TaxTMI 
TaxTMI 
2016 (3) TMI 1445
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....er u/s. 263 be cancelled since it was passed without complying with conditions precedent and improperly holding that the assessment order passed was erroneous and prejudicial to the interests of Revenue when n fact it was not so. 2. For that on the facts and in the circumstances of the case, the CIT was unjustified in setting aside the entire assessment and directing passing of de nove assessment when the show cause notice issued was only for specific grounds. 3. For that on the facts and in the circumstances of the case, the CIT's order u/s. 263 directing AO to make addition of Rs.11,66,78,994/- being alleged excessive manufacturing loss be held to be unsustainable as no show cause notice on this issue was issued and the finding was recorded arbitrarily by considering incorrect and inappropriate facts & figures. 4. For that on the facts and in the circumstances of the case, the CIT's order directing AO to disallow depreciation of Rs.4,74,803/- be held unsustainable since the same represented alleged excess depreciation allowed in the earlier assessments. 5. For that on the facts and in the circumstances of the case, the CIT's order directing AO ....
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....lowability of discount allowed by examining the customers to whom payments are made be held to be unsustainable since no show cause notice on this issue was given and the direction being impracticable is liable to be cancelled." 3. Briefly stated facts are that assessee is engaged in the business of manufacturing and trading of jewellery and following the mercantile system of accounting. For the relevant AY 2010-11, the assessee filed its return of income on 30.09.2010 and assessment was framed by JCIT, Range-10 Kolkata u/s. 143(3) of the Act after issuing notices u/s. 143(2) and 142(1) of the Act along with a detailed questionnaire dated 18.10.2012. The assessee produced complete books of accounts along with bills and vouchers of sales and purchases and stock register. The AO made certain additions and disallowances and framed assessment u/s. 143(3) of the Act. Subsequently, the Ld. CIT on examination of assessment records for the relevant AY 201011 observed that the assessment framed by AO u/s. 143(3) of the Act dated 18.03.2013 is erroneous and prejudicial to the interest of Revenue and for this purposes he issued show cause notice No. Kol/CIT-IV/263/Anljali Jew/2010-11/13-14....
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....ilent as to what AIR information was available in the records, which was not reconciled by assessee. As regards to another allegation, the company has reported to manufacturing loss of 72.02 kg. of gold and no enquiry was conducted about the reasonableness of such loss. The assessee explained that though loss of 72. Kg. of gold is substantial in numeric terms but such loss cannot be considered to be in relative terms seeing the size of the business of assessee. It was explained that in the business of manufacture of gold jewelleries, the gold is purchased either in pure form i.e. 24 carats or it is purchased of lesser cartage. Jewelleries however cannot be made in 24 carat gold. The jewelleries are manufactured in gold having 22 carats or less. In order to manufacture jewelleries, gold is required to be melted in fire and in the process of jewellery making there is always melting loss. It was explained by the assessee that in the immediately preceding 3 years the melting loss incurred by the company was 56.95; 57.91 & 37.61 kgs which in percentage was 5.68%; 4.94% 8.98% respectively. In the current year the loss of 72 kgs in percentage terms was 5.05% of the jewelleries manufacture....
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....on of the parties / Kariganrs is to be made their receipts including gold may be examined u/s. 194C. f) During the course of assessments proceedings the assessee has submitted some details along with forwarding letter dated December, 3 2012 before the assessing officer. During the curse of discussion in 263 proceedings the documents filed by the assessee before the AO was verified. It appears form Annexure-E the assessee has made huge payment to its sister concern M/s Anjali estate and developers. The Assessing Officer has called the details of the expenditure and assessee has submitted the expenditure above Rs.1 lakh. The Assessee has also enclosed 7 bills along with Annexure-B. The 1st three bills are prepared on the different dated but received only on 8th January, 2010 by the assessee. Bills available on record assessee as under: Date Bill No. Value (Rs) 08.01-2010 529 200855.52 08.01.2010 533 182282.23 08.01.2010 537 169556.05 30.03.2010 06/AED/10-11 2244870.00 31.03.2010 541/AED/09-10 126700.00 31.03.2010 542/AED/09-10 103009.00 31.03.2010 547/AED/09-10 221870.00 Surprisingly the 4th bil....
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....verified. j) The claim of discount allowed to the buyers amounting to Rs.1,50,01,453/-. Without justification of business expediency. The AO must ask assessee to produce these parties and examine genuineness of such huge expenditure. The assessee must be asked to identify recipients and prove the genuineness and amount paid is verifiable from returns of the recipients. 8. From the above facts, it emerges that CIT has revised the assessments on the following issues: a) Directed the AO to make addition of Rs.11,66,78,994/- on account of excess manufacturing cost calculated @ 4.79% of gross sales. b) Directed the AO to make addition of Rs.4,74,803/- being excess depreciation allowance granted in earlier years. c) Directed the AO to reconciliation of AIR information & examine the same; d) Directed the AO that sales to sister concerns is not at arm's length price and he has not examined the same. The AO to examine in terms of Sec. 40A(2)(b) of the Act and addition be made on account of suppression of profit in the hands of the assessee. e) Directed the AO to examine the loss of manufacturing of gold of 72.019 kgs amounting to Rs.1....
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....ing activities carried out by the assessee were not examined and therefore the assessment order suffered from lack of enquiry. The assessee explained before us that the quantitative details of gold were in fact provided by the tax auditor in Annexure-F to the Tax Audit report and complete quantitative details of gold were furnished at the time of filing of return itself and this was examined and considered by AO prior to framing of assessment and said details are part of the assessment records. Ld. Counsel argued that it is only with reference to the quantitative details available in the assessment records, the CIT could quantify the alleged excessive manufacturing loss and direct AO to make disallowance of Rs.11,66,78,994/-. We find that allegation of CIT regarding excessive manufacturing loss is in paras 3.7 and 3.8 of the impugned order and he has computed "manufacturing costs" by taking into account the following expenses: Wages & labour Rs.6,23,51,872/- * Packing Material Rs.55,72,915/- * Testing & refining charges Rs.1,20,11,512/- Total Rs.7,99,36,299/- We observed from records that CIT also considered value of melting loss as part of manufact....
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....y of the gold for selling purposes was 12,63,966 gms (13,35,985 - 72,019). The melting loss of 72,019 gms out of consumption of 13,35,984 in % terms worked out at 5.05%. In the circumstances when cost of melting loss was factored into costing then average cost of gold sold worked out at Rs.1504.68 per gm (Rs.1432.35 x 1.505) In addition to per gram cost of gold, the assessee incurred the following direct costs as outlined in the revision order. Direct costs * Wages & labaour 6,23,51,872/- * Packing charges 55,72,914/- * Testing charges 1,20,11,512/- 7,99,36,299/- The direct costs at Sr. No. (i) & (iii) pertained to jewelleries manufactured by the assessee and sold to both M/s Anjali Jewellers and Retail customers. However the packing charges were incurred only in respect of sales made to retail customers. The ornaments were sold to M/s Anjali Jewellers in bulk and hence packing charges were not incurred by the assessee. Instead, M/s Anjali jewelers incurred packaging cost when the said firm sold gold ornaments to its own retail customers at its own show rooms. Accordingly, the packaging cost incurred by the a....
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....ales to Anjali Jewellers: Metal (in Qty) 416669.062 gms Metal value Rs.64,57,87,674/- Rs.1550 / gm (avg) Making charges Rs.2,32,40,165/- Rs. 56 / gm (avg) Sales to retail customers: Metal (in Qty) 872208.78 gms Metal value Rs.136,67,86,332/- Rs.1567 / gm (avg) Making charges Rs.2139,60,087/- Rs.245 / gm (avg) Based on the above data, he stated that the comparative figures cost and price of jewellery sold to Anjali Jewellers, retail customers and the operating profit margin in respective segment was as follows:- Particulars Anjali Jewellers Retail customers Sales per gram *Metal *Making charge 1550 56 1606 1567 245 1812 Cost of sales per gram * Metal * Making charge * Packing 1514 49 -- 1563 1514 49 6.40 1569.40 Net margin (profit) 43 242.40 From the above table, we find that while making sale of ornaments, the assessee earned profit on sale made both to M/s Anjali Jewellers and retail customers though margin of profit in the case of sale made to Anjali Jewellers was lower. Th....
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....nd arrived at wrong conclusion. We are of the view that in view of the foregoing facts the assessee recovered "melting loss" component of the cost by way of "metal sale" value billed to customers and not "making charges". In the circumstances the melting loss of Rs.10,87,26,931/- should have been excluded from the manufacturing cost of Rs.18,86,63,231/- for ascertaining the true manufacturing costs incurred vis-àvis the "making charges" billed to customers. 14. In regard to making charges, these were never part of "manufacturing cost" and it was wrong to presume that such cost was recovered in form of "making charges". It was explained that testing & refining charges were paid accredited agencies to verify the purity of gold re-purchased from the customers and testing & refining charges were inextricably linked to the purchase value of gold. The testing charges therefore formed part of the metal component of the invoiced value and not the "making charges". The "metal sales value" of Rs.1550 per gm charges from M/s Anjali Jewellers or for that matter Rs.1567 per gm charges from the retail customers was more than the average per gm metal cost of Rs.1504.68 per gm (excluding....
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....only with reference to sales made to retail customers. Testing & refining charges 1,20,11,512 To be considered as part of "gold metal cost" and not "making charges Loss of gold 10,87,26,931 To be considered as part of "gold metal cost" and not "making charges". * The figures stated above are the figures cited by the Ld. CIT in the revision order/Analysis of manufacturing costs & sales value Sales as per P & L a/c Rs.243,58,87,153 Les: Sales to other retail customers not considered By CIT in his analysis : Rs. 18,61,12,896 Net sales considered by Ld. CIT for comparison : Rs.224,97,74,257 Metal value (in Rs) Making charges (in Rs) A. Recovery in form of metal sales value 201,25,74,006 Recovery in form of making charges 23,72,00,252 A1. Quantity sold 12,63,965 gms Quantity sold 12,63,965 gms B1. Sales value / gm (A /A1) 1593 / gm C. Metal gold cost 180,48,78,078 Wages & labouar (being direct cost of jewellery making) 6,23,51,872 D. Loss of gold 10,87,26,931 E. Testing & refining charges 1,20,11,512 ....
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....h was recouped in the form of "making charges" was reasonable and not excessive and therefore the directions given by CIT for making addition of Rs.11,66,78,994/- deserves to be cancelled. 17. We find from the facts of the case and arguments of the ld. Counsel that the CIT has not considered various materials facts while analyzing and comparing the manufacturing cost and making charges recovered by the assessee from sales made to related party, M/s Anjali Jeweellers and the sales made to retail customers, which had a bearing on the comparability, which were as follows;- Functional & cost differences between sales to Anjali Jewellers and other retail customers (ground Nos. 12-15). M/s Anjali Jewellers is a Partnership firm which deals in jewellery and ornaments and is a separate, independent and operational firm having its own showrooms & establishments. M/s Anjali Jewellers incurs separate operational costs including cost of establishment, packing and marketing costs for marketing and sales so jewelries sourced from the assessee in bulk. Promoters / Directors of the assessee and partners of the said firm belong to same family the assessee as well as the firm are regular....
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....o its own retail customers was comparable to the prices charged by the assessee from its own retail customers. In view of the above data, it would be observed that neither the manufacturing cost incurred with regard to the sales made to M/s Anjali Jewellers was excessive nor the price charged from M/s Anjali Jewellers was on the lower side. Operating margin of 10% was allowed to M/s Anjali Jewellers to meet its own establishment & marketing costs and also earn profit from its marketing and selling activity. For the relevant AY 2010-11 M/s Anjali Jewellers returned total income at Rs.1,77,91,572/- and this was taxed at maximum marginal rate. Copy of the IT acknowledgement of M/s Anjali Jewellrs for AY 2010-11 is filed in the APB. Accordingly, we are of the view that the prices charged from M/s Anjali Jewellers were therefore fair and reasonable and the assessee did retain profit margin while selling jewelleries to the related party and the assessee declared no excessive manufacturing cost. Further, sales made to related party, M/s Anjali Jewellers were in bulk (representing 26.91% of total sales). Apart from the bulk sales to M/s Anjali Jewellers, the assessee did not make any bulk ....
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....nd CIT having not found or proved any specific infirmity could not consider the assessment to be erroneous and direct AO to conduct fresh enquiries. Moreover when the expenses on labour & wages were allowed by AO after verification no disallowance out of wages could be ordered by CIT on the ground of alleged excess manufacturing cost, which had been fully explained by assessee and cannot be subject matter of revision u/s 263 of the Act. 20. As regards to payments of Rs.1,20,11,512/- majorly comprised of testing and refining charges paid to accredited agencies such as A.J. Hall marking Centre, G.N. Hallmarking & Refinery Pvt. Ltd. & Rahul hallmarks Pvt. Ltd. all the payments were made through proper banking channel and subjected to TDS u/s. 194J of the Act, wherever applicable. Complete details thereof had already been submitted in the course of original assessment u/s. 143(3) of the Act, which is also enclosed at page 88 of the APB. In the circumstances the correctness and genuineness of testing& refining charges stood firmly established and therefore no disallowance / addition on its account was warranted and, hence, the same cannot be subject matter of revision u/s 263 of the ....
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....ble. It is further certified that loss of gold depends on the intricacy of designs and such loss varies between 4% to 10%. It is certified that in the cases of stone studded ornaments such loss can be higher than 10%. On reference to assessee's audited account for the FY 20009-10, it was explained that the melting loss was 72 kgs which in percentage terms was only 5.05% was well within the standard limits. Such loss was commensurate with the loss disclosed in the audited accounts of the earlier and succeeding years. Before CIT assessee had also furnished the communication issued by the All India Gems & Jewellery Trade Federation, wherein it was confirmed that percentage of wastage in making of jewellery ranges between 2% to 10%. The median value comes to 6%. The melting loss of 5.05% incurred by the assessee was thus commensurate with the permitted wastage as per standard trade limits. Reference was further made to the Handbook of Procedures published by the Director General of Foreign Trade, Ministry of Commerce 7 Industry, Government of India dated 19.04.2007. at page 76 of the Handbook, the Ministry of Commerce & Industry has prescribed the standard wastage limits in the gem & j....
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.... costs incurred compared favourable with the 'making charges' recovered from related party. We have thus fully substantiated the genuineness and reasonableness of manufacturing costs incurred by the assessee. The direct costs and making charges incurred by the assessee were reasonable and even the prices charged from the related party were commensurate with the costs incurred by the assessee. Hence, the direction given by CIT for making addition on account of excess manufacturing cost of Rs.11,66,78,994/- is therefore vacated. 25. The next issue in this appeal of assessee is as regards to the sales made to related parties, the CIT is of the view that the sales to sister concern were not at arm's length" and therefore the AO should have examined the sale transactions in light of Sec. 40A(2) of the Act. 26. In this regard, the assessee explained that Sec. 40A(2)(b) of the Act is applicable only to expenditure" and not sales/income and therefore the invocation of the revisionary powers by Ld. CIT on its issue is prima facie erroneous and legally unjustified. Ld. Counsel explained that it is well understood that Sec. 40A(2) of the Act mandates disallowance of "excessive payments ....
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....ion of S. 40A(2)of the Act. Ld. Counsel for the assessee argued that even the domestic transfer pricing provisions are not applicable to the present case. Domestic transfer pricing provisions were introduced by the Finance Act, 2012 with effect from 01.04.2013. in the circumstances the said provisions were not applicable to AY 2010-11 in question. 28. Further, Ld. Counsel for the assessee argued that even if the assessee was charging lower price form its sister concern, it was not a case where the assessee incurred loss on sales made to related party. From the facts stated in earlier paragraphs, it shall be observed that the average sales price to M/s Anjali Jewellers worked out to Rs.1606 per gram whereas the costs incurred by the assessee was Rs.1563 per gram. The assessee therefore earned a net margin of Rs.43 per gram sold to M/s Anjali Jewellers. in view of these facts he argued that CIT's finding that the sales made to M/s Anjali Jewellers were at prices lower than the "cost" and thereby inference that assessee deliberately incurred loss was erroneous and unjustified. We find that it is not a case that lower price was being charged in order to avoid tax and / or the arrang....
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.... had paid remuneration to a related concern for attending auctions on behalf of the assessee and managing its affairs. The AO held that nature of services were vague and therefore disallowed the payments made by the assessee under Section 40A(20(b) of the Act. On appeal, the High Court held that the AO did not bring any cogent material on record which would show that the payment was excessive or unreasonable. The court observed that the assessee had established that the payee had credited the payments received in its P&L a/c and had paid taxes on the higher side which showed that there was no intention to deceive or evade any tax in the circumstances the High Court deleted the disallowance made u/s. 40A(2)(b) of the Act. Similar disallowance was deleted by the Gujarat High Court in the case of CIT v. Indu Nissan Oxo Chemical Industries Ltd. 45 taxman. Com 478 (Guj) wherein the disallowance made u/s. 40A(2)B) in respect of payments made to the directors were deleted by the High Court, observing that the recipient of payments was taxed at maximum rate and therefore there was no avoidance or evasion of taxes as envisaged u/s 40A(20(b) of the Act. In view of the above, we are of the vi....
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....e directions given to examine the same is unjustified and contrary to the jurisdictional facts of the case. Hence, the same are quashed. 31. The next issue in this appeal is regarding certain bills held to be bogus by Ld. CIT in his revision order. In the revisionary order CIT has observed that the assessee had furnished certain bills raised by M/s Anjali Estate & Developers towards repairs and maintenance carried out at various showrooms of the assessee. From the copies of bills submitted CIT observed that one particular bill of Rs.22,44,870/- bearing number 006/AED/10-11 was dated 25.04.2010 but had been received by the assessee on 30.03.2010. According to Ld. CIT the aforesaid bill was bogus and had been claimed to avoid tax on profits. 32. It was explained by assessee that admittedly the assessee had booked the bill of Rs.22,44,870/- bearing number 006/AED/10-11 on the last date of the financial year 2009-10. However, the aforesaid bill was not claimed as an 'expense' or 'deduction' by the assessee in the relevant year. The assessee explained that it had transferred an aggregate sum of Rs.24,87,140/- out of 'Repairs & Maintenance' to accounting Head of 'Deferred Revenu....