Income Tax Appellate Tribunal - Delhi
Kailash Jewels Pvt. Ltd., New Delhi vs Assessee on 18 May, 2015
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH: 'I' NEW DELHI
BEFORE SHRI I. C. SUDHIR, JUDICIAL MEMBER
AND
SHRI B. C. MEENA, ACCOUNTANT MEMBER
I.T.A .No.-101/Del/2015
(Assessment Year-2010-11)
M/s Kailash Jewels Pvt. Ltd. Vs. ITO
2396, 2nd Floor, Gurudwara Ward-14(1),
Road, Karol Bagh, New Delhi. New Delhi.
PAN: AADCK5550F
(APPELLANT) (RESPONDENT)
Assessee by:-Sh. Mayank Jain, Sh. Madhur Jain,
& Sh. Parmatma Singh, Advs.
Revenue by:-Sh. Judy James, Standing Counsel.
Date of Hearing : 12.03.2015
Order pronounced on: 18.05.2015
ORDER
PER I. C. SUDHIR, JUDICIAL MEMBER
The assessee has questioned the first appellate order on the following grounds:
"1. That the impugned order passed by the Ld. AO/DRP is bad in facts in law in the present case.
2. That the Ld. AO/DRP erred in treating the international transaction entered into by the assessee for the purpose of 'job work' to be 'purchase' and 'sale'. The AO has ignored the fact that the assessee company exclusively for its AE and no consideration has been passed by it's AE except for the 'making charges.' It is further relevant to note that once the AO has accepted that the assessee is doing the job work for its AE, he cannot treat the same to be sale.I.T.A .No.-101/Del/2015 2
3. That the Ld. AO failed to consider the copy of account of the 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.
7. That the Ld. Assessing Officer/Transfer Pricing Officer (AO)/(TPO) erred in rejecting the Transfer Pricing documentation maintained by the assessee u/s 92D of the Act read with Rule 10D and in carrying out a fresh search for comparable companies. The I.T.A .No.-101/Del/2015 3 margin of a retailer is always more than a wholesaler. A wholesaler has lesser margins and more volume.
8. That the Ld. Assessing Officer (AO) erred in rejecting the benchmarking approach adopted by the assessee in the transfer pricing study and thereby making a transfer pricing adjustment to Rs.11,26,98,369/- to the income of the appellant by holding that assessee's calculation of 4.84% of (profit before Tax)/total cost is window dressed and further the assessee company is not being compensated by its AE for the risk for carrying gold bars/gold jewellery from one country to another.
9. That the Ld. DRP/AO erred in rejecting cost plus method adopted by the assessee, and has wrongly applied the Transaction net Margin Method (TNMM) without considering the nature of the business of the assessee, FAR analysis and thereby ignoring the provision of Rule 10B(2)/10C of the Income Tax Act, 1961. The Ld. AO failed to consider that TNMM method can only be applied in case there are high value of intangibles.
10. That the Ld. DRP erred in disregarding the differences in the Functional Asset Risk (FAR) profile of the assessee contract manufacturing for its Associated Enterprise (AE) and the other 12 companies who are having a distinguishable FAR analysis, whose detailed justification have been submitted by the appellant during the course of the proceedings.
11. The Ld. AO erred in calculating the operating revenue at 108% of operating costs by incorrectly including cost of gold received on FOC basis from AE in operating cost.I.T.A .No.-101/Del/2015 4
12. That in Ld. DRP/AO while calculating the arm's length of the international transaction completely disregarded the nature of business of the assessee which is of that a 'contract manufacturer' exclusively for its AE and misunderstood the same to be a 'manufacturer', which is completely impermissible in law.
13. The AO failed to consider that the assessee after receiving the order sheet from its AE, discussed the designs on phone and the same are finalized over fax and mail. The summary order sheet, designs were filed before the DRP but the same were ignored.
14. That the Ld. 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.I.T.A .No.-101/Del/2015 5
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 the orders of the authorities below, material available on record and the decisions relied upon.
3. The relevant facts in brief are that the assessee company is engaged in the business of manufacturing and trading of Gold & Silver Jewellery etc. During the year the assessee company entered into international transaction with Associate Enterprises (in short 'AE') M/s AL-MOWAI-JI Jewellers LLC of Dubai (UAE) amounting to Rs.86.16 crore. As the international transaction with AE M/s AL-MOWAI-JI Jewellers LLC of Dubai (UAE) was of more than Rs.5 crore, the case of the assessee was referred to Transfer Pricing Officer (TPO) with the approval of CIT u/s 92CA of IT Act for determination of Arm's Length Pricing. The TPO vide its order dated 29.11.2013 propose and increase of Rs.11,26,98,369/- in the total income of the assessee for the international transaction undertaken by the assessee. The assessee was asked to show cause as to why and upward adjustment of Rs.11,26,98,369/- to the income of the assessee should not be made being be difference in Arm's Length Price as determined by the TPO. The assessee responded the said show cause notice with detailed reply to which the TPO did not agree on several aspects. The I.T.A .No.-101/Del/2015 6 assessee was thereafter served with the draft assessment order against which the assessee raised objections before the ld. DRP. The ld. DRP after considering the facts and jurisdictional decisions has rejected the objections of the assessee and upheld the adjustments made by the TPO. Against these action of authorities below the assessee has referred present appeal on the above grounds questioning the addition of Rs.11,26,98,369/- made to the income of the assessee being difference between Arm's Length Price and the price charged by the assessee.
4. The learned AR submitted that first addition made by the Department is of Rs. 9,50,31,469 to the net profit. The A.O has treated the international transaction of job work entered into by the assessee to be 'purchase and sale' and while calculating arms length price has added the cost of gold into the cost base, ignoring the fact that no consideration has been passed by the assessee to the AE, except for making charges. 5.1. The learned AR submitted further that, a. The value of gold imported and exported is only a pass through cost and cannot be a part of the cost base of the assessee. The assessee 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) I.T.A .No.-101/Del/2015 7
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 exported and is not entitled to any profit on any gold content, therefore he cannot be penalized to pay tax on the amount which is 10 times of his actual revenue. He placed reliance on the following decisions:
a. CIT Vs. Gopal Purohit, 336 ITR 287 (Bom) (Para 4) b. Kedarnath Jute Manufacturing, 82 ITR 363 (SC) c. Sutlej Cotton Mills Ltd., 116 ITR 1 (SC) (Para 3, 4, 10) 4.3. The learned AR submitted further that the assessee does not separately invoice the jewellery items exported to AE i.e. assessee does not charge the AE for specific designs.I.T.A .No.-101/Del/2015 8
4.4. The learned AR pointed out that the assessee does not have any right to dispose of the gold. The AE remains the owner of the gold sent to the assessee. It is settled law that a property cannot have two owners. He placed reliance on the following decisions:
R.B. Jodha Mal Kuthiala Vs. Commissioner of Income Tax (1971) 82 ITR 570 (SC) (Para 8) 4.5. The learned AR pointed out that the Ld. TPO/DRP has erred in adding the value of raw material consumed in the operating cost of the assessee.
4.6. He submitted that the transaction entered into by the assessee with its AE cannot be termed as 'sale' as defined in Section 4 of 'Sales of goods Act', 1930 as there is no consideration/price passed as regards the content of gold.
4.7. The learned AR submitted that the making charges are not linked to the value of the gold, had this been the situation the making charges would have reduced in case of depreciation of gold value. Furthermore, detailed designs of jewellery were also submitted before the Ld. TPO/DRP. 4.8. The learned AR contended that the Ld. TPO has arbitrarily applied the TNMM method. CUP being a direct method should have been preferred over TNMM.
The Assessee applied CUP method:
I.T.A .No.-101/Del/2015 9
a. By comparing the making charges charged by Non-related parties to Almowaiji.
b. By comparing the making charges charged by Non-related parties to a Non related party.
4.9. The learned AR pointed out that the job work charged by the assessee at $0.65/gram of gold is higher than what the AE pays to other companies for making of plain gold jewellery. The assessee has given external comparables with respect to the transactions carried out by parties in Delhi. The assessee has further given comparables of price charged by a company in Delhi to a company in Dubai. The Ld. TPO/DRP erred in rejecting the CUP 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 I.T.A .No.-101/Del/2015 10 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 earning a return on capital employed @ 51.16%. After the impugned adjustment, the return on investment comes to 7087%, which is inconceivable.
4.11. The learned AR argued that the second addition is of Rs.
1,76,66,900/- with respect to the risk of carriage of gold, which is total value of gold imported & exported multiplied by 1%. The addition is arbitrary and untenable in law. The assessee submits that the insurance and freight is only a reimbursement and is not a source of income to the assessee.
4.12 According to Dubai laws, insurance cannot be done for an overseas transaction, therefore the assessee on the behalf of the AE has taken insurance policies. All the three insurance policies have been ignored by the TPO/DRP.
4.13 The learned AR contended that reimbursements can never come within the ambit of income under Section 4 of the Act and therefore of income cannot be deemed under Chapter X of the Act. He cited decision in the case of Vodafone Vs. UOI, W.P. 871/2014 (Para 38) in support. I.T.A .No.-101/Del/2015 11 4.14 The learned AR submitted that the assessee being a job worker is entitled to exemption under Section 10A of the Income Tax Act, 1961. Reliance is placed on the judgment rendered by the Hon'ble Delhi High Court in CIT Vs. Lovlesh Jain, ITA No. 1223/2011 (Para 2, 5, 6, 6.2, 6.3, 8, 9, 10).
4.15 The learned AR pointed out that it can be seen from the balance sheet of the assessee for the AY under consideration, the total capital of the assessee is only Rs. 23.99 lacs. It is highly unbelievable that from such a low capital an income of Rs. 11.31 crores is generated, that too, in the first year of business.
5. The Ld. DR/standing counsel in its submissions relied upon the order passed by the Ld. TPO and DRP and the judgments referred to therein.
5.1 The main contention of the Ld.DR is that the assessee is engaged in business of jewellery manufacturing and is not merely a job worker. He pointed out that in Central Excise, there is a concept of "Manufacture of goods by a job worker". The job worker also being a manufactures is liable to pay Central Excise duty, unless exempted. The value for payment of duty would be the cost of raw material plus the job work charges. A new Rule 10A has been inserted in the Central Excise Valuation (Determination of the price of Excisable goods) Rules with effect from 1.4.2007 as per I.T.A .No.-101/Del/2015 12 which the value at which the principal manufacture 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 sends a plain list of Jewellery items required by them. I.T.A .No.-101/Del/2015 13 A sample request letter was placed on rerecord, which reads out as follows:-
"We are pleased to place the following order in 22 Karat gold jewellery.
1. Mix Weight Sets.
2. Kashti Rings with Sheesha
3. Kantge & Bracelets
4. Guluband Sets
5. Chain Sets,
6. Kursi Sets
7. Jhumki & Tops The total order is for 15 Kilo of pure gold of 99.50% fineness."
5.6 The Ld. DR Further submitted that nothing is mentioned about quantity of different items, designs to be followed ( Indian, traditional, modern etc.) and it is also silent with regards to use of various other precious/ semi precious stones like addition of diamonds, nag, mina etc. In the absence of the aforesaid, it should be presumed that the entire documentation created by the assessee company is just eye wash and has been created with an intention to mislead the authorities and evade the payment of tax.
5.7 The Ld DR further contended in relation to selection of Most Appropriate Method that the Assessee Company has adopted Cost plus Method for the purpose of benchmarking of its international transactions executed with AE. However , later on in the TP Study itself, the assessee company has made an attempt to apply CUP method for the justification I.T.A .No.-101/Del/2015 14 and benchmarking of international transactions. The Ld. DR contended that CUP method is not applicable in the case of the assessee as
a) The taxpayer himself states that making charges are different from design to design and also differs region to region, so on what basis, the Assessee Company has adopted the application of CUP method, where jewellery purchased by AE form non-related parties located at different countries have been compared with the purchase form the Assessee Company.
b) Moreover, while making such comparison, although the taxpayer mention about the details of region, no details have been provided in relation to type of jewellery supplied by unrelated parties to AE.
5.8 The Ld. DR has further stated that as the TP study furnished by the Assessee Company does not contain any comparison with the external comparable companies, thus, TPO had no other option but to carry out the fresh search of comparables for the purpose of benchmarking analysis. It was argued by the Ld. DR that in transfer pricing, particularly when a profit based method like TNMM is applied, 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
I.T.A .No.-101/Del/2015 15
2 Deep Diamond India Ltd. 15.06
3 PC Jewellers Ltd. 11.14
4 Titan Industries Ltd. 14.01
5 Shree Ganesh jewellery House 8.5
(India) Ltd
6. Tribhovandas Bhimji Zaveri Ltd. 7.39
7. Shangold India Ltd. 6.14
8. Leela Gold Designs Ltd. 4.54
9. Forever Precious Jewellery & 4
Diamonds Ltd.
10. Surana Corporation Ltd. 2.77
11. Winsome Diamonds & Jewellery 3.85
Ltd.
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 included in the operating cost. The Ld DR relied upon the computation done by the Ld. TPO of the arm's length price of the international transactions entered into by the assessee which worked out as under:-
Particulars Amt in Rs.
Operating Cost (A) 8787,58,047
Arm's Length 9567,91,762
Revenue
I.T.A .No.-101/Del/2015 16
(B+A*108.88%)
Operating Revenue 8617,60,293
Collected (C)
Adjustment (B-C) 950,31,469
5.10 As regards the second addition of Rs. 176,66,900, the Ld. DR
relied upon the order of the Ld. TPO and contended that had the
assessee's got this service carried out from an independent party that too must have charged at least 1 % as the cost of value and volume of transaction carried out. The Ld. DR referred to rule 10AB relied upon by the Ld. TPO and accordingly relied upon the computation done by the Ld. TPO as under:
Total grams of gold (bars/jewellery) 11,40,638 grams carried away Assuming Risk factor of 1% 11,406 grams Average Price at which Gold is imported Rs 1,581/- per gram from AE Financial Risk to be compensated by AE Rs. 18033485/- to Assessee Company Receipt shown by assessee on this Rs. 366585/- account Adjustment proposed for Risk Rs. 176,66,900/-
6. We find that the issues raised in the grounds revolves around the validity of transfer pricing adjustment of Rs.11,26,98,369 to the income I.T.A .No.-101/Del/2015 17 of the assessee holding that the assessee's calculation of 4.84% of (profit before tax)/total cost is window dressed.
6.1. The related facts and the stand of the assessee are that:
1. The Assessee is a job worker of plain gold jewellery in bulk only for its AE. Relevant A.Y. is 2010-11. The assessee returned an income from job work to be Rs.4,25,448/-, which is exempted u/s 10A of the Act, whereas the income has been assessed at Rs.11,31,23,817/- by the Department.
2. M/s. Almowaiji Jewellers LLC (AE) sends a list of plain jewellery items required by them to the assessee containing the purity of gold and weight of items.
- Based on the above order, Almowaiji send pure gold bars of .999 or .995 fineness on FOC (free of cost) basis. Since the gold has to leave the country of origin and enter port of destination, an invoice is made containing the quantity, fineness and USD value of Gold bars along with other description of shipment etc. The invoice clearly states that the 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 I.T.A .No.-101/Del/2015 18 (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.
(b) No profit or loss in $ terms is allowed to assessee for the gold received, converted and re-exported as jewellery, since the gold was sent by Almowaiji FOC. Accordingly, $ value of jewellery contained in the export invoice of the assessee (including permissible wastage) would be equivalent to $ value of gold imported FOC.
(c) Permissible wastage for .875 fineness jewellery is about .57% and for 0.917 fineness is about .327% of the net weight of jewellery exported as mentioned in the invoice raised by the assessee.
(d) The assessee is allowed $0.65 per net weight of jewellery (irrespective of fineness) as mentioned in the invoice raised as making charges. Additionally, the assessee shall also separately bill for freight and insurance charges @ approximately $350 per consignment. In short, the net recoverable amount as shown in the export invoice is the making, freight and insurance charges only.
(e) 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 I.T.A .No.-101/Del/2015 19 has taken a transit policy and a stock policy. All risks are covered in the said policies. 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 fixed rate of $350 per consignment. In the year under consideration, the assessee had actually incurred Rs.
2,66,722 as freight and insurance charges and received Rs. 3,66,585 (@ $350 per consignment) from its AE. The assessee had already placed on record three insurance policies:
i. Import policy of Rs. 20 crores for gold imported from Dubai Airport to Delhi Airport. (Pg.88, Vol-I) ii. Export policy of Rs. 20 crores for jewellary exported from Delhi Airport to Dubai Airport.
(Pg.81, Vol-I)
iii. Burglary Policy (Pg. 79, Vol-I)
(f) The export invoice contains the BOE No. against which the gold was received FOC. It also contains the quantative tally of gold received and converted into Jewellery.
(g) Considering that since Almowaiji has raised an invoice (although FOC) for gold bars, there is a Bill of entry as per customs (although FOC), the assessee's liability for any loss of such gold, it's obligation to convert the same into specified jewellery and resend to 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 I.T.A .No.-101/Del/2015 20 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 from the bill of entry, custom document, import invoice of the assessee company in the relevant assessment year. The assessee is required to convert the gold received from AE into Jewellery (as per specification ) and send it back to AE such that the quantity of pure gold content in jewellery supplied including permissible wastage equals the quantity of pure gold received. The $ value of jewellery contained in the export invoice of the assessee (including permissible wastage) would be equivalent to $ value of gold imported FOC. The assessee used to charge $0.65 per net weight of jewellery (irrespective of fineness) as mentioned in the invoice raised as making charges. The assessee has stated that I.T.A .No.-101/Del/2015 21 once the order sheet is received, it is mutually discussed on phone with AE and design, weight and quantity of items is decided and a paper is prepared. The copies of order sheets and designs are part of record and are relied upon by the assessee to fortify its submission. 6.3 Additionally, the assessee also separately bills for freight and insurance charges @ $350 per consignment. The jewellery as per the specifications is sent back to its AE in Dubai. The export invoice contains the BOE No. against which the gold was received FOC. It also contains the quantitative tally of gold received and converted into jewellery. 6.4 It is observed that the assessee exclusively works for its AE and no consideration has been passed by the assessee for the value of gold imported from the AE. The assessee is only entitled to making charges at the rate of $ 0.65 per gram of gold. The making charges as demonstrated by the assessee are charged per gram of gold as per the prevailing industrial practice. The same is evident from the copies of invoices annexed to the TP report filed by the assessee. Just because the assessee passes memorandum entries/notional entries in its books of account, it cannot be said that the international transaction entered into by the assessee is of "purchase and sale". It is apposite to refer to the judgment rendered by the Hon'ble Bombay High Court in CIT Vs. Gopal Purohit, 336 ITR 287 (Bom) wherein the Hon'ble Court held that the substance of the I.T.A .No.-101/Del/2015 22 transaction has to be seen rather than form of transaction. It was held as under:-
"4.Insofar as Question (c) is concerned, again there cannot be any dispute 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 fact that the assessee is only entitled to job charges paid by its AE. Furthermore, the import and export invoices are on FOC basis which are duly verified by the custom authorities at the time of I.T.A .No.-101/Del/2015 23 import of gold and export of jewellery. Also, it can be seen from the custom documents, no custom duty is required to be paid by the assessee or by its AE for the value of gold imported and jewellery exported. 6.6 In substance, the assessee is not the owner of the gold imported and jewellery exported and is not entitled to any profit on the gold content. The assessee does not have any right to dispose of the gold and the AE remains the owner of the gold sent. The gold sent cannot have two owners. It is pertinent to refer to the judgment relied upon by the ld. AR in the case of R.B. Jodha Mal Kuthiala Vs. CIT (1971) 82 ITR 570 (SC) wherein the Hon'ble Supreme Court held as under:
"8. The questions is who is the 'owner' referred to in this section? I sit the person in whom the property vests or is it he who is entitled to some beneficial interest in the property? It must be remembered that s. 9 brings to tax the income from property and not the interest of a person in the property. A property cannot be owned by two persons, each one having independent and exclusive right over it. Hence, for the purpose of s. 9, the owner must be that person who can exercise the rights of the owner, not on behalf of the owner but in his own right. "
6.7 Even as per Sales of Goods Act,1930 the transactions entered into by the assessee with its AE cannot be termed as 'sale'. Section 4 (1) of the Sales of Goods Act is extracted herein below:
"A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to the I.T.A .No.-101/Del/2015 24 buyer for a price. There may be a contract of sale between one part owner and another."
As admittedly, no consideration is passed for the value of gold, which is evident from the bank statements produced by the assessee, therefore, the aforesaid transactions cannot be termed as 'sale'.
6.8 The Ld. DR has contended that the assessee cannot claim exemption under Section 10A of the Act if he is a job worker. The Ld. AR on the other hand had rebutted the contention made by the Ld. DR and relied upon 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 "manufacture" or "production" of articles or things. The assessee did not manufacture or produce articles/things.I.T.A .No.-101/Del/2015 25
5. This appeal pertains to the Assessment Year 2007- 08.
5.2 The facts as recorded by the Assessing Officer in the case of Lovlesh Jain are that the assessee had received gold supplied by Ramdan Jewellery, Dubai and the same after conversion into jewellery was "exported" by the assessee to Ramdan Jewellery, Dubai. Ramdan Jewellery, Dubai continued to remain the legal owner of the gold and had not sold the gold to the assessee and no sale consideration for purchase of gold was paid. The assessee was paid conversion charges or production/manufacturing charges for converting the gold into jewellery. The Assessing Officer held that the assessee was not manufacturing ornaments/ jewellery and was not an exporter as he was paid making charges for the job work/services for making ornaments as per specification of third parties. Accordingly, it was held that the assessee was not entitled to deduction under Section 10A of the Act.
5.3 The CIT (Appeals) decided the issue in favour of the assessee. He held that the assessee was engaged in the activity of production of jewellery, which is covered by Section 10A and the Assessing Officer had not examined the said aspect and had only considered whether or not assessee was engaged in manufacturing. He further held that the assessee was engaged in "export" in view of sections 2(o) and 2(m) of Special Economic Zones Act, 2005. Accordingly, he did not agree with the finding of the Assessing Officer and held that the assessee was entitled to deduction under Section 10A. 5.4 The tribunal has dismissed the appeal of the Revenue and agreed with the findings given by the CIT(Appeals).
6. This appeal pertains to the assessment year 2002-03. The assessee‟s unit for making gold jewellery is located in NSEZ area, Noida. In the assessment year 2002-03, the assessee had received standard gold from M/s Onrich Jeweller (LLC), Deira, Dubai, UAE and after manufacturing the jewellery, it I.T.A .No.-101/Del/2015 26 was "exported" to M/s Onrich at Dubai and to a third person at London on instructions from M/s Onrich, Dubai. The gold imported into India was of 0.995 purity and was required to be converted into jewellery of 22/21 carats. On another occasion gold was received by the assessee in form of "breads" and was required to be "manufactured" 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 assessee begins to manufacture or produce articles or things or computer software.
9. The assessee converts standard gold into ornaments. The standard gold has purity levels of 0.999/0.995, whereas the ornaments have a purity level of 22 carats or lower. Purity is reduced by mixing other metals like silver, copper, etc. This is I.T.A .No.-101/Del/2015 27 necessary to give strength and durability to the ornaments as gold with 0.999/0.995 purity is very soft and tends to bend or break easily. The contention of the Revenue is that conversion of standard gold into ornaments does not amount to "manufacture or production" of articles or things as the primary material is the same, i.e. gold, and no new product with different chemical composition or attributes comes into existence. The term "manufacture or production" used in Section 10A and 10B have to be given strict and restrictive interpretation.
10. The word "manufacture" can be given, both a wider as well as a narrower connotation. In wider sense, it simply means to make, fabricate or bring into existence an article or product either by physical labour or by mechanical power. Given a narrower connotation it means transforming of the raw material into a commercial product/commodity or finished product which has a new, separate entity but this does not necessarily mean that the material by which the commodity is manufactured must lose its identity. The latter connotation has been accepted and applied with some moderation/clarification in several decisions, keeping in view the context in which the word "manufacture" has been used. The Supreme Court in Graphic Company India Limited versus Collector of Customs, (2001) 1 SCC 549 and Union of India versus Delhi Cloth and General Mills Company Limited, AIR 1963 SC 791 has held that manufacture has to be understood to mean transformation of goods into a new commodity commercially distinct and separate, and having its own character, use and name whether it be the result of one or several processes. However, every change does not result in "manufacture" though every change in an article may be a result of treatment or manipulation by labour or/and machines. If an operation or process that renders a commodity or article fit for use, which it is otherwise not fit, the change/process falls within the meaning of the word "manufacture"."I.T.A .No.-101/Del/2015 28
6.9 In the present case, the value of gold imported and 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 associate enterprise in the print/electronic etc. media and for that purpose, the assessee is required to make payment to third parties for rendering of advertisement space on behalf of its customers or associated enterprises. It is, thus, clear that the assessee's business is not sale of advertising slots to its customers or associate concern. For performing the functions for and on behalf of associated enterprises, the assessee is remunerated by its associated enterprises on the basis of a fixed commission/charges based on expenses or cost incurred by the assessee for release of a particular advertisement. It is also to be noted that advertising space (be it I.T.A .No.-101/Del/2015 29 media, print or outdoor), has been let out by third party vendors in the name of ultimate customers and beneficiary of advertisement. We have gone through the invoices and purchase orders from third party vendors and find that they contain customers' name, and all the terms of advertisement are finalized after taking the approval from the customers. The assessee simply acts as an intermediary between the ultimate customer and the third party vendor in order to facilitate placement of the advertisement. The payment made by the assessee to vendors is recovered from the respective customers or associate enterprises. In the event customer fails to pay any such amount to the advertisement agency, the bad debt risk is borne by the third party vendor and not by the advertising agency i.e. the assessee. It is, thus, clear that the assessee has not assumed any risk on account of non-payment by its customers or associated enterprises. At this stage a useful reference may be made to ITS 2009 Transfer Pricing Guidelines accepted by the OECD where it is laid down that when an associate enterprises is acting only as an agent or intermediary in the provision of service, it is important in applying the cost plus method that the return or mark-up is appropriate for the performance of an agency function rather than for the performance of the services themselves, and, in such a case, it may be not appropriate to determine arm's length price as a mark-up on the cost of services but rather on the cost of agency function itself, or alternatively, depending on the type of comparable data being used, the mark-up on the cost of services should be lower than would be appropriate for the performance of the services themselves. In this 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..."I.T.A .No.-101/Del/2015 30
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 carried out by the assessee. 6.12 The comparables relied upon the assessee are as under:
Labour charges Labour charges charged to Invoice Total Net LABOUR Labour USD/INR, Charged by no/Date Weight CHARGES Charges based on CLAIMED in $ per BOB gm of value of Net exports Weight I.T.A .No.-101/Del/2015 31 Mizan & Co, Delhi New Kailash Jewellery 30.05.2009 1040.03 20801 0.42 47.29 House, New Delhi Mizan & Co, Delhi New Kailash Jewellery 17.09.2009 1302 19530 0.31 48.35 House, New Delhi Mizan & Co, Delhi New Kailash Jewellery 20.09.2009 2357 58930 0.52 48.35 House, New Delhi Mizan & Co, Delhi New Kailash Jewellery 21.10.2009 685.745 6857 0.21 47.7 House, New Delhi Mizan & Co, Delhi New Kailash Jewellery 31.03.2010 1673.85 25108 0.33 45.7 House, New Delhi Avisons Jewellers New Kailash Jewellery 08.01.2010 1966.49 39330 0.43 46.3 House, New Delhi Meenakshi Ramadan Jewellery LLC, 12.10.2009 24564.6 1307 0.05 International Delhi Dubai Meenakshi Ramadan Jewellery LLC, 28.10.2009 15700.5 9822 0.63 International Delhi Dubai 6.13 The assessee has compared its labour charges to rates charged by some of the non-related supplier's to Almowaiji.
Party Name Address Invoice no/Date Total Net LABOUR Labour Charges in $ Weight CHARGES per gm of Net CLAIMED Weight Unigold International No.2 Little Road, DUB 020286 1014.7 609 0.60 Pte.Ltd. Singapore 536981 Unigold International No.2 Little Road, DUB 020287 5390 3511 0.65 Pte.Ltd. Singapore 536981 Moro Moda Jewellery Room No.1202,Capitol A0215/09 1495 822 0.55 Limited Centre,5-19,Jardine's Bazar,Causeway bay,Hongkong Edge Well SDN. BHD 6, Lorong Perusahaan Inv No. E0010585 1809.420 1081.72 0.60 Maju 10, Taman Dt. 26.3.2010 Perusahaan Pelangi, 13600 Prai, Malaysia AHY Jewellery SDN 101-06-09 to 101-06- Inv No. 2114 Dt. 984.240 288.26 0.29 BHD 11, Meena Perdana, 02/04/2010 Jalan Gurdwara, 10300 Penang, Malaysia Sadaf Jewellery F.Z.C. P.O. Box: 122579, Saif Inv No. 1016 Dt. 257.600 155.19 0.60 Zone, Sharjah - U.A.E 01/04/2010 F.M. Trading SDN BHD. 32, 1st Floor Campbell Inv No. 20195 Dt. 6587.700 3623.23 0.55 (No. 571623-X) Street, 10100 Penang, 31/1/2010 (Overseas) Malaysia I.T.A .No.-101/Del/2015 32 Zenmax SDN BHD Plot 15, Bayan Lepas Inv No. 0146 Dt. 678.900 187.37 0.28 (190833A) Industrial Estate, 18/6/2010 Phase- IV, 1190 Bayan Lepas, Penang CHL Jewelleries 11A & 15, Jalan Inv No. 004451 1104.040 533.92 0.48 Marketing SDN BHD Industri Beringin, Dt. 24/4/2010 (524321-W) Taman Perindustrian Beringin, Juru, 11100 Buklt Mertajam, Penang AHY Jewellery SDN 101-06-09 to 101-06- Inv No. 2106 Dt. 1326.730 499.74 0.38 BHD 11, Meena Perdana, 27/3/2010 Jalan Gurdwara, 10300 Penang, Malaysia Zenmax SDN BHD Plot 15, Bayan Lepas Inv No. 8255 Dt. 1656.800 180.58 0.11 (190833A) Industrial Estate, 20/12/2009 Phase- IV, 1190 Bayan Lepas, Penang 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 of Meenakshi International, a company based in Delhi who is engaged in doing job work in similar business conditions with the Ramadan Jewellery LLC, a company based in Dubai. It can be seen from the invoices referred above that the labour charges charged by Meenakshi International is in the range of $ 0.05-0.63 per gram of I.T.A .No.-101/Del/2015 33 gold. Further, it can be seen from the invoices placed on record of Mizan & Co., Delhi to New Kailash Jewellery House, Delhi that the labour charges are in the range of $ 0.21-0.52 per gram of gold. We find that the nature of business of the comparables is similar to that of the assessee and the price charged by the assessee is at arms length. It is clear from the invoices placed on record alongwith the TP report that in case of job work as that of the assessee, labour charges are not dependent on the designs of the jewellery and labour charges are calculated as per net weight of gold. 6.16 As we have held that the assessee has correctly applied CUP method to benchmark its transaction, TNMM being an indirect method cannot be applied in the case of the assessee. TNMM method can only be applied when direct and traditional methods are incapable of determining the arm's length price of the transaction. TNMM method is a profit based method which might result in possibility of vitiation of results by number of factors which are not relevant to the determination of prices at which international transactions are entered into by the associated enterprises. It would thus follow that in a situation in which the assessee has followed one of the standard methods of determining ALP, such a method cannot be discarded in preference over transactional profit methods I.T.A .No.-101/Del/2015 34 unless the revenue authorities are able to demonstrate the fallacies in application of standard methods.
6.17 Furthermore, the method adopted by the Ld. TPO is ex facie incorrect as all the comparables relied upon by the Ld. TPO are companies which are engaged in retail business who sell directly to the consumer. On the other hand, the assessee is engaged in a business to business model whose profitability cannot be compared to companies which are in business to customer model. Moreover, the profitability of the comparables relied upon by the Ld. TPO is calculated after including the cost of gold into the operating base of the company as the companies are in retail segment. The comparison 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 I.T.A .No.-101/Del/2015 35 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 the assessee that reimbursements can never come within the scope of charging Section 4 of the Act and therefore income cannot be deemed under the transfer pricing provisions under Chapter X of the Act as held by Hon'ble Bombay High Court in Vodafone Vs. UOI W.P(c) 871/2014 wherein it was held as under:
"38......The charge of Income now has to be found in Section 4 of the Act. If it is income which is chargeable to tax, under the normal provision of the Act, then alone Chapter X of the Act could be invoked. Sections 4 and 5 of the Act brings /charges to tax total income of the previous year. This would take us to the meaning of the word income under the Act as defined in Section 2(24) of the Act. The amounts received on issue of shares is admittedly a capital I.T.A .No.-101/Del/2015 36 account transaction not separately brought within the definition of Income, except in cases covered by Section 56(2) (viib) of the Act. Thus such capital account transaction not falling within a statutory exception cannot be brought to tax as already discussed herein above while considering the challenge to the grounds as mentioned in the impugned order."
6.19 We thus delete the second addition of Rs. 176,66,900/- on account of provision of facility, freight and insurance.
7. In result thereof, the appeal is allowed.
Order pronounced in the open Court on 18 /05/2015.
Sd/- Sd/-
(B. C. MEENA) (I. C. SUDHIR)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: 18 /05/2015
*Mohan Lal*
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(Appeals)
5. DR: ITAT
ASSISTANT REGISTRAR
I.T.A .No.-101/Del/2015 37
Date
Draft dictated on computer 08 .05.2015
Draft placed before author 08.05.2015
Draft proposed & placed before the second 18.05.2015
member
Draft discussed/approved by Second Member.
Approved Draft comes to the Sr.PS/PS 22.05.2015 Kept for pronouncement on 18.05.2015 File sent to the Bench Clerk 22.05.2015 Date on which file goes to the AR Date on which file goes to the Head Clerk. Date of dispatch of Order.