WITH REGARD TO T HE SUPPRESSED SALE DID NOT REQUIRE ANY INTERFERENCE BY THE DRP AND THEREFORE THE SAME WAS UPHELD. 34. ON CAREFUL CONSIDERATION OF ABOVE SUBMISSIONS WE OBSERVE THAT IN THE CASE OF TIANJIN CHINA I.E. HEADQUARTER OR PARENT C OMPANY THE TPO VIDE ITS ORDER DATED 18.1.2013 HAS HELD THAT NO ADVERSE INFE RENCE IS DRAWN IN RESPECT OF INTERNATIONAL TRANSACTION UNDERTAKEN BY THE ASSESSE E DURING FY 2008-09 PERTAINING TO THE AY 2009-10 WHICH IS ASSESSMENT YE AR UNDER CONSIDERATION. THE RELEVANT OPERATIVE PART OF THIS ORDER READS AS UNDER:- 2.2 THE GROUP IS PRIMARILY PROVIDING HIGH QUALITY HEALTH PRODUCTS FOR CONSUMERS GLOBALLY. TIENS IS THE BRAND NAME OF TIANSHI GROUP PRODUCTS THE FOOD SUPPLEMENTS MANUFA CTURED BY THE GROUP ARE UNIQUE IN CONSTITUTION OWNING TO THE IR FORMULATIONS FROM CHINESE HERBS AND THE HEALTH CARE EQUIPMENTS ARE INNOVATIONS COMBINING ANCIENT CHINE SE HEALTH THEORIES WITH DEVELOPMENTS IN SCIENCE AND TECHNOLOG Y THE MAJOR INTERNATIONAL TRANSACTIONS UNDERTAKEN BY ASSESSEE WITH ITS AE AND DURING THE F.Y 2008-09 ARE AS UNDE R; 24 S.NO. NATURE OF TRANSACTION METHOD SELECTED VALUE OF TRANSACTIONS 1 PURCHASE OF FOOD SUPPLEMENTS AND HEALTH EQUIPMENT TNMM 9 64 49 953 2 SALE OF FOOD SUPPLEMENTS HEALTH EQUIPMENTS AND BUSINESS KITS TNM 31 34 13 859 3 FREIGHT RECOVERY AT COST 1 93 830 4. THE TRANSFER PRICING DOCUMENTATION WHICH CONTAINS THE FUNCTIONAL AND ECONOMIC ANALYSIS OF C OMPARABLES AND OF ASSESSEE HAS BEEN EXAMINED AND PLACED ON RE CORD. 5. IN VIEW OF THE FUNCTIONAL AND ECONOMIC ANALYSIS OF ASSESSEE AND OF COMPARABLES NO ADVERSE INFERENCE I S DRAWN IN RESPECT OF THE INTERNATIONAL TRANSACTIONS UNDERTAKE N BY THE ASSESSEE DURING THE F.Y 2008-09. 33. WE FURTHER OBSERVE THAT IN THE CASE OF TIANJIN INDIA THE TPO VIDE ITS ORDER DATED 22.1.2013 DIRECTED THE AO TO REDUCE RS.16 73 35 606 FROM THE PURCHASE PRICE PAID BY THE ASSESSEE TO ITS AE I.E. RELATED PARTY. BUT WE ALSO OBSERVE THAT THIS ORDER DATED 22.1.13 WAS FURTHER RECTIFIED U/S 154 OF THE ACT AND THE TPO CONCLUDED THAT THE PRICE PAID BY THE ASSESSEE F OR PURCHASES TO ITS ASSOCIATED ENTERPRISES BEING LOWER THAN THE ALP WORKED OUT IN ACCORDANCE WITH RULE 10B(1)(B) OF THE INCOME TAX RULES 1962. NO ADJUSTMENT IS REQUIRED IN THIS REGARD. RELEVANT OPERATIVE PART OF THIS ORDER AT PAGE 298 OF THE PAPER BOOK OF THE ASSESSEE READS AS UNDER:- THE ASSESSEE HAS PAID RS.31 10 33 139 FOR PURCHAS ES MADE FROM ITS AES AS AGAINST RS.35 29 83 970 WHICH IS THE ALP WORKED OUT IN ACCORDANCE WITH RULE 10B(1)(B). THE PRICE PAID BY ASSESSEE FOR PURCHASES BEING LOWER THAN THE ALP WORKED OUT AS ABOVE NO ADJUSTMENT ON THIS ACCOUNT IS BEING MADE. 35. AT THIS JUNCTURE WE MAY TAKE COGNIZANCE OF THE DECISION OF SPECIAL BENCH AS RELIED BY THE ASSESSEE IN THE CASE OF AZTE C SOFTWARE & TECH. LTD. VS ACIT (2007) 107 ITD 200 (BANG.)(SB) WHEREIN SPEAKIN G FOR THE SPECIAL BENCH IT WAS HELD THAT PRIOR TO THE SUB-SECTION 4 OF SECTION 92CA OF THE ACT THE 25 ORDER OF THE TPO WAS NOT BINDING ON THE ASSESSEE BU T THIS HAS BEEN MODIFIED W.E.F. 1.6.2007 AND THEREAFTER THE ORDER OF THE TPO IS BINDING ON THE AO WHO NOW HAS NO CHOICE BUT TO PASS AN ORDER IN CONFORMIT Y WITH THE ORDER OF THE TPO. THE RELEVANT OPERATIVE PART OF THE ORDER OF THE SPE CIAL BENCH (SUPRA) AT PAGE 206 AND 207 READS AS UNDER:- IT IS CLEAR FROM ABOVE THAT DECISION OF SUPREME CO URT IN THE CASE OF RAJESH KUMAR (SUPRA) ITSELF INDICATE THAT W ORDS 'HAVING REGARD TO' SUGGEST THAT ASSESSMENT IS TO BE MADE HA VING REGARD TO THE REPORT OF THE TPO WHICH IS REQUIRED TO BE CO NSIDERED WITH OTHER RELEVANT MATERIAL AVAILABLE ON RECORD. THERE IS NOTHING TO SUGGEST THAT TPO'S REPORT ON TR ANSFER PRICING IS CONCLUSIVE AND DEBARS ASSESSING OFFICER FROM LOOKING AT ANY OTHER MATERIAL. THE AFORESAID CONCLUSION IS ALSO IN LINE WITH LATES T CHANGE MADE IN SECTION 92C BY THE LEGISLATURE THROUGH THE FINAN CE ACT 2007. SUB-SECTION (4) OF SECTION 92CA HAS BEEN SUBS TITUTED WITH THE FOLLOWING SUB-SECTION W.E.F. 1.6.2007: [(4) ON RECEIPT OF THE ORDER UNDER SUB-SECTION (3) THE ASSESSING OFFICER SHALL PROCEED TO COMPUTE THE TOTAL INCOME O F THE ASSESSEE UNDER SUB-SECTION (4) OF SECTION 92C IN CO NFORMITY WITH THE ARM'S LENGTH PRICE AS SO DETERMINED BY THE TRANSFER PRICING OFFICER] 53. NOW WORDS 'HAVING REGARD TO' HAVE BEEN REPLACED BY WORDS 'IN CONFORMITY WITH'. SO NOW ASSESSING OFFICER AFTE R INTRODUCTION OF SUBSECTION (4) ABOVE IS REQUIRED TO PASS ASSESSMENT ORDER IN CONFORMITY WITH THE ORDER OF TH E TRANSFER PRICING OFFICER DETERMINING ARM'S LENGTH PRICE. NOW THE ORDER OF THE TPO HAS BEEN EXPRESSLY MADE BINDING ON THE A SSESSING OFFICER. FROM THE ABOVE IT IS CLEAR THAT THERE WAS A LACUNA IN THE ACT AS APPROPRIATE LANGUAGE WAS NOT USED EARLIE R. THIS HAS BEEN MODIFIED AND W.E.F. 1.6.2007 THE ORDER OF TPO IS BINDING ON THE ASSESSING OFFICER WHO NOW HAS NO CHOICE BUT TO PASS AN 26 ORDER IN CONFORMITY WITH THE ORDER OF THE TPO. THE WORD 'HAVING REGARD TO' DID NOT CONVEY THE SAME MEANING. FOR ALL THE AFORESAID REASONS WE HOLD THAT PRIOR TO SUBSTI TUTION OF SUB- SECTION (4) BY A NEW SECTION THE ORDER OF THE TPO WAS NOT BINDING ON THE ASSESSING OFFICER. 36. LD. DR SUBMITTED A REJOINDER AND HAS DRAWN OUR ATTENTION TOWARDS PARA 4.5 OF THE IMPUGNED ORDER OF THE DRP AND SUBMITTED THAT THE DETERMINATION OF ALP BY THE TPO IS OF NO RELEVANCE IN DECIDING THE I SSUE OF ALLEGED SUPPRESSED SALE BY THE ASSESSEE. THE LD. COUNSEL CONTENDED TH AT IN VIEW OF DECISION OF SPECIAL BENCH IN THE CASE OF AZTEC SOFTWARE & TECH. LTD. VS ACIT (SUPRA) THE AO IS DUTY BOUND TO PASS ORDER IN CONFORMITY WITH T HE ORDER OF THE TPO. THE ASSESSMENT CANNOT BE MADE BEYOND THE AMBIT OF THE O RDER OF THE TPO. 37. IN VIEW OF ABOVE RIVAL CONTENTIONS AND SUBMISSI ONS WE RESPECTFULLY FOLLOW THE RATIO LAID DOWN BY THE SPECIAL BENCH IN THE CASE OF AZTEC SOFTWARE & TECH. LTD. VS ACIT (SUPRA) WHEREIN IT HAS BEEN HELD THAT THE AO DOES NOT HAVE ANY WAY OUT BUT TO ACCEPT THE VALUE OF THE INTERNAT IONAL TRANSACTION BETWEEN THE ASSESSEE AND ITS ASSOCIATED ENTERPRISE IN CONFORMIT Y WITH THE VALUE DETERMINED BY THE TPO FOR THE POST AMENDMENT SECTION 92CA(IV) W.E.F. 1.6.2007. THE PRESENT CASE IS RELATED TO AY 2009-10 WHICH RELATES TO FY 2008-09 AND OBVIOUSLY THE RATIO LAID DOWN BY THE SPECIAL BENCH IN THE CASE OF AZTEC SOFTWARE & TECH. LTD. VS ACIT (SUPRA) IS SQUARELY A PPLICABLE IN THE PRESENT CASE. WE ALSO NOTE THAT THE TPO VIDE ITS ORDER DAT ED 18.1.2013 HAS HELD THAT THE TRANSFER PRICING DOCUMENTATION WHICH CONTAINS FUNCT IONAL AND ECONOMICAL ANALYSIS OF THE COMPARABLES OF THE ASSESSEE SHOWS T HAT NO ADVERSE INFERENCE MAY 27 BE DRAWN IN RESPECT OF INTERNATIONAL TRANSACTION U NDERTAKEN BY THE ASSESSEE WITH ITS BRANCH OFFICE IN INDIA AND FROM BRANCH OFFICE T O 100% OWNED SUBSIDIARY COMPANY TIANJIN INDIA. WE FURTHER NOTE THAT THE TP O THROUGH ITS ORDER DATED 28.2.2014 PASSED U/S 154 OF THE ACT RECTIFYING THE DRP ASSESSMENT ORDER DATED 26.12.2013 HAVE HELD THAT THE ASSESSEE PAID RS.31 1 0 33 139/- FOR THE PURCHASES MADE FROM ITS AE AS AGAINST RS. 35 29 83 970/- WHIC H IS THE ALP WORKED OUT IN ACCORDANCE WITH RULE 10B(1)(B) OF THE ACT AND THE P RICE PAID BY THE ASSESSEE FOR PURCHASES BEING LOWER THAN THE ALP WORKED OUT T HEREIN NO ADJUSTMENT ON THIS ACCOUNT IS BEING MADE. THUS WE FURTHER HOLD THAT THE AO/DRP IS DUTY BOUND TO PASS AN ORDER IN THIS REGARD IN CONFORMITY WITH THE VALUE DETERMINED BY THE AO AND THE PROVISIONS OF THE ACT DO NOT ALLOW T HIS AUTHORITY TO TAKE A DIFFERENT STAND OR VIEW AGAINST THE ORDER OF THE TP O. FROM THE ORDER OF THE DRP WE ALSO OBSERVE THAT IN PARA 4.4 THE DRP HAS HELD THAT THE DETERMINATION OF ALP BY THE TPO IS OF NO RELEVANCE IN DECIDING THE I SSUE OF SUPPRESSED SALE BY THE ASSESSEE. WE ALSO NOTE THAT THE SALES SHOWN BY THE ASSESSEE TO TIANJIN INDIA HAS BEEN ACCEPTED BY THE AO IN THE CASE OF PURCHASE R I.E. TIANJIN INDIA HENCE THE SALES MADE BY THE ASSESSEE CANNOT BE DISTURBED BY BASELESS ESTIMATION IN THE NAME OF SUPPRESSED SALES AS WRONGLY ALLEGED BY THE REVENUE. 38. COMING TO THE ISSUE OF ALLEGED SUPPRESSED SALE BY THE ASSESSEE WE OBSERVE THAT THE AO PREPARED RE MAND REPORT DATED 22.10.2013 (PAPER BOOK IV PAGE 415-416 ) WHEREIN THE AO REPORTED TO THE DRP THAT ON VERIFI CATION OF BOOKS OF ACCOUNTS NOTHING ADVERSE HAS BEEN FOUN D (LAST LINE AT PAGE 416). WE FURTHER OBSERVE THAT IN THE REMAND REPORT DATED 26.11.2013 (PAPER BOOK VOLUME I V PAGE 430-433) WE OBSERVE THAT THE AO HAS TAKE N A U TURN FOR THE EARLIER CONCLUSION OF THE REPORT DATED 22.10.2013 AND HAS MENTIONED THAT THE B OOKS OF 28 ACCOUNTS PRODUCED BY THE ASSESSEE CANNOT BE ACCEPTE D AND RELIANCE CANNOT BE TAKEN INTO ACCOUNT. THE RELEVANT OPERATIVE PART OF THIS REMAND REPORT IS BEING REPRODUCED FOR THE SAKE OF CLARITY IN OUR FINDINGS WHICH READS AS UNDER:- ON PERUSAL OF NOTE SHEET ENTRIES QUESTIONNAIRE U/ S 142(1) ISSUED ON 17 .08.2011 AND 10.10.2012 AND THE FACTS GIVEN IN THE ASSESSMENT ORDER IT IS SEEN THAT THE CONTENTION OF THE ASSESSEE IN THIS REGARD IS NOT CORRECT AS SUFFICIENT OPPORT UNITY HAS BEEN AFFORDED TO THE ASSESSEE FOR PRODUCING BOOKS OF ACC OUNTS. IN ORDER TO SUBSTANTIATE COPY OF QUESTIONNAIRE U/S 14 2(1) ISSUED ON17.08:2011 AND 10.10.2012 IS ENCLOSED HEREWITH WH ICH CLEARLY INDICATE THAT THE ASSESSEE WAS ASKED TO PRO DUCE THE BOOKS OF ACCOUNTS MUCH BEFORE THE DATE AS MENTIONED BY THE ASSESSEE BEFORE THE HON'BLE DRP I.E. 25.03.2013. T HEREFORE THE ASSESSEE'S COMMUNICATION TO DRP-II ABOUT DIREC TION TO PRODUCE BOOKS OF ACCOUNTS ON 25.03.2013 IS INCORREC T AND MISREPRESENTATION OF THE FACTS. BESIDES IT IS ALSO SEEN THAT NOTHING NEW HAS BEEN INCORPORATED BY THE ASSESSEE. BEFORE THE HONBLE DRP ON THIS GROUND ACCEPT MISREPRESENTING THE FACTS. FURTHER THOUGH THE BOO KS OF ACCOUNTS I.E. CASH BOOK BANK BOOK EXPENSE LEDGER SALES REGISTER; STOCK REGISTER & VOUCHERS ABOVE RS. 50 00 0/- HEAD WISE FOR INDIRECT EXPENSES HAS BEEN PRODUCED BUT TH ERE IS NO REASON FOR ADMITTANCE OF THESE EVIDENCES AT THIS ST AGE AS THE ASSESSEE HAS NOT GIVEN ANY REASON WHICH PREVENTED A SSESSEE TO PRODUCE THE BOOKS OF ACCOUNTS AT THE TIME OF ASSESS MENT PROCEEDINGS ALSO THE GENUINENESS OF THE EXPENDITU RES INCURRED BY THE ASSESSEE CANNOT BE VERIFIED IN THIS SHORT S PAN OF TIME. IN VIEW OF THE SAME THE BOOKS OF ACCOUNTS PRODUCED BY THE APPLICANT BEFORE THE UNDERSIGNED CANNOT BE ACCEPTED AND RELIANCE CANNOT BE TAKEN INTO ACCOUNT AT THIS STAGE . 3 9. IN VIEW OF ABOVE WE OBSERVE THAT THE AO TOOK A VERY CONTRADICTORY VIEW IN TWO REMAND REPORTS AS WE NOTE THAT IN THE FIRST REMAND REPORT DATED 22.10.2013 THE AO MENTIONED THAT ON VERIFICATION O F BOOKS OF ACCOUNTS NOTHING ADVERSE HAS BEEN FOUND. ON THE OTHER HAND IN THE SUBSEQUENT REMAND 29 REPORT DATED 26.11.2013 WHICH WAS ACTUALLY SENT TO THE DRP THE AO REJECTED THE BOOKS OF ACCOUNTS OF THE ASSESSEE AND HELD THAT THE GENUINENESS OF THE EXPENDITURE INCURRED BY THE ASSESSEE CANNOT BE VERI FIED IN THIS SHORT SPAN OF TIME AND THE ASSESSEE HAS NOT GIVEN ANY REASON WHIC H PREVENTED THE ASSESSEE TO PRODUCE THE BOOKS OF ACCOUNTS AT THE TIME OF DRAFT ASSESSMENT PROCEEDINGS. THIS APPROACH OF THE AO IS NOT ACCEPTABLE AND JUSTI FIABLE IN VIEW OF OUR CONCLUSION REGARDING GROUND NO. 4 OF THE ASSESSEE WHICH HAVE BEEN ADJUDICATED IN FAVOUR OF THE ASSESSEE. 40. TURNING TO THE ISSUE OF ALLEGED SUPPRESSED SA LE BY THE ASSESSEE AFTER CAREFUL CONSIDERATION OF WRITTEN SUBMISSIONS AND AR GUMENTS PLACED BY BOTH THE BOTH SIDES AT THE OUTSET WE OBSERVE THAT THE DRP HELD THAT THE DETERMINATION OF ALP IS OF NO RELEVANCE IN DECIDING THE ISSUE OF SUP PRESSED SALE BY THE ASSESSEE AND WENT ON TO ESTIMATE THE VALUE OF SUPPRESSED SAL E ON ACCOUNT OF DIFFERENCE BETWEEN THE VALUE OF MRP DECLARED TO THE CUSTOM AUT HORITIES AND MRP ALTERED ON THE PRODUCTS SOLD TO THE TIANJIN INDIA. AT THE COST OF REPETITION WE REITERATE OUR ABOVE NOTED OBSERVATION THAT THE LEGAL FICTION CREATED BY THE CENTRAL EXCISE ACT AND THE CUSTOMS ACT PROVIDES A MEASURE FOR LEVY OF EXCISE/CUSTOM DUTY WHICH CANNOT BE FOLLOWED OR IMPORTED TO THE INCOME TAX ACT. IN VIEW OF DECISION OF HONBLE APEX COURT IN THE CASE OF KTMS MOHD. (SUPRA) AND COCA COLA EXPORT CORPORATION (SUPRA) THE MEANING OF MRP IN CENTRAL EXCISE & CUSTOMS ACT HAVE BEEN LEGISLATED WITH A DIFFERENT O BJECT TO EVALUATE AND 30 CALCULATE EXCISE AND CUSTOM DUTY WHICH CANNOT BE BL INDLY IMPORTED FOR PROVISIONS OF INCOME TAX ACT. 41. ON THIS ISSUE WE ALSO RESPECTFULLY TAKEN NOTE OF THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF ITC LTD. VS CCE (2004 ) 7 SCC 591 WHEREIN THEIR LORDSHIPS HAVE HELD THAT A LEGAL FICTION HAS BEEN CREATED FOR PRESCRIBING THE MEASURE FOR THE PURPOSES OF LEVY OF CUSTOM DUTY ON THE MANUFACTURER AND THE DEEMED VALUE OF SALES TAKING MRP AS A BENCHMARK CAN NOT SUBSTITUTE THE REAL VALUE OF THE SALES FOR THE PURPOSE OF COMPUTING THE TAXABLE INCOME UNDER THE PROVISIONS OF THE ACT. WE MAY ALSO NOTE THAT THE M RP MAY BE THE MAXIMUM PRICE AT WHICH THE RETAILER OR A SHOP KEEPER ULTIMA TELY SELL THE PRODUCT TO THE CONSUMERS BUT THE DR HAS NOT DISPUTED THE POINT THA T THE ASSESSEES BRANCH OFFICE IN INDIA AND ASSESSEES 100% SUBSIDIARY COMP ANY I.E. TIANJIN INDIA IS NOT RETAILER OR SHOP KEEPER WHO SELL THE PRODUCT TO THE ULTIMATE CUSTOMER BUT THEY ARE SECOND AND THIRD STAGE ENTITY IN THE CHAIN OF M ULTI LEVEL MARKETING OF THE TIANJIN GROUP WHEREIN THE ASSESSEE THROUGH IT BRANC H OFFICE MAKES SALES TO ITS 100% OWNED SUBSIDIARY I.E. TIANJIN INDIA WHO FURTHE R SELLS THE PRODUCT TO THE DISTRIBUTORS/FRANCHISEES/SHOPKEEPERS AND THE PRICE OF THIS SECOND AND THIRD LEVEL SALES IS ALWAYS NEGOTIABLE WHICH CANNOT BE EQUATED WITH THE MRP BY ANY STRETCH OF IMAGINATION. 42. FROM THE OPERATIVE PART OF THE ORDER OF THE DRP PASSED U/S 144C(5) OF THE ACT WE OBSERVE THAT THE DRP ALLEGED THAT THE ASSES SEE DID NOT PRODUCE THE BOOKS OF ACCOUNTS BEFORE THE AO AND AS PER REMAND R EPORT DATED 22.10.2013 31 AND 26.11.2013 WE DECLINE TO ACCEPT THIS ALLEGATIO N OF THE DRP AGAINST THE ASSESSEE. FROM PARA 4.1 OF THE DRP AT PAGE 11 OF T HE IMPUGNED ORDER WE FURTHER OBSERVE THAT THE DRP HAS TAKEN THE BASIS OF THE REMAND REPORT OF THE AO WHEREIN IT HAS BEEN MENTIONED THAT THE CUSTOM DUTY PAID ON THE REVISED MRP AS PER DRIS SEARCH HAS NOT BEEN ACCOUNTED BY THE ASSE SSEE. BUT THE TPO IN ITS ORDER DATED 18.1.2013 HAS MENTIONED THAT EVEN AFTER TAKING INTO ACCOUNT THE REVISED TOTAL EXPENDITURE WITH 2.58 CRORE DIFFEREN TIAL CUSTOM DUTY THE REVISED OPERATIVE PROFIT IN THIS SCENARIO WOULD WORK OUT TO RS. 5.05 CRORE AND AFTER CONSIDERING THE PAYMENT OF DIFFERENTIAL CUSTOM DUTY THERE WOULD NOT BE ANY IMPACT ON THE ALP DETERMINED BY THE TPO. 43. FROM A CAREFUL READING OF THE OPERATIVE PART OF THE DRP WE NOTE THAT THE DRP HAS NOTICED DIFFERENTIAL MRP OF ONLY THREE PROD UCTS I.E. ZINC CAPSULES CELL REJUVENATION CALCIUM TABLETS AND THE DRP FURTHER A DOPTED AVERAGE OF DIFFERENTIAL OF THESE THREE ITEMS AND APPLIED THE S AME TO THE 83 PRODUCTS OF WHICH 883618 UNITS WERE SOLD BY THE ASSESSEE IN IND IA. LD COUNSEL FOR THE ASSESSEE ON THIS POINT HAS DRAWN OUR ATTENTION TOWA RDS PAGES 535 TO 537 OF PAPER BOOK V OF THE ASSESSEE AND SUBMITTED THAT ONL Y SOME OF THE PRODUCTS WERE INVOLVED IN THE CASE WHERE MRP WAS ENTERED AND THE LIST OF SUCH PRODUCTS WAS PROVIDED AS PART OF CHART AND IT WAS ALSO SUBMI TTED THAT THE REVENUE HAS NOT DISPUTED THE QUANTITY OF THE PRODUCTS AS STATED TO BE SOLD BY THE ASSESSEE TO TIANJIN INDIA. 32 44. LD. COUNSEL FURTHER CONTENDED THAT THE ADDITION MADE BY THE DRP AND AFFECTED BY THE AO WAS BASED ON THE MRP WHICH HAS N O RELEVANCE FOR THE PURPOSE OF QUANTIFICATION OF SALES ADOPTED EITHER B Y THE ASSESSEE THROUGH ITS BRANCH OFFICE OR BY TIANJIN INDIA TO THE DISTRIBUTO RS/RETAILERS/SHOPKEEPERS. LD. COUNSEL FURTHER SUBMITTED THAT THE CALCULATION MADE BY DRP FOR THE PURPOSE OF QUANTIFICATION OF CUSTOM DUTY HAS NO RELEVANCE TO T HE ACTUAL VALUE OF SALE EFFECTED BY THE ASSESSEE TIANJIN INDIA TO THE DISTR IBUTORS/FRANCHISEES. LD. COUNSEL FURTHER CONTENDED THAT FOR THE PRODUCTS ON WHICH MRP WAS ALTERED A TOTAL REVISED MRP WORKED OUT BY THE DRP WAS RS.40.9 0 CRORE AND THE EARLIER REPORTED MRP OF SUCH PRODUCTS WAS RS.13.86 CRORE. ACCORDINGLY THE DIFFERENTIAL AMOUNT IN MRP WAS OF RS. 27 CRORE WHIC H WAS CALCULATED FOR THE PURPOSE OF LEVY OF EXCISE/CUSTOM DUTY AND WHICH HAS NO RELEVANCE TO THE CALCULATION OF ACTUAL SALE EFFECTED BY THE ASSESSEE THROUGH ITS BRANCH TO TIANJIN INDIA AND FROM TIANJIN INDIA TO SUBSEQUENT DISTRIBU TORS/STOCKISTS/FRANCHISEES. LD. COUNSEL ALSO CONTENDED THAT THE REVENUE AUTHORI TIES HAVE NOT BROUGHT OUT ANY FACT WHICH COULD SUBSTANTIATE THE ALLEGATION OF THE REVENUE THAT THE ASSESSEE OR ITS BRANCH OFFICE IN INDIA OR ITS 100% OWNED SUB SIDIARY COMPANY TIANJIN INDIA SUPPRESSED THE ACTUAL VALUE OF SALES AT ANY S TAGE OF MULTI LEVEL MARKETING CHANNEL. LD. COUNSEL HAS DRAWN OUR ATTENTION AT PA GE 535 TO 537 OF THE PAPER BOOK V OF THE ASSESSEE AND SUBMITTED THAT THE AO AT SL. NO. 39 HAS ACCOUNTED 407300 CAPS OF BOTTLES WHICH HAVE BEEN INCLUDED IN THE UNITS OF TOTAL QUANTITY SOLD OF 883618 AND THE AVERAGE DIFFERENTIAL OF 483 AS NOTED BY THE AO IN PARA 11 AT PAGE 7 OF THE ASSESSMENT ORDER) CANNOT BE USE D FOR ESTIMATION OF AMOUNT 33 OF SUPPRESSED SALE ADOPTED BY THE ASSESSEE OR ITS 1 00% OWNED SUBSIDIARY COMPANY. ON THIS ISSUE THE DR FAIRLY ACCEPTED THA T THE BASIS OF CALCULATION ENVISAGED IN PARA 11 OF THE ASSESSMENT ORDER IS NOT EXPLICIT AND THE SAME IS INCLUSIVE OF 407300 CAPS OF BOTTLES AND SEVERAL OTH ER ITEMS OF SIMILAR KIND. 45. IN VIEW OF ABOVE DISCUSSION WE ARE INCLINED TO HOLD THAT THE DRP WAS NOT RIGHT IN KEEPING ASIDE THE REPORTS OF THE TPO WHICH APPROVED AND CONFIRMED THAT THE INTERNATIONAL TRANSACTION EFFECTED BY THE ASSESSEE AND ITS ASSOCIATES IN INDIA WAS IN CONFORMITY WITH THE COMPARABLES ADOPTE D FOR DETERMINATION OF ALP. THE AO/DRP PROCEEDED TO MAKE THE ADDITION BY E STIMATING THE SUPPRESSED SALE ADOPTED BY THE ASSESSEE BY MAKING E STIMATION. WE ALSO NOTE THAT FOR THE PURPOSE OF ESTIMATION OF ALLEGED SUPPR ESSED SALE THE AO PICKED UP THREE ITEMS AND THEIR AVERAGE DIFFERENTIAL WAS ADOP TED FOR THE PURPOSE OF QUANTIFICATION OF ALLEGED SUPPRESSED SALE. FOR FIN AL CALCULATION THE AO CONSIDERED THE QUANTITY OF 883618 OF 83 VARIOUS PRO DUCTS SOLD BY THE ASSESSEE IN INDIA WHICH INCLUDES PETTY ITEMS OF VERY MINIMAL VA LUE SUCH AS CAP OF BOTTLES TIE PINS UMBRELLA BUTTONS CD CLOTH COVERS ETC. WE FURTHER NOTE THAT THE AO TOOK AVERAGE OF DIFFERENTIAL OF ONLY THREE VITAL IT EMS AND MULTIPLIED THE SAME TO THE TOTAL UNITS OF ALL 83 PRODUCTS I.E. 883618. T O THE BEST OF OUR UNDERSTANDING WE ARE UNABLE TO ACCEPT THE BASIS OF THE AO AND THE DRP AS NOTED ABOVE FOR QUANTIFICATION OF VALUE OF ALLEGED SUPPRESSED SALE OF THE ASSESSEE. 46. ON THE BASIS OF FOREGOING DISCUSSION WE REACH TO A LOGICAL CONCLUSION THAT THE ESTIMATION OF SUPPRESSED SALE MADE BY THE AO IN PARA 11 AT PAGE 7 OF 34 THE ASSESSMENT ORDER DATED 13.1.2014 IS NOT JUSTIFI ED COGENT AND ACCEPTABLE AND WE FURTHER HOLD THAT THE DRP WAS NOT RIGHT IN UPHOL DING THE DRAFT ASSESSMENT ORDER ON THIS ISSUE. THUS WE FIND IT APPROPRIATE TO SET ASIDE THE OBSERVATIONS FINDINGS AND CONCLUSION OF THE REVENUE AUTHORITIES ON THIS ISSUE AND WE SET ASIDE THE SAME. ACCORDINGLY GROUND NO. 1 2 2.1 2.2 2.3 AND 2.4 OF THE ASSESSEE ARE ALLOWED. GROUND NO. 6 47. GROUND NO. 6 OF THE ASSESSEE IS PREMATURE AND C ONSEQUENTIAL TO THE MAIN ISSUE AND WE DISMISS THE SAME WITHOUT ANY ADJUDICAT ION. ITA NO. 1117/DEL/2014 REVENUES APPEAL 48. THE GROUNDS RAISED BY THE REVENUE READ AS UNDER : 1. WHETHER ON THE FACTS AND IN CIRCUMSTANCES OF TH E CASE THE HONBLE DISPUTE RESOLUTION PANEL (DRP) HAS ERRED IN DIRECTING THE ASSESSING OFFICER TO DELETE THE PROPOSED ADDITION OF RS.92 65 306/- BEING 10% OF T HE TOTAL EXPENSES CLAIMED BY THE ASSESSEE PROPOSED TO BE DISALLOWED BY THE ASSESSING OFFICER ON ACCOUNT OF FAILURE OF THE ASSESSEE TO PRODUCE WITHOUT ANY REASONABLE CAUSE THE BOOKS OF ACCOUNTS AND VOUCHER S DESPITE REPEATED OPPORTUNITIES DURING THE COURSE OF THE DRAFT ASSESSMENT PROCEEDINGS. 1.1 WHETHER THE HONBLE DRP HAS ERRED IN HOLDING THAT T HE PROPOSED ADDITION OF RS.92 65 306/- WAS WITHOUT ANY RATIONAL BASIS NOT APPRECIATING THE FACT THAT THE ONUS WAS ON THE ASSESSEE TO SUBSTANTIATE THE CLAIM OF EXPENDITURE BY PRODUCING THE BOOKS OF ACCOUNTS & VOUCHERS AND IN THE ABSENCE OF THE BOOKS OF ACCOUNT S AND VOUCHERS ETC. THE ASSESSING OFFICER WAS JUSTIFI ED IN THE CIRCUMSTANCES OF THE CASE IN DISALLOWING A PART OF THE EXPENSES ON ESTIMATE BASIS. 35 1.2 WHETHER THE HONBLE DRP HAVING ONCE ACCEPTED THE FINDINGS OF THE AO THAT THE ASSESSEE HAD FAILED TO PRODUCE THE BOOKS OF ACCOUNTS & VOUCHERS DESPITE SUFFICIENT AND REPEATED OPPORTUNITIES DURING THE DR AFT ASSESSMENT PROCEEDINGS ERRED IN PROCEEDING TO HOLD THAT THERE WAS NO RATIONAL BASIS FOR THE PROPOSED ADDITION BY THE AO. 1.3 WHETHER THE HONBLE DRP FAILED TO APPRECIATE THE AO WAS JUSTIFIED IN MAINTAINING HIS STAND IN THE REMAN D PROCEEDINGS THAT IN THE ABSENCE OF REASONABLE CAUSE FOR FAILURE TO PRODUCE THE BOOKS OF ACCOUNTS & VOUCHERS DURING THE DRAFT ASSESSMENT PROCEEDINGS T HE SAME COULD NOT BE ADMITTED AND VERIFIED AT THE REMA ND STAGE AND THAT THE GENUINENESS OF THE EXPENSES WAS NOT AMENABLE TO VERIFICATION IN SUCH A SHORT SPAN OF TI ME. 1.4 WHETHER THE HONBLE DRP ERRED IN DIRECTING THE AO T O DELETE THE PROPOSED ADDITION ON ACCOUNT OF UNVERIFI ABLE EXPENSES ON THE GROUND THAT NOTHING ADVERSE IN RELATION TO THE EXPENSES CLAIMED BY THE ASSESSEE HA D COME TO LIGHT DURING THE PROCEEDINGS BEFORE THE DIRECTORATE OF REVENUE INTELLIGENCE (DRI) & CUSTOMS AUTHORITIES NOT APPRECIATING THE FACT THAT THE SCO PE OF THE ACTION TAKEN AGAINST THE ASSESSEE BY THE SAID AUTHORITIES WAS COMPLETELY DIFFERENT AND THAT NEITH ER THE QUANTUM NOR THE GENUINENESS OF BUSINESS EXPENSE S IS THE SUBJECT-MATTER FOR INQUIRIES IN THE PROCEEDI NGS BEFORE THESE AUTHORITIES. ITA NO.1117/DEL/2014 REVENUES APPEAL GROUND NO. 1 1.1 1.2 1.3 & 1.4 OF THE REVENUE 49. APROPOS AFOREMENTIONED GROUNDS OF THE REVENUE LD. DR SUBMITTED THAT THE DRP HAS ERRED IN DIRECTING THE AO TO DELETE THE PROPOSED ADDITION OF RS.92 65 306/- BEING 10% OF THE TOTAL EXPENSES CLAI MED BY THE ASSESSEE PROPOSED TO BE DISALLOWED BY THE AO ON ACCOUNT OF F AILURE OF THE ASSESSEE TO PRODUCE WITHOUT ANY REASONABLE CAUSE THE BOOKS OF ACCOUNTS AND VOUCHERS 36 DESPITE REPEATED OPPORTUNITIES DURING THE COURSE OF THE DRAFT ASSESSMENT PROCEEDINGS. THE DR FURTHER CONTENDED THAT THE DRP HAS ERRED IN HOLDING THAT THE PROPOSED SAID ADDITION WAS WITHOUT ANY RATIONAL BASIS BY NOT APPRECIATING AND IGNORING THE FACT THAT THE ONUS WAS ON THE ASSE SSEE TO SUBSTANTIATE THE CLAIM OF EXPENDITURE BY PRODUCING THE BOOKS OF ACCOUNTS BILLS AND VOUCHERS AND IN ABSENCE OF THE SAME THE AO WAS JUSTIFIED IN DISALL OWING 10% OF THE EXPENSES ON ESTIMATE BASIS. 50. THE DR FURTHER CONTENDED THAT ONCE THE DRP HAS ACCEPTED THE FINDINGS OF THE AO THAT THE ASSESSEE HAS FAILED TO PRODUCE THE BOOKS OF ACCOUNTS AND VOUCHERS DESPITE SUFFICIENT AND REPEATED OPPORTUNIT IES DURING THE DRAFT ASSESSMENT PROCEEDINGS THEN THE DRP GROSSLY ERRED IN HOLDING THAT THERE WAS NO RATIONAL BASIS FOR ESTIMATED ADDITION BY THE AO. THE DR ALSO CONTENDED THAT IN ABSENCE OF REASONABLE CAUSE WHICH PREVENTED THE ASSESSEE TO PRODUCE THE BOOKS OF ACCOUNTS AND VOUCHERS DURING THE DRAFT ASS ESSMENT PROCEEDINGS THE SAME COULD NOT BE ADMITTED AT THE REMAND STAGE AND IN THIS SITUATION GENUINENESS OF THE EXPENSES CLAIMED BY THE ASSESSEE WAS NOT POSSIBLE TO VERIFY IN SUCH A SHORT SPAN OF TIME DURING REMAND PROCEEDI NGS. THE DR PARTED WITH THE ARGUMENT WITH THIS FINAL SUBMISSION THAT THE DR P ERRED IN DIRECTING THE AO TO DELETE THE PROPOSED ADDITION ON ACCOUNT ON UNVER IFIABLE EXPENSES ON THE GROUND THAT NOTHING ADVERSE IN RELATION TO THE EXPE NSES CLAIMED BY THE ASSESSEE HAD BEEN BROUGHT TO LIGHT DURING PROCEEDINGS BEFORE THE DRI AND CUSTOM AUTHORITIES AND THE DRP WAS NOT JUSTIFIED IN IGNORI NG THE FACT THAT THE BASIS AND 37 SCOPE OF THE ACTION TAKEN AGAINST THE ASSESSEE BY T HE DRI AND CUSTOM AUTHORITIES WAS COMPETENTLY DIFFERENT THAT NEITHER THE QUANTUM NOR THE GENUINENESS OF THE BUSINESS EXPENSES WAS THE SUBJECT MATTER FOR THE IN QUIRY IN THE PROCEEDINGS BEFORE THESE AUTHORITIES. THE LD. DR SUPPORTED TH E ACTION OF THE AO AND SUBMITTED THAT THE IMPUGNED DRP ORDER MAY BE SET AS IDE BY DELETING THE IMPUGNED ADDITION. 51. LD. COUNSEL OF THE ASSESSEE REPLIED THAT THE AO WAS DIRECTED TO BY THE DRP TO ALLOW THE ASSESSEE TO PRODUCE ITS BOOS OF AC COUNTS ALONG WITH RELEVANT BILLS AND VOUCHERS DURING REMAND PROCEEDINGS BUT TH E AO IN THE BEGINNING OF THE ORDER SIMPLY ALLEGED THAT THE CUSTOM DUTY PAID ON REVISED MRP HAS NOT BEEN ACCOUNTED AND SUBSEQUENTLY THE AO OBSERVED THAT THE ASSESSEE HAS NOT GIVEN ANY REASON WHICH PREVENTED THE ASSESSEE TO PRODUCE THE BOOKS OF ACCOUNTS AT THE TIME OF DRAFT ASSESSMENT PROCEEDINGS AND THE GENUIN ENESS OF THE EXPENDITURE INCURRED AND CLAIMED BY THE ASSESSEE CANNOT BE VERI FIED IN THE SHORT SPAN OF TIME. LD. COUNSEL STRONGLY CONTENDED THAT THE AO D URING THE REMAND PROCEEDINGS REJECTED BOOKS OF ACCOUNTS DESPITE DIRE CTIONS OF THE DRP THAT THE ASSESSEE SHOULD BE ALLOWED TO PRODUCE BOOKS OF ACCO UNTS AND RELEVANT VOUCHERS AND THE ACTION OF THE AO IS ALSO CONTRARY TO THE LE TTER AND SPIRIT OF PROVISIONS OF SECTION 143(3) OF THE ACT. LD. COUNSEL FURTHER CON TENDED THAT WHILE THE ACTION OF THE AO REJECTING BOOKS OF ACCOUNTS OF THE ASSES SEE IS NOT VALID AND JUSTIFIED THEN THE DISALLOWANCE OF 10% OF CLAIMED EXPENDITURE ON ESTIMATED BASIS IS NOT 38 SUSTAINABLE THEREFORE THE DRP DELETED THE IMPUGNE D ADDITION WITH A COGENT AND REASONABLE OBSERVATIONS AND FINDINGS. 52. ON CAREFUL CONSIDERATION OF ABOVE WE FIND IT A PPROPRIATE TO REPRODUCE THE RELEVANT OPERATIVE PART OF THE DRP WHICH DELETED TH E AD HOC ADDITION MADE BY THE AO ON ESTIMATED BASIS. THE RELEVANT PARA 4.4.3 OF THE DRP READS AS UNDER:- 4.4.3 COMING TO GROUND NO. 2.1 RELATING TO THE PROPOSED ADHOC DISALLOWANCE OF RS.92 65 306/- BEIN G 10% OF TOTAL EXPENSES WE FIND THAT THE AO HAS NOT GIVEN A NY RATIONAL BASIS FOR THE SAME EITHER IN THE DRAFT ASSESSMENT O RDER AND OR IN THE REMAND REPORT. NOTHING ADVERSE IN RELATION T O THE EXPENSES CLAIMED BY THE ASSESSEE HAS ALSO COME TO L IGHT IN THE PROCEEDINGS BEFORE DRI/ CUSTOMS AUTHORITEIS. IN THE EVENT THE ABOVE ADHOC DISALLOWANCE PROPOSED BY THE AO IS FOUN D TO BE WITHOUT ANY BASIS. THE AO IS THEREFORE DIRECTED T O DELETE THE SAME. 53. IN VIEW OF ABOVE WE NOTE THAT THE AO EXAMINED THE BOOKS OF ACCOUNTS PRODUCED BY THE ASSESSEE DURING REMAND PROCEEDINGS AND CATEGORICALLY STATED IN THE FIRST REMAND REPORT THAT NOTHING ADVERSE WAS FO UND THEREIN. HOWEVER WHEN THE DRP HAD REMANDED THE MATTER TO THE AO WITH DIRE CTION TO EXAMINE THE BOOKS OF ACCOUNTS THEN IT WAS THE DUTY CAST UPON T HE AO TO FOLLOW THE DIRECTIONS OF THE SUPERIOR AUTHORITY. WE ARE UNABL E TO SEE AND UNDERSTAND ANY VALID REASON WHICH PROMPTED THE AO TO CHANGE HIS ST AND IN THE SECOND REMAND REPORT OBJECTING TO THE ADMISSION OF BOOKS OF ACCOU NTS. FROM A BARE READING OF THE DRAFT ASSESSMENT ORDER AND THE REMAND REPORT W E NOTE THAT NOTHING ADVERSE HAS BEEN BROUGHT OUT BY THE AO TO THE GENUINENESS A ND QUANTUM OF EXPENSES CLAIMED BY THE ASSESSEE. UNDER THESE CIRCUMSTANCES WHEN REJECTION OF BOOKS OF ACCOUNTS BY THE AO IS NOT VALID AND JUSTIFIED THEN THE IMPUGNED AD HOC 39 DISALLOWANCE OF 10% OF THE EXPENDITURE CLAIMED BY T HE ASSESSEE AS PROPOSED BY THE AO IS NOT SUSTAINABLE AND HELD TO BE WITHOUT A NY BASIS. THEREFORE WE ARE INCLINED TO HOLD THAT THE DRP WAS RIGHT IN DELETING IMPUGNED AD HOC DISALLOWANCE OF RS.92 65 306/- BEING 10% OF TOTAL E XPENSES CLAIMED BY THE ASSESSEE. ACCORDINGLY GROUND NO.1 TO 1.4 OF THE R EVENUE BEING DEVOID OF MERITS DESERVES TO BE DISMISSED AND WE DISMISS THE SAME. 54. IN THE RESULT THE APPEAL OF ASSESSEE IS PARTLY ALLOWED AS INDICATED ABOVE AND APPEAL OF THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 28.11.2014. SD/- SD/- (T.S. KAPOOR) (CHANDRAMOHAN G ARG) ACCOUNTANT MEMBER JUDICIAL MEMBER DT. 28TH NOVEMBER 2014 GS COPY FORWARDED TO:- 1. APPELLANT 2. RESPONDENT 3. C.I.T.(A) 4. C.I.T. 5. DR BY ORDER A SSTT. REGISTRAR