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2015 (5) TMI 850
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....e assessee in the books of the AE was duly furnished, which clearly shows that he AE does not debit the assessee company for the value of gold sent by it for processing. It only records the quantity of gold for reconciliation purposes. 4. That the Ld. AO failed to appreciate that the assessee never acquired a right to dispose of the gold received for conversion as its own. Furthermore, the aforesaid submission that the assessee is contract manufacturer is fortified by the fact that the export invoice does not mention the price of each jewellery item. 5. That the Ld. AO arbitrarily calculated the risk factor to be 1% of the cost of gold bars imported and the jewellery exported. The Ld. AO failed to appreciate the business model of the assessee and despite producing the details of insurance policies, freight expenses etc., the same were completely ignored for no reason whatsoever. 6. The Ld. AO failed to consider that the gold sent by AE cannot be insured in Dubai on account of applicable Insurance Laws. Even if a company in India sends goods to its overseas branch, the same cannot be insured in India. Accordingly the assessee has taken a transit policy and a stock policy. ....
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.... AO went beyond its jurisdiction by altering the business model of the assessee without any basis and without declaring any transaction to be sham. 15. That the Ld. AO failed to consider that making charges are not linked to the value of gold. Had this been so, the making charges would have been reduced in the case of depreciation of gold and vice versa. 16. That the Ld. AO failed to appreciate the settled law that entries in books of account alone are not conclusive in determining the nature of income CIT vs. Gopal Purohit 336 ITR 287 (Bom.). 17. That the assessee has not given any advance of LC or bank guarantee or security against the gold received from its AE. Hence there is no profit or loss on the value of gold received and sent back in the shape of jewellery. 18. That the Ld. AO failed to consider the substance of the transaction carried out by the assessee with its AE, rather, it went on the form of transaction, which is impermissible in law. The assessee craves liberty of the Hon'ble Bench to add, alter and amend the grounds of appeal during the course of appeal." 2. We have heard and consider the arguments advanced by the parties, and have gone through t....
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....ee is only entitled for the job charges / conversions charges. He placed reliance on the following decisions: i. M/s Twilight Jewellery Pvt. Ltd. Vs. Dy. Commissioner of Income Tax-9(3), ITA No. 7281/Mum/2012 (Para 2.1, 4, 6) ii. DCIT Circle 3(1), New Delhi Vs. M/s Cheil Communications India Pvt. Ltd., I.T.A. No. 712/Del/2010 (Para 40) b) The import and export invoices is on FOC basis and no financial consideration is being passed as is evident from the invoices, bank statements and bill of entry duly verified by the custom authorities. c) Furthermore, no custom duty is required to be paid either by the assessee. d) As no consideration is passed for the value of gold and the same being a pass through cost only, the foreign exchange fluctuation bears no financial impact on the assessee. e) The foreign exchange fluctuation for the 'making charges' received by the assessee from its AE are accounted for in the profit and loss account. 4.2. The learned AR submitted that only notional/memorandum entries are recorded in the books of account of the asssessee for the value of gold, whereas in substance, the assessee is not the owner of the gold imported/jewellery export....
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....method of the assessee merely on the basis that some of companies are located in different geographical locations. 4.10. The learned AR submitted that the comparables given by the Ld. TPO are wholly inapplicable in the present case for the principal reason that the comparables given by the Ld. TPO are of retails companies who sell directly to the consumer. On the other hand, the assessee is only a job worker and the business model of the assessee being B2B (Business to Business) cannot be compared to companies having B2C (Business to (end) Customer) model. The 8% making charges referred to by the Ld. TPO (at page 29 of the appeal paper book) are of companies which are engaged in selling jewellery to the customer unlike the assessee who does job work exclusively for its AE. Moreover, the figure of 8% referred to therein is the percentage inclusive of the value of gold whereas in the case of assessee the value of gold cannot be taken into consideration for comparison. The assessee has given detailed reasons (at page 32 of Vol-II) as to why the comparable chosen by the Ld. TPO are not applicable to the case of the assessee. It is pertinent to mention here that the assessee is earni....
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....nufacture sells his goods will be the basis for determining the transaction value for payment of central excise duty by the job worker. As per him, the legal provisions do not recognize "Central Manufacture". According to the Ld. DR, the assessee cannot simultaneously claim exemption under section 10A of the Income Tax Act and claim to be a job worker. 5.2 He further contended that the orders from AE to the assessee only mention the name of the item. It does not mention how many of these items are to be prepared, what should be the size of items, what is the design pattern, what should be the purity, what should be the weight that implies that everything is left at the discretion of the assessee. 5.3 The Ld DR argued that no evidence has been submitted with regard to the business model followed by the Dubai based AE. 5.4 He contended that the entries passed through the books of accounts and even the documentation maintained shows that assessee is doing the business only of manufacturing and sale of Jewellery." 5.5 The Ld DR stressed upon the lack of proper documentation and justification of arrangements with AE. It is stated in the business model of the assessee, the AE....
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....ied, it is always desirable to have a broader set of comparables. Broader set of comparables becomes all the more necessary when the arm's length price is to be determined by adopting arithmetical mean. The comparables selected by the Ld. TPO for applying the TNMM method after making relevant adjustments are as under: S.No. Company Name Net Profit margin 1. Tiara Jewels Pvt. Ltd. 18.59 2 Deep Diamond India Ltd. 15.06 3 PC Jewellers Ltd. 11.14 4 Titan Industries Ltd. 14.01 5 Shree Ganesh jewellery House (India) Ltd 8.5 6. Tribhovandas Bhimji Zaveri Ltd. 7.39 7. Shangold India Ltd. 6.14 8. Leela Gold Designs Ltd. 4.54 9. Forever Precious Jewellery & Diamonds Ltd. 4 10. Surana Corporation Ltd. 2.77 11. Winsome Diamonds & Jewellery Ltd. 3.85 12. Sovereign Diamonds Ltd 10.57 Average 8.88 5.9 Thereafter, the Ld. DR further contended that the cost base adopted by the assessee was very narrow and it did not include the cost of gold into the cost base. He argued that since the assessee is a manufacturer, the cost of raw material ought to have been....
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.... gold bars are on FOC basis. - Almowaiji passes no financial entry for the value of gold sent to the assessee. Only they record the quantity of gold converted in 100% fineness in the account of the assessee for internal control purposes. - The gold is hand carried as baggage by the employee of the assessee by air and the expense thereof is also booked by the assessee company. - The Bill of entry contains all details of the above invoice and duties etc. Since the unit of the assessee is situated in NSEZ, the assessee is not required to discharge any duty with regard to the same. The BOE also clearly states that the goods are on FOC (Free of Cost) basis. It is further relevant to note that no customs duty on the gold imported is to be paid by the assessee, which is evident from the documents placed on record. - As per the terms of understanding between the assessee company and Almowaiji: - (a) The assessee is required to convert the gold received from Almowaiji into jewellery {as per specification} and send it back to them such that the quantity of pure gold content in jewellery supplied including permissible wastage equals the quantity of pure gold received. ....
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.... Almowaiji, and lastly internal controls, the assessee company books the same as purchase at a conversion rate mentioned in the BOE and credits Almowaiji. Conversely, at the time of sending the jewellery back to Almowaiji, the assessee company raises an export invoice and the same is recorded in INR at the conversion rate mentioned on the shipping bill and debits Almowaiji. (h) Inward remittances for the making charges/ freight/ insurance are either received in advance or post sale. However, this does not have any financial impact since the assessee company does not have any borrowing cost. Since no profit/ loss in $ terms is allowed to the assessee, translation into INR at the BOE/ Shipping bill rates, cause a difference, which is offset by an entry of exchange difference equivalent to the difference between BOE rates and Shipping bill rates for each consignment. 6.2 At the outset, we shall deal with the nature of work carried out by the assessee and decide as to whether the assessee is a 'job worker' or a 'manufacturer'. It is an admitted fact that the assessee imports pure gold bars of .999 of .995 fineness on FOC (free of cost) basis from its AE. The same is evident fr....
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....e about the basic proposition that entries in the books of account alone are not conclusive in determining the nature of income. The Tribunal has applied the correct principle in arriving at the decision in the facts of the present case. The finding of fact does not call for interference in an appeal under s. 260A. No substantial question of law is raised. The appeal is accordingly dismissed. " The aforesaid proposition of law further finds force from the judgment rendered by the Hon'ble Supreme Court in Kedarnath Jute Manufacturing, 82 ITR 363 (SC) and Sutlej Cotton Mills Ltd, 116 ITR 1 (SC). 6.5 It is difficult to conceive how a transaction is said to be having the character of "purchase and sale" when the cost of raw material is not passed between the parties. Even the AE does not pass any financial entry in its books of account while carrying out aforesaid transaction with the assessee. Considering the nature of the business of the assessee more particularly the fact that no consideration is passed as regards the value of gold imported, we arrive at conclusion that the assessee is a job worker and not a manufacturer. We are fortified in our aforesaid conclusion by the ....
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....pon the judgment rendered by the Hon'ble jurisdictional High Court in the case of CIT Vs. Lovlesh Jain ITA No. 1223/2011. We are in agreement with submission made by the assessee that section 10A exemption can be given to a job worker. It is relevant to extract the following portions of the aforesaid judgment relied upon by the assessee. "2. The contention of the Revenue in these appeals is that the respondent assessee is not entitled to deduction under Section 10A/ 10B of the Act for the following reasons:- (i) The assessee had not "exported" gold ornaments as the imported standard gold (i.e. 24 carat gold bars, bricks or biscuits), which was converted into ornaments by the assessee, was not owned by the assessee. The assessee was paid making charges and not sale consideration. The imported standard gold was owned by the third parties resident abroad. Accordingly the assessee had not derived profits and gains as are derived by an undertaking from export of articles/things. (ii) The assessee is not an undertaking engaged in manufacture or production of articles or things. Conversion of standard gold into ornaments is not "ma....
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...." into jewellery. The gold, on all occasions, was sent free of cost. 6.2 In the present case, the assessee had claimed deduction under Section 10B of the Act. The Assessing Officer disallowed the said deduction on the ground that the assessee did not manufacture any article or thing and the ownership over raw gold and jewellery was of the foreign party i.e. M/s Onrich Jewellery and the assessee had received making charges. 6.3 The CIT (Appeals) held that the conversion of raw gold or gold bars into jewellery amounts to manufacture. He also held that whether or not assessee‟s activity was manufacture or not, was independent of the question of ownership of the gold. He relied upon decisions of the Gujarat High Court in CIT versus J.B. Kharwar& Sons,[1987] 163 ITR 394 and the Madras High Court in Taj Fire Works Industries, [2007] 288 ITR 92. 8. Section 10A/10B of the Act stipulates that an assessee is entitled to deduction from such profits and gains as are derived by an undertaking from export of articles or things or computer software, from the total income of the assessee. Deduction under the said Section is admissible for the prescribed period from the date when the....
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.... exported is only a 'pass through cost' and cannot be part of the operating cost of the assessee. The Ld. TPO and DRP erred in including the cost of gold in the cost base of the assessee, while computing the arm's length price of the international transaction. It is relevant to refer to the judgment rendered by this Tribunal in DCIT Circle 3(1), New Delhi Vs. M/s Cheil Communications India Pvt. Ltd. I.T.A No. 712/Del/2010, wherein it was held as under: "40. ....... The payment made by the assessee to third party vendor/media agencies for and on behalf of the principal has not been included in the total cost for determining the profit margin, though, on the other hand, the TPO has included the payment reimbursed by the assessee's associate enterprise to the assessee on account of payment made to third party vendor/media agencies. It is not in dispute that the assessee is engaged in undertaking advertising services for its customers/associate enterprises in the capacity of an agent. As part of its business operation, the assessee facilitates placement of advertisement for its ass....
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....his type of cases, it will be appropriate to pass on the cost of rendering advertising space, to the credit recipient without a mark up and to apply a mark-up only to the costs incurred by the intermediary in performing its agency function..." 6.10 Lastly, the assessee also does not separately invoice the jewellery items exported to AE. Thus we are of the view that the assessee is a job worker and not a manufacturer and the Ld. TPO and DRP erred in including the cost of gold into the operating cost of the assessee. 6.11 The next issue which is to be decided as to which is the Most Appropriate Method (MAM) for calculating the arm's length price of the international transaction entered into by the assessee. The assessee has relied upon CPM and CUP method to benchmark its international transactions. However, during the course of arguments, the assessee did not press the applicability of CPM method and extensively relied upon the applicability of CUP method by giving external comparables with respect to the transactions carried out by parties in Delhi and has further given comparables of priced charged by a company in Delhi to a company in Dubai engaged in the similar business ca....
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....alaysia Inv No. 20195 Dt. 31/1/2010 6587.700 3623.23 0.55 Zenmax SDN BHD (190833A) Plot 15, Bayan Lepas Industrial Estate, Phase- IV, 1190 Bayan Lepas, Penang Inv No. 0146 Dt. 18/6/2010 678.900 187.37 0.28 CHL Jewelleries Marketing SDN BHD (524321-W) 11A & 15, Jalan Industri Beringin, Taman Perindustrian Beringin, Juru, 11100 Buklt Mertajam, Penang Inv No. 004451 Dt. 24/4/2010 1104.040 533.92 0.48 AHY Jewellery SDN BHD 101-06-09 to 101-06-11, Meena Perdana, Jalan Gurdwara, 10300 Penang, Malaysia Inv No. 2106 Dt. 27/3/2010 1326.730 499.74 0.38 Zenmax SDN BHD (190833A) Plot 15, Bayan Lepas Industrial Estate, Phase- IV, 1190 Bayan Lepas, Penang Inv No. 8255 Dt. 20/12/2009 1656.800 180.58 0.11 6.14 The Ld. TPO has however, rejected the applicability of CUP method and relied upon the TNMM method for calculation of arm's length price. 6.15 We have to first consider the applicability of CUP being a direct method, in the present case. The assessee has placed on record the invoices of the aforesaid companies referred to in the table above. Our attention was particularly drawn to the invoice o....
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....by the Ld. TPO to one Manohar Lal Saraf Jewellers who is charging 8% making charges cannot be applied to the case of the assessee for the aforesaid reasons. Thus in view of our findings above we delete the first addition of Rs. 9,50,31,469/- made on account of applicability of MAM. 6.18 The second addition is with respect to the charges of facility, freight and insurance made by the assessee. The assessee has drawn our attention to the bills of travel from Delhi to Dubai and Dubai to Delhi of one of its employee Mr. Mukesh Bhola. The assessee has further placed on record three insurance policies i.e. i. Import policy of Rs. 20 crores for gold imported form Dubai Airport to Delhi Airport. II. Export policy of Rs. 20 crores for jewellery exported from Delhi Airport to Dubai Airport. III. Burglary Policy. A perusal of these policies clearly shows that in case of any loss, the same would be recovered from the insurance company and paid to the AE. The assessee is only reimbursed by its AE of the freight and insurance charges at the rate of $ 350 consignment. These three insurance polices have been ignored by the Ld. TPO and DRP. We are in agreement with the contention of ....