M/s. Kailash Jewels Pvt. Ltd., New Delhi V. ITO, New Delhi

ITA 101/DEL/2015

• Counselvise Citation: [2015] 120 COUNSELVISE.COM (IT) 9979 (ITAT-DELHI)
• Duration Of Justice: 4 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-05-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Next Hearing Date: 12-03-2015
• Assessment Year: 2010-2011
• Appeal Filed On: 06-01-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: JUDY JAMES
• Assessee Lawyers: PARMATMA SINGH ADVS; MAYANK JAIN SH MADHUR JAIN
• Keywords: Depreciation; Transfer pricing; International transaction
• Section: 92D; 11A; 56(2); 10B

Judgement Text

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, 2 ND 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 ORD ER ON THE FOLLOWING GROUNDS: 1. THAT THE IMPUGNED ORDER PASSED BY THE LD. AO/DR P IS BAD IN FACTS IN LAW IN THE PRESENT CASE. 2. THAT THE LD. AO/DRP ERRED IN TREATING THE INTERN ATIONAL TRANSACTION ENTERED INTO BY THE ASSESSEE FOR THE PU RPOSE OF JOB WORK TO BE PURCHASE AND SALE. THE AO HAS IGNOR ED THE FACT THAT THE ASSESSEE COMPANY EXCLUSIVELY FOR ITS AE AND NO CONSIDERATION HAS BEEN PASSED BY ITS AE EXCEPT FOR THE MAKING C HARGES. IT IS FURTHER RELEVANT TO NOTE THAT ONCE THE AO HAS ACCEP TED THAT THE ASSESSEE IS DOING THE JOB WORK FOR ITS AE, HE CANNO T 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 A CCOUNT OF THE ASSESSEE IN THE BOOKS OF THE AE WAS DULY FURNISHED, WHICH CLEARLY SHOWS THAT HE AE DOES NOT DEBIT THE ASSESSEE COMPAN Y 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 AS SESSEE NEVER ACQUIRED A RIGHT TO DISPOSE OF THE GOLD RECEIVED FO R 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 EX PORTED. THE LD. AO FAILED TO APPRECIATE THE BUSINESS MODEL OF THE A SSESSEE 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 BRAN CH, THE SAME CANNOT BE INSURED IN INDIA. ACCORDINGLY THE ASSESSE E 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 C OMPANIES. THE I.T.A .NO.-101/DEL/2015 3 MARGIN OF A RETAILER IS ALWAYS MORE THAN A WHOLESAL ER. A WHOLESALER HAS LESSER MARGINS AND MORE VOLUME. 8. THAT THE LD. ASSESSING OFFICER (AO) ERRED IN REJ ECTING THE BENCHMARKING APPROACH ADOPTED BY THE ASSESSEE IN TH E 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 ASSESSEES CALCULATION OF 4.84% OF (PROFIT BEFORE T AX)/TOTAL COST IS WINDOW DRESSED AND FURTHER THE ASSESSEE COMPANY IS NOT BEING COMPENSATED BY ITS AE FOR THE RISK FOR CARRYING GOL D 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 TRANSA CTION 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 DIFF ERENCES IN THE FUNCTIONAL ASSET RISK (FAR) PROFILE OF THE ASSESSEE CONTRACT MANUFACTURING FOR ITS ASSOCIATED ENTERPRISE (AE) AN D THE OTHER 12 COMPANIES WHO ARE HAVING A DISTINGUISHABLE FAR ANAL YSIS, WHOSE DETAILED JUSTIFICATION HAVE BEEN SUBMITTED BY THE A PPELLANT DURING THE COURSE OF THE PROCEEDINGS. 11. THE LD. AO ERRED IN CALCULATING THE OPERATING R EVENUE AT 108% OF OPERATING COSTS BY INCORRECTLY INCLUDING COST OF GO LD 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 ARMS LENGTH OF THE INTERNATIONAL TRANSACTION COMPLETELY DISREGARDED TH E NATURE OF BUSINESS OF THE ASSESSEE WHICH IS OF THAT A CONTRA CT MANUFACTURER EXCLUSIVELY FOR ITS AE AND MISUNDERSTOOD THE SAME TO BE A MANUFACTURER, WHICH IS COMPLETELY IMPERMISSIBLE I N LAW. 13. THE AO FAILED TO CONSIDER THAT THE ASSESSEE AFT ER RECEIVING THE ORDER SHEET FROM ITS AE, DISCUSSED THE DESIGNS ON P HONE AND THE SAME ARE FINALIZED OVER FAX AND MAIL. THE SUMMARY O RDER 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 AN D 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 SETTLE D LAW THAT ENTRIES IN BOOKS OF ACCOUNT ALONE ARE NOT CONCLUSIVE IN DETERM INING 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 FRO M ITS AE. HENCE THERE IS NO PROFIT OR LOSS ON THE VALUE OF GOLD REC EIVED AND SENT BACK IN THE SHAPE OF JEWELLERY. 18. THAT THE LD. AO FAILED TO CONSIDER THE SUBSTAN CE 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 HONBLE BENCH TO ADD, ALTER AND AMEND THE GROUNDS OF APPEAL DURING THE COURSE OF AP PEAL. 2. WE HAVE HEARD AND CONSIDER THE ARGUMENTS ADVANCE D BY THE PARTIES, AND HAVE GONE THROUGH THE ORDERS OF THE AUTHORITIES BEL OW, MATERIAL AVAILABLE ON RECORD AND THE DECISIONS RELIED UPON. 3. THE RELEVANT FACTS IN BRIEF ARE THAT THE ASSESSE E COMPANY IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND TRADING OF GOLD & SIL VER JEWELLERY ETC. DURING THE YEAR THE ASSESSEE COMPANY ENTERED INTO INTERNAT IONAL 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 INT ERNATIONAL 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 TRA NSFER PRICING OFFICER (TPO) WITH THE APPROVAL OF CIT U/S 92CA OF IT ACT FOR DET ERMINATION OF ARMS LENGTH PRICING. THE TPO VIDE ITS ORDER DATED 29.11.2013 PR OPOSE AND INCREASE OF RS.11,26,98,369/- IN THE TOTAL INCOME OF THE ASSESS EE FOR THE INTERNATIONAL TRANSACTION UNDERTAKEN BY THE ASSESSEE. THE ASSESSE E 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 ARMS LENGTH PRICE AS DETERMINED BY THE TPO. THE ASSESSEE RESPONDED THE S AID 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 ASSES SMENT 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 THE SE ACTION OF AUTHORITIES BELOW THE ASSESSEE HAS REFERRED PRESENT APPEAL ON T HE ABOVE GROUNDS QUESTIONING THE ADDITION OF RS.11,26,98,369/- MADE TO THE INCOME OF THE ASSESSEE BEING DIFFERENCE BETWEEN ARMS LENGTH PRIC E AND THE PRICE CHARGED BY THE ASSESSEE. 4. THE LEARNED AR SUBMITTED THAT FIRST ADDITION MAD E 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 I NTO BY THE ASSESSEE TO BE PURCHASE AND SALE AND WHILE CALCULATING ARMS L ENGTH PRICE HAS ADDED THE COST OF GOLD INTO THE COST BASE, IGNORING THE F ACT THAT NO CONSIDERATION HAS BEEN PASSED BY THE ASSESSEE TO THE AE, EXCEPT F OR MAKING CHARGES. 5.1. THE LEARNED AR SUBMITTED FURTHER THAT, A. THE VALUE OF GOLD IMPORTED AND EXPORTED IS ONLY A P ASS THROUGH COST AND CANNOT BE A PART OF THE COST BASE OF THE ASSESS EE. 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. COMMISS IONER 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 COMM UNICATIONS 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 A ND NO FINANCIAL CONSIDERATION IS BEING PASSED AS IS EVIDENT FROM TH E INVOICES, BANK STATEMENTS AND BILL OF ENTRY DULY VERIFIED BY THE C USTOM AUTHORITIES. C) FURTHERMORE, NO CUSTOM DUTY IS REQUIRED TO BE PA ID EITHER BY THE ASSESSEE. D) AS NO CONSIDERATION IS PASSED FOR THE VALUE OF G OLD AND THE SAME BEING A PASS THROUGH COST ONLY, THE FOREIGN EXCHANG E 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 TH E PROFIT AND LOSS ACCOUNT. 4.2. THE LEARNED AR SUBMITTED THAT ONLY NOTIONAL/ME MORANDUM ENTRIES ARE RECORDED IN THE BOOKS OF ACCOUNT OF THE ASSSES SEE 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 TA X ON THE AMOUNT WHICH IS 10 TIMES OF HIS ACTUAL REVENUE. HE PLACED RELIAN CE 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 ASSE SSEE 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 D OES NOT HAVE ANY RIGHT TO DISPOSE OF THE GOLD. THE AE REMAINS THE OW NER OF THE GOLD SENT TO THE ASSESSEE. IT IS SETTLED LAW THAT A PROPERTY CAN NOT 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/DR P HAS ERRED IN ADDING THE VALUE OF RAW MATERIAL CONSUMED IN THE OP ERATING 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 SEC TION 4 OF SALES OF GOODS ACT, 1930 AS THERE IS NO CONSIDERATION/PRICE PASSE D AS REGARDS THE CONTENT OF GOLD. 4.7. THE LEARNED AR SUBMITTED THAT THE MAKING CHARG ES 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 H AVE 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-R ELATED PARTIES TO ALMOWAIJI. B. BY COMPARING THE MAKING CHARGES CHARGED BY NONR ELATED PARTIES TO A NON RELATED PARTY. 4.9. THE LEARNED AR POINTED OUT THAT THE JOB WORK C HARGED 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 A SSESSEE HAS GIVEN EXTERNAL COMPARABLES WITH RESPECT TO THE TRANSACTIO NS CARRIED OUT BY PARTIES IN DELHI. THE ASSESSEE HAS FURTHER GIVEN COMPARABLE S 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 LOC ATIONS. 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 AS SESSEE IS ONLY A JOB WORKER AND THE BUSINESS MODEL OF THE ASSESSEE BEING B2B (BUSINESS TO BUSINESS) CANNOT BE COMPARED TO COMPANIES HAVING B2 C (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 ASSESS EE 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 I N THE CASE OF ASSESSEE I.T.A .NO.-101/DEL/2015 10 THE VALUE OF GOLD CANNOT BE TAKEN INTO CONSIDERATIO N 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 IMPU GNED ADJUSTMENT, THE RETURN ON INVESTMENT COMES TO 7087%, WHICH IS INCON CEIVABLE. 4.11. THE LEARNED AR ARGUED THAT THE SECOND ADDITIO N 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 SUBMIT S THAT THE INSURANCE AND FREIGHT IS ONLY A REIMBURSEMENT AND IS NOT A SO URCE OF INCOME TO THE ASSESSEE. 4.12 ACCORDING TO DUBAI LAWS, INSURANCE CANNOT BE D ONE FOR AN OVERSEAS TRANSACTION, THEREFORE THE ASSESSEE ON THE BEHALF O F THE AE HAS TAKEN INSURANCE POLICIES. ALL THE THREE INSURANCE POLICIE S HAVE BEEN IGNORED BY THE TPO/DRP. 4.13 THE LEARNED AR CONTENDED THAT REIMBURSEMENTS C AN 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 3 8) IN SUPPORT. I.T.A .NO.-101/DEL/2015 11 4.14 THE LEARNED AR SUBMITTED THAT THE ASSESSEE BEI NG A JOB WORKER IS ENTITLED TO EXEMPTION UNDER SECTION 10A OF THE INCO ME TAX ACT, 1961. RELIANCE IS PLACED ON THE JUDGMENT RENDERED BY THE HONBLE DELHI HIGH COURT IN CIT VS. LOVLESH JAIN, ITA NO. 1223/2011 (P ARA 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 CONSIDERATIO N, THE TOTAL CAPITAL OF THE ASSESSEE IS ONLY RS. 23.99 LACS. IT IS HIGHLY U NBELIEVABLE THAT FROM SUCH A LOW CAPITAL AN INCOME OF RS. 11.31 CRORES IS GENE RATED, THAT TOO, IN THE FIRST YEAR OF BUSINESS. 5. THE LD. DR/STANDING COUNSEL IN ITS SUBMISSIONS R ELIED UPON THE ORDER PASSED BY THE LD. TPO AND DRP AND THE JUDGMEN TS REFERRED TO THEREIN. 5.1 THE MAIN CONTENTION OF THE LD.DR IS THAT THE AS SESSEE IS ENGAGED IN BUSINESS OF JEWELLERY MANUFACTURING AND IS NOT MERE LY A JOB WORKER. HE POINTED OUT THAT IN CENTRAL EXCISE, THERE IS A CONC EPT 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 VA LUE 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 VA LUATION (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 LEGA L 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 H OW MANY OF THESE ITEMS ARE TO BE PREPARED, WHAT SHOULD BE THE SIZE O F ITEMS, WHAT IS THE DESIGN PATTERN, WHAT SHOULD BE THE PURITY, WHAT SHO ULD BE THE WEIGHT THAT IMPLIES THAT EVERYTHING IS LEFT AT THE DISCRETION O F THE ASSESSEE. 5.3 THE LD DR ARGUED THAT NO EVIDENCE HAS BEEN SUBM ITTED WITH REGARD TO THE BUSINESS MODEL FOLLOWED BY THE DUBAI BASED A E. 5.4 HE CONTENDED THAT THE ENTRIES PASSED THROUGH TH E BOOKS OF ACCOUNTS AND EVEN THE DOCUMENTATION MAINTAINED SHOWS THAT AS SESSEE IS DOING THE BUSINESS ONLY OF MANUFACTURING AND SALE OF JEWELLER Y. 5.5 THE LD DR STRESSED UPON THE LACK OF PROPER DOCU MENTATION AND JUSTIFICATION OF ARRANGEMENTS WITH AE. IT IS STATED IN THE BUSINESS MODEL OF THE ASSESSEE, THE AE SENDS A PLAIN LIST OF JEWELLER Y ITEMS REQUIRED BY THEM. I.T.A .NO.-101/DEL/2015 13 A SAMPLE REQUEST LETTER WAS PLACED ON RERECORD, WHI CH 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 99.5 0% FINENESS. 5.6 THE LD. DR FURTHER SUBMITTED THAT NOTHING IS ME NTIONED 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 DIA MONDS, NAG, MINA ETC. IN THE ABSENCE OF THE AFORESAID, IT SHOULD BE PRESU MED THAT THE ENTIRE DOCUMENTATION CREATED BY THE ASSESSEE COMPANY IS JU ST EYE WASH AND HAS BEEN CREATED WITH AN INTENTION TO MISLEAD THE A UTHORITIES AND EVADE THE PAYMENT OF TAX. 5.7 THE LD DR FURTHER CONTENDED IN RELATION TO SELE CTION OF MOST APPROPRIATE METHOD THAT THE ASSESSEE COMPANY HAS AD OPTED COST PLUS METHOD FOR THE PURPOSE OF BENCHMARKING OF ITS INTER NATIONAL TRANSACTIONS EXECUTED WITH AE. HOWEVER , LATER ON IN THE TP STUD Y ITSELF, THE ASSESSEE COMPANY HAS MADE AN ATTEMPT TO APPLY CUP METHOD FO R 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 ASS ESSEE AS A) THE TAXPAYER HIMSELF STATES THAT MAKING CHARGES ARE DIFFERENT FROM DESIGN TO DESIGN AND ALSO DIFFERS REGION TO RE GION, SO ON WHAT BASIS, THE ASSESSEE COMPANY HAS ADOPTED THE APPLICATION OF CUP METHOD, WHERE JEWELLERY PURCHASE D BY AE FORM NON-RELATED PARTIES LOCATED AT DIFFERENT COUNT RIES 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 DE TAILS HAVE BEEN PROVIDED IN RELATION TO TYPE OF JEWELLERY SUPP LIED BY UNRELATED PARTIES TO AE. 5.8 THE LD. DR HAS FURTHER STATED THAT AS THE TP ST UDY FURNISHED BY THE ASSESSEE COMPANY DOES NOT CONTAIN ANY COMPARISON WI TH THE EXTERNAL COMPARABLE COMPANIES, THUS, TPO HAD NO OTHER OPTION BUT TO CARRY OUT THE FRESH SEARCH OF COMPARABLES FOR THE PURPOSE OF BENC HMARKING 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 DES IRABLE TO HAVE A BROADER SET OF COMPARABLES. BROADER SET OF COMPARABLES BECO MES ALL THE MORE NECESSARY WHEN THE ARMS LENGTH PRICE IS TO BE DETE RMINED BY ADOPTING ARITHMETICAL MEAN. THE COMPARABLES SELECTED BY THE LD. TPO FOR APPLYING THE TNMM METHOD AFTER MAKING RELEVANT ADJUSTMENTS A RE AS UNDER: S.NO. COM PANY 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 (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 T HE COST BASE ADOPTED BY THE ASSESSEE WAS VERY NARROW AND IT DID NOT INCL UDE 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. T PO OF THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS ENTERED INT O BY THE ASSESSEE WHICH WORKED OUT AS UNDER:- PARTICULARS AMT IN RS. OPERATING COST (A) 8787,58,047 ARMS LENGTH REVENUE 9567,91,762 I.T.A .NO.-101/DEL/2015 16 5.10 AS REGARDS THE SECOND ADDITION OF RS. 176,6 6,900, THE LD. DR RELIED UPON THE ORDER OF THE LD. TPO AND CONTENDED THAT HAD THE ASSESSEES GOT THIS SERVICE CARRIED OUT FROM AN IND EPENDENT 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 RUL E 10AB RELIED UPON BY THE LD. TPO AND ACCORDINGLY RELIED UPON THE COMPUTA TION DONE BY THE LD. TPO AS UNDER: TOTAL GRAMS OF GOLD (BARS/JEWELLERY) CARRIED AWAY 11,40,638 GRAMS ASSUMING RISK FACTOR OF 1% 11,406 GRAMS AVERAGE PRICE AT WHICH GOLD IS IMPORTED FROM AE RS 1,581/- PER GRAM FINANCIAL RISK TO BE COMPENSATED BY AE TO ASSESSEE COMPANY RS. 18033485/- RECEIPT SHOWN BY ASSESSEE ON THIS ACCOUNT RS. 366585/- ADJUSTMENT PROPOSED FOR RISK RS. 176,66,900/- 6. WE FIND THAT THE ISSUES RAISED IN THE GROUNDS RE VOLVES AROUND THE VALIDITY OF TRANSFER PRICING ADJUSTMENT OF RS.11,26 ,98,369 TO THE INCOME (B+A*108.88%) OPERATING REVENUE COLLECTED (C) 8617,60,293 ADJUSTMENT (B-C) 950,31,469 I.T.A .NO.-101/DEL/2015 17 OF THE ASSESSEE HOLDING THAT THE ASSESSEES CALCULA TION OF 4.84% OF (PROFIT BEFORE TAX)/TOTAL COST IS WINDOW DRESSED. 6.1. THE RELATED FACTS AND THE STAND OF THE ASSESSE E 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 RETU RNED AN INCOME FROM JOB WORK TO BE RS.4,25,448/-, WHICH IS EXEMPTE D 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 T HE 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 DE STINATION, AN INVOICE IS MADE CONTAINING THE QUANTITY, FINENESS A ND USD VALUE OF GOLD BARS ALONG WITH OTHER DESCRIPTION OF SHIPME NT ETC. THE INVOICE CLEARLY STATES THAT THE GOLD BARS ARE ON FO C BASIS. - ALMOWAIJI PASSES NO FINANCIAL ENTRY FOR THE VALUE O F GOLD SENT TO THE ASSESSEE. ONLY THEY RECORD THE QUANTITY OF GOLD CONVERTED IN 100% FINENESS IN THE ACCOUNT OF THE ASSESSEE FOR IN TERNAL CONTROL PURPOSES. - THE GOLD IS HAND CARRIED AS BAGGAGE BY THE EMPLOYEE OF THE ASSESSEE BY AIR AND THE EXPENSE THEREOF IS ALSO BOO KED 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 SITUA TED IN NSEZ, THE ASSESSEE IS NOT REQUIRED TO DISCHARGE ANY DUTY WITH REGARD TO THE SAME. THE BOE ALSO CLEARLY STATES THAT THE GOODS AR E ON FOC I.T.A .NO.-101/DEL/2015 18 (FREE OF COST) BASIS. IT IS FURTHER RELEVANT TO NOT E THAT NO CUSTOMS DUTY ON THE GOLD IMPORTED IS TO BE PAID BY THE ASSESSEE, WHICH IS EVIDENT FROM THE DOCUMENTS PLACED ON RECOR D. - AS PER THE TERMS OF UNDERSTANDING BETWEEN THE ASSES SEE COMPANY AND ALMOWAIJI: - (A) THE ASSESSEE IS REQUIRED TO CONVERT THE GOLD RECEIV ED FROM ALMOWAIJI INTO JEWELLERY {AS PER SPECIFICATION} AND SEND IT BACK TO THEM SUCH THAT THE QUANTITY OF PURE GOLD CO NTENT IN JEWELLERY SUPPLIED INCLUDING PERMISSIBLE WASTAGE EQ UALS 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 JEWELLE RY, SINCE THE GOLD WAS SENT BY ALMOWAIJI FOC. ACCORDINGLY, $ VALUE OF JEWELLERY CONTAINED IN THE EXPORT INVOICE OF THE AS SESSEE (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 N ET WEIGHT OF JEWELLERY EXPORTED AS MENTIONED IN THE IN VOICE RAISED BY THE ASSESSEE. (D) THE ASSESSEE IS ALLOWED $0.65 PER NET WEIGHT OF JEW ELLERY (IRRESPECTIVE OF FINENESS) AS MENTIONED IN THE INVO ICE RAISED AS MAKING CHARGES. ADDITIONALLY, THE ASSESSEE SHALL ALSO SEPARATELY BILL FOR FREIGHT AND INSURANCE CHARGES @ APPROXIMATELY $350 PER CONSIGNMENT. IN SHORT, THE N ET RECOVERABLE AMOUNT AS SHOWN IN THE EXPORT INVOICE I S 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 COM PANY IN INDIA SENDS GOODS TO ITS OVERSEAS BRANCH, THE SA ME CANNOT BE INSURED IN INDIA. ACCORDINGLY THE ASSESSE E 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 FIXE D RATE OF $350 PER CONSIGNMENT. IN THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAD ACTUALLY INCURRED R S. 2,66,722 AS FREIGHT AND INSURANCE CHARGES AND RECEI VED 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 WHI CH THE GOLD WAS RECEIVED FOC. IT ALSO CONTAINS THE QUANTAT IVE TALLY OF GOLD RECEIVED AND CONVERTED INTO JEWELLERY. (G) CONSIDERING THAT SINCE ALMOWAIJI HAS RAISED AN INVO ICE (ALTHOUGH FOC) FOR GOLD BARS, THERE IS A BILL OF EN TRY AS PER CUSTOMS (ALTHOUGH FOC), THE ASSESSEES LIABILITY FO R ANY LOSS OF SUCH GOLD, ITS OBLIGATION TO CONVERT THE SAME I NTO SPECIFIED JEWELLERY AND RESEND TO ALMOWAIJI, AND LA STLY INTERNAL CONTROLS, THE ASSESSEE COMPANY BOOKS THE S AME AS PURCHASE AT A CONVERSION RATE MENTIONED IN THE BOE AND CREDITS ALMOWAIJI. CONVERSELY, AT THE TIME OF SENDI NG THE JEWELLERY BACK TO ALMOWAIJI, THE ASSESSEE COMPANY R AISES AN EXPORT INVOICE AND THE SAME IS RECORDED IN INR AT T HE 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 SA LE. HOWEVER, THIS DOES NOT HAVE ANY FINANCIAL IMPACT SI NCE 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 RATE S, 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 ASS ESSEE 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 DOCU MENT, IMPORT INVOICE OF THE ASSESSEE COMPANY IN THE RELEVANT ASSESSMENT YEA R. THE ASSESSEE IS REQUIRED TO CONVERT THE GOLD RECEIVED FROM AE INTO JEWELLERY (AS PER SPECIFICATION ) AND SEND IT BACK TO AE SUCH THAT TH E QUANTITY OF PURE GOLD CONTENT IN JEWELLERY SUPPLIED INCLUDING PERMISSIBLE WASTAGE EQUALS THE QUANTITY OF PURE GOLD RECEIVED. THE $ VALUE OF JEWE LLERY CONTAINED IN THE EXPORT INVOICE OF THE ASSESSEE (INCLUDING PERMISSIB LE WASTAGE) WOULD BE EQUIVALENT TO $ VALUE OF GOLD IMPORTED FOC. THE ASS ESSEE USED TO CHARGE $0.65 PER NET WEIGHT OF JEWELLERY (IRRESPECTIVE OF FINENESS) AS MENTIONED IN THE INVOICE RAISED AS MAKING CHARGES. THE ASSESS EE HAS STATED THAT I.T.A .NO.-101/DEL/2015 21 ONCE THE ORDER SHEET IS RECEIVED, IT IS MUTUALLY DI SCUSSED ON PHONE WITH AE AND DESIGN, WEIGHT AND QUANTITY OF ITEMS IS DECI DED AND A PAPER IS PREPARED. THE COPIES OF ORDER SHEETS AND DESIGNS AR E PART OF RECORD AND ARE RELIED UPON BY THE ASSESSEE TO FORTIFY ITS SUBM ISSION. 6.3 ADDITIONALLY, THE ASSESSEE ALSO SEPARATELY BILL S FOR FREIGHT AND INSURANCE CHARGES @ $350 PER CONSIGNMENT. THE JEWEL LERY 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 I NTO JEWELLERY. 6.4 IT IS OBSERVED THAT THE ASSESSEE EXCLUSIVELY WO RKS FOR ITS AE AND NO CONSIDERATION HAS BEEN PASSED BY THE ASSESSEE FOR T HE 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 CHA RGES AS DEMONSTRATED BY THE ASSESSEE ARE CHARGED PER GRAM OF GOLD AS PER THE PREVAILING INDUSTRIAL PRACTICE. THE SAME IS EVIDENT FROM THE C OPIES OF INVOICES ANNEXED TO THE TP REPORT FILED BY THE ASSESSEE. JUS T BECAUSE THE ASSESSEE PASSES MEMORANDUM ENTRIES/NOTIONAL ENTRIES IN ITS B OOKS OF ACCOUNT, IT CANNOT BE SAID THAT THE INTERNATIONAL TRANSACTION E NTERED INTO BY THE ASSESSEE IS OF PURCHASE AND SALE. IT IS APPOSITE TO REFER TO THE JUDGMENT RENDERED BY THE HONBLE BOMBAY HIGH COURT IN CIT VS . GOPAL PUROHIT, 336 ITR 287 (BOM) WHEREIN THE HONBLE COURT HELD THAT T HE SUBSTANCE OF THE I.T.A .NO.-101/DEL/2015 22 TRANSACTION HAS TO BE SEEN RATHER THAN FORM OF TRA NSACTION. IT WAS HELD AS UNDER:- 4.INSOFAR AS QUESTION (C) IS CONCERNED, AGAIN THERE CANNOT BE ANY DISPUTE ABOUT THE BASIC PROPOSITION THAT ENTRIE S IN THE BOOKS OF ACCOUNT ALONE ARE NOT CONCLUSIVE IN DETERM INING THE NATURE OF INCOME. THE TRIBUNAL HAS APPLIED THE CORR ECT PRINCIPLE IN ARRIVING AT THE DECISION IN THE FACTS OF THE PRESENT CASE. THE FINDING OF FACT DOES NOT CALL FOR INTERFE RENCE IN AN APPEAL UNDER S. 260A. NO SUBSTANTIAL QUESTION OF LA W IS RAISED. THE APPEAL IS ACCORDINGLY DISMISSED. THE AFORESAID PROPOSITION OF LAW FURTHER FINDS FORC E FROM THE JUDGMENT RENDERED BY THE HONBLE SUPREME COURT IN K EDARNATH JUTE MANUFACTURING, 82 ITR 363 (SC) AND SUTLEJ COTTON MI LLS LTD, 116 ITR 1 (SC). 6.5 IT IS DIFFICULT TO CONCEIVE HOW A TRANSACTION I S SAID TO BE HAVING THE CHARACTER OF PURCHASE AND SALE WHEN THE COST OF R AW MATERIAL IS NOT PASSED BETWEEN THE PARTIES. EVEN THE AE DOES NOT PA SS ANY FINANCIAL ENTRY IN ITS BOOKS OF ACCOUNT WHILE CARRYING OUT AF ORESAID TRANSACTION WITH THE ASSESSEE. CONSIDERING THE NATURE OF THE BUSINES S OF THE ASSESSEE MORE PARTICULARLY THE FACT THAT NO CONSIDERATION IS PASSED AS REGARDS THE VALUE OF GOLD IMPORTED, WE ARRIVE AT CONCLUSION THA T 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 EN TITLED TO JOB CHARGES PAID BY ITS AE. FURTHERMORE, THE IMPORT AND EXPORT INVOICES ARE ON FOC BASIS WHICH ARE DULY VERIFIED BY THE CUSTOM AUTHORI TIES AT THE TIME OF I.T.A .NO.-101/DEL/2015 23 IMPORT OF GOLD AND EXPORT OF JEWELLERY. ALSO, IT CA N 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 JEW ELLERY EXPORTED. 6.6 IN SUBSTANCE, THE ASSESSEE IS NOT THE OWNER OF THE GOLD IMPORTED AND JEWELLERY EXPORTED AND IS NOT ENTITLED TO ANY P ROFIT ON THE GOLD CONTENT. THE ASSESSEE DOES NOT HAVE ANY RIGHT TO DI SPOSE 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 JUDGMEN T RELIED UPON BY THE LD. AR IN THE CASE OF R.B. JODHA MAL KUTHIALA VS. CIT (1971) 82 ITR 570 (SC) WHEREIN THE HONBLE 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 VEST S 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 INCO ME FROM PROPERTY AND NOT THE INTEREST OF A PERSON IN THE PR OPERTY. A PROPERTY CANNOT BE OWNED BY TWO PERSONS, EACH ONE H AVING 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 TRANSAC TIONS ENTERED INTO BY THE ASSESSEE WITH ITS AE CANNOT BE TERMED AS SA LE. 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 GOO DS 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 V ALUE OF GOLD, WHICH IS EVIDENT FROM THE BANK STATEMENTS PRODUCED BY THE ASSESSEE, THEREFORE, THE AFORESAID TRANSACTIONS CAN NOT BE TERMED AS SALE. 6.8 THE LD. DR HAS CONTENDED THAT THE ASSESSEE CANN OT CLAIM EXEMPTION UNDER SECTION 10A OF THE ACT IF HE IS A J OB 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 HONBLE JU RISDICTIONAL 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 RELEV ANT 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 UN DER 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 CON VERTED INTO ORNAMENTS BY THE ASSESSEE, WAS NOT OWNED BY THE ASS ESSEE. THE ASSESSEE WAS PAID MAKING CHARGES AND NOT SALE CONSI DERATION. THE IMPORTED STANDARD GOLD WAS OWNED BY THE THIRD PARTI ES RESIDENT ABROAD. ACCORDINGLY THE ASSESSEE HAD NOT DERIVED PR OFITS AND GAINS AS ARE DERIVED BY AN UNDERTAKING FROM EXPORT OF ART ICLES/THINGS. (II) THE ASSESSEE IS NOT AN UNDERTAKING ENGAGED IN MANUF ACTURE OR PRODUCTION OF ARTICLES OR THINGS. CONVERSION OF STA NDARD GOLD INTO ORNAMENTS IS NOT MANUFACTURE OR PRODUCTION OF A RTICLES 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 GOL D SUPPLIED BY RAMDAN JEWELLERY, DUBAI AND THE SAME AFTER CONVERSI ON 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. T HE ASSESSEE WAS PAID CONVERSION CHARGES OR PRODUCTION/MANUFACTURING CHARGES FOR CONVERTING THE GOLD INTO JEWELLERY. THE ASSESSING O FFICER HELD THAT THE ASSESSEE WAS NOT MANUFACTURING ORNAMENTS/ JEWEL LERY AND WAS NOT AN EXPORTER AS HE WAS PAID MAKING CHARGES FOR T HE JOB WORK/SERVICES FOR MAKING ORNAMENTS AS PER SPECIFICA TION 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 O F THE ASSESSEE. HE HELD THAT THE ASSESSEE WAS ENGAGED IN THE ACTIVI TY OF PRODUCTION OF JEWELLERY, WHICH IS COVERED BY SECTION 10A AND TH E ASSESSING OFFICER HAD NOT EXAMINED THE SAID ASPECT AND HAD ON LY CONSIDERED WHETHER OR NOT ASSESSEE WAS ENGAGED IN MANUFACTURIN G. HE FURTHER HELD THAT THE ASSESSEE WAS ENGAGED IN EXPORT IN V IEW 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 S ECTION 10A. 5.4 THE TRIBUNAL HAS DISMISSED THE APPEAL OF THE REVENU E 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 AS SESSEE HAD RECEIVED STANDARD GOLD FROM M/S ONRICH JEWELLER (LLC), DEIRA, DUBAI, UAE AND AFTER MANUFACTURING THE JEWEL LERY, IT I.T.A .NO.-101/DEL/2015 26 WAS EXPORTED TO M/S ONRICH AT DUBAI AND TO A THIR D PERSON AT LONDON ON INSTRUCTIONS FROM M/S ONRICH, DUBAI. T HE GOLD IMPORTED INTO INDIA WAS OF 0.995 PURITY AND WAS REQ UIRED TO BE CONVERTED INTO JEWELLERY OF 22/21 CARATS. ON ANO THER 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 FRE E OF COST. 6.2 IN THE PRESENT CASE, THE ASSESSEE HAD CLAIMED D EDUCTION UNDER SECTION 10B OF THE ACT. THE ASSESSING OFFICER DISALL OWED THE SAID DEDUCTION ON THE GROUND THAT THE ASSESSEE DID NOT M ANUFACTURE ANY ARTICLE OR THING AND THE OWNERSHIP OVER RAW GOLD AN D 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 R AW 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 GOL D. HE RELIED UPON DECISIONS OF THE GUJARAT HIGH COURT IN CIT VER SUS J.B. KHARWAR& SONS,[1987] 163 ITR 394 AND THE MADRAS HIG H COURT IN TAJ FIRE WORKS INDUSTRIES, [2007] 288 ITR 92. 8. SECTION 10A/10B OF THE ACT STIPULATES THAT AN AS SESSEE IS ENTITLED TO DEDUCTION FROM SUCH PROFITS AND GAINS AS ARE DER IVED BY AN UNDERTAKING FROM EXPORT OF ARTICLES OR THINGS OR CO MPUTER SOFTWARE, FROM THE TOTAL INCOME OF THE ASSESSEE. DEDUCTION UN DER THE SAID SECTION IS ADMISSIBLE FOR THE PRESCRIBED PERIOD FROM THE DATE WHEN THE ASSESSEE BEGINS TO MANUFACTURE OR PRODUCE ARTIC LES OR THINGS OR COMPUTER SOFTWARE. 9. THE ASSESSEE CONVERTS STANDARD GOLD INTO ORNAMEN TS. THE STANDARD GOLD HAS PURITY LEVELS OF 0.999/0.995, WHE REAS 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 OR NAMENTS AS GOLD WITH 0.999/0.995 PURITY IS VERY SOFT AND TENDS TO B END OR BREAK EASILY. THE CONTENTION OF THE REVENUE IS THAT CONVE RSION OF STANDARD GOLD INTO ORNAMENTS DOES NOT AMOUNT TO MANUFACTURE OR PRODUCTION OF ARTICLES OR THINGS AS THE PRIMARY MA TERIAL 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 WID ER AS WELL AS A NARROWER CONNOTATION. IN WIDER SENSE, IT SIMPLY MEA NS TO MAKE, FABRICATE OR BRING INTO EXISTENCE AN ARTICLE OR PRO DUCT EITHER BY PHYSICAL LABOUR OR BY MECHANICAL POWER. GIVEN A NAR ROWER CONNOTATION IT MEANS TRANSFORMING OF THE RAW MATERI AL INTO A COMMERCIAL PRODUCT/COMMODITY OR FINISHED PRODUCT WH ICH HAS A NEW, SEPARATE ENTITY BUT THIS DOES NOT NECESSARILY MEAN THAT THE MATERIAL BY WHICH THE COMMODITY IS MANUFACTURED MUS T 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 BEE N USED. THE SUPREME COURT IN GRAPHIC COMPANY INDIA LIMITED VERSU S COLLECTOR OF CUSTOMS, (2001) 1 SCC 549 AND UNION OF INDIA VERS US DELHI CLOTH AND GENERAL MILLS COMPANY LIMITED, AIR 1963 S C 791 HAS HELD THAT MANUFACTURE HAS TO BE UNDERSTOOD TO MEAN TRANSFORMATION OF GOODS INTO A NEW COMMODITY COMMER CIALLY DISTINCT AND SEPARATE, AND HAVING ITS OWN CHARACTER , USE AND NAME WHETHER IT BE THE RESULT OF ONE OR SEVERAL PROCESSE S. HOWEVER, EVERY CHANGE DOES NOT RESULT IN MANUFACTURE THOUG H EVERY CHANGE IN AN ARTICLE MAY BE A RESULT OF TREATMENT O R MANIPULATION BY LABOUR OR/AND MACHINES. IF AN OPERATION OR PROCE SS THAT RENDERS A COMMODITY OR ARTICLE FIT FOR USE, WHICH IT IS OTH ERWISE 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, WHIL E COMPUTING THE ARMS 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. L TD. 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 PRIN CIPAL 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 ASSESSEES ASSOCIATE ENTERPRISE T O THE ASSESSEE ON ACCOUNT OF PAYMENT MADE TO THIRD PARTY VENDOR/ME DIA AGENCIES. IT IS NOT IN DISPUTE THAT THE ASSESSEE IS ENGAGED I N UNDERTAKING ADVERTISING SERVICES FOR ITS CUSTOMERS/ASSOCIATE EN TERPRISES IN THE CAPACITY OF AN AGENT. AS PART OF ITS BUSINESS OPERA TION, THE ASSESSEE FACILITATES PLACEMENT OF ADVERTISEMENT FOR ITS ASSO CIATE ENTERPRISE IN THE PRINT/ELECTRONIC ETC. MEDIA AND FOR THAT PURPOS E, THE ASSESSEE IS REQUIRED TO MAKE PAYMENT TO THIRD PARTIES FOR RENDE RING OF ADVERTISEMENT SPACE ON BEHALF OF ITS CUSTOMERS OR A SSOCIATED ENTERPRISES. IT IS, THUS, CLEAR THAT THE ASSESSEES BUSINESS IS NOT SALE OF ADVERTISING SLOTS TO ITS CUSTOMERS OR ASSOCIATE CONCERN. FOR PERFORMING THE FUNCTIONS FOR AND ON BEHALF OF ASSOC IATED ENTERPRISES, THE ASSESSEE IS REMUNERATED BY ITS ASS OCIATED ENTERPRISES ON THE BASIS OF A FIXED COMMISSION/CHAR GES BASED ON EXPENSES OR COST INCURRED BY THE ASSESSEE FOR RELEA SE OF A PARTICULAR ADVERTISEMENT. IT IS ALSO TO BE NOTED THAT ADVERTIS ING 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 A DVERTISEMENT. WE HAVE GONE THROUGH THE INVOICES AND PURCHASE ORDE RS FROM THIRD PARTY VENDORS AND FIND THAT THEY CONTAIN CUSTOMERS NAME, AND ALL THE TERMS OF ADVERTISEMENT ARE FINALIZED AFTER TAKI NG THE APPROVAL FROM THE CUSTOMERS. THE ASSESSEE SIMPLY ACTS AS AN INTERMEDIARY BETWEEN THE ULTIMATE CUSTOMER AND THE THIRD PARTY V ENDOR IN ORDER TO FACILITATE PLACEMENT OF THE ADVERTISEMENT. THE P AYMENT MADE BY THE ASSESSEE TO VENDORS IS RECOVERED FROM THE RESPE CTIVE CUSTOMERS OR ASSOCIATE ENTERPRISES. IN THE EVENT CUSTOMER FAI LS TO PAY ANY SUCH AMOUNT TO THE ADVERTISEMENT AGENCY, THE BAD DE BT RISK IS BORNE BY THE THIRD PARTY VENDOR AND NOT BY THE ADVE RTISING AGENCY I.E. THE ASSESSEE. IT IS, THUS, CLEAR THAT THE ASSE SSEE HAS NOT ASSUMED ANY RISK ON ACCOUNT OF NON-PAYMENT BY ITS C USTOMERS OR ASSOCIATED ENTERPRISES. AT THIS STAGE A USEFUL REFE RENCE MAY BE MADE TO ITS 2009 TRANSFER PRICING GUIDELINES ACCEPTE D BY THE OECD WHERE IT IS LAID DOWN THAT WHEN AN ASSOCIATE E NTERPRISES IS ACTING ONLY AS AN AGENT OR INTERMEDIARY IN THE PROV ISION OF SERVICE, IT IS IMPORTANT IN APPLYING THE COST PLUS METHOD TH AT THE RETURN OR MARK-UP IS APPROPRIATE FOR THE PERFORMANCE OF AN AG ENCY FUNCTION RATHER THAN FOR THE PERFORMANCE OF THE SERVICES THE MSELVES, AND, IN SUCH A CASE, IT MAY BE NOT APPROPRIATE TO DETERMINE ARMS LENGTH PRICE AS A MARK-UP ON THE COST OF SERVICES BUT RATH ER 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 P ERFORMANCE 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 IT S 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 TH E OPERATING COST OF THE ASSESSEE. 6.11 THE NEXT ISSUE WHICH IS TO BE DECIDED AS TO WH ICH IS THE MOST APPROPRIATE METHOD (MAM) FOR CALCULATING THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION ENTERED INTO BY THE A SSESSEE. THE ASSESSEE HAS RELIED UPON CPM AND CUP METHOD TO BENC HMARK ITS INTERNATIONAL TRANSACTIONS. HOWEVER, DURING THE COU RSE OF ARGUMENTS, THE ASSESSEE DID NOT PRESS THE APPLICABI LITY OF CPM METHOD AND EXTENSIVELY RELIED UPON THE APPLICABILIT Y OF CUP METHOD BY GIVING EXTERNAL COMPARABLES WITH RESPECT TO THE TRANSACTIONS CARRIED OUT BY PARTIES IN DELHI AND HAS FURTHER GIV EN COMPARABLES OF PRICED CHARGED BY A COMPANY IN DELHI TO A COMPANY I N DUBAI ENGAGED IN THE SIMILAR BUSINESS CARRIED OUT BY THE ASSESSEE. 6.12 THE COMPARABLES RELIED UPON THE ASSESSEE ARE A S UNDER: LABOUR CHARGES CHARGED BY LABOUR CHARGES CHARGED TO INVOICE NO/DATE TOTAL NET WEIGHT LABOUR CHARGES CLAIMED LABOUR CHARGES IN $ PER GM OF NET WEIGHT USD/INR, BASED ON BOB VALUE OF EXPORTS I.T.A .NO.-101/DEL/2015 31 MIZAN & CO, DELHI NEW KAILASH JEWELLERY HOUSE, NEW DELHI 30.05.2009 1040.03 20801 0.42 47.29 MIZAN & CO, DELHI NEW KAILASH JEWELLERY HOUSE, NEW DELHI 17.09.2009 1302 19530 0.31 48.35 MIZAN & CO, DELHI NEW KAILASH JEWELLERY HOUSE, NEW DELHI 20.09.2009 2357 58930 0.52 48.35 MIZAN & CO, DELHI NEW KAILASH JEWELLERY HOUSE, NEW DELHI 21.10.2009 685.745 6857 0.21 47.7 MIZAN & CO, DELHI NEW KAILASH JEWELLERY HOUSE, NEW DELHI 31.03.2010 1673.85 25108 0.33 45.7 AVISONS JEWELLERS NEW KAILASH JEWELLERY HOUSE, NEW DELHI 08.01.2010 1966.49 39330 0.43 46.3 MEENAKSHI INTERNATIONAL DELHI RAMADAN JEWELLERY LLC, DUBAI 12.10.2009 24564.6 1307 0.05 MEENAKSHI INTERNATIONAL DELHI RAMADAN JEWELLERY LLC, DUBAI 28.10.2009 15700.5 9822 0.63 6.13 THE ASSESSEE HAS COMPARED ITS LABOUR CHARGES T O RATES CHARGED BY SOME OF THE NON-RELATED SUPPLIERS TO AL MOWAIJI. PARTY NAME ADDRESS INVOICE NO/DATE TOTAL NET WEIGHT LABOUR CHARGES CLAIMED LABOUR CHARGES IN $ PER GM OF NET WEIGHT UNIGOLD INTERNATIONAL PTE.LTD. NO.2 LITTLE ROAD, SINGAPORE 536981 DUB 020286 1014.7 609 0.60 UNIGOLD INTERNATIONAL PTE.LTD. NO.2 LITTLE ROAD, SINGAPORE 536981 DUB 020287 5390 3511 0.65 MORO MODA JEWELLERY LIMITED ROOM NO.1202,CAPITOL CENTRE,5-19,JARDINE'S BAZAR,CAUSEWAY BAY,HONGKONG A0215/09 1495 822 0.55 EDGE WELL SDN. BHD 6, LORONG PERUSAHAAN MAJU 10, TAMAN PERUSAHAAN PELANGI, 13600 PRAI, MALAYSIA INV NO. E0010585 DT. 26.3.2010 1809.420 1081.72 0.60 AHY JEWELLERY SDN BHD 101-06-09 TO 101-06- 11, MEENA PERDANA, JALAN GURDWARA, 10300 PENANG, MALAYSIA INV NO. 2114 DT. 02/04/2010 984.240 288.26 0.29 SADAF JEWELLERY F.Z.C. P.O. BOX: 122579, SAIF ZONE, SHARJAH - U.A.E INV NO. 1016 DT. 01/04/2010 257.600 155.19 0.60 F.M. TRADING SDN BHD. (NO. 571623-X) (OVERSEAS) 32, 1ST FLOOR CAMPBELL STREET, 10100 PENANG, MALAYSIA INV NO. 20195 DT. 31/1/2010 6587.700 3623.23 0.55 I.T.A .NO.-101/DEL/2015 32 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 CALCULAT ION OF ARMS LENGTH PRICE. 6.15 WE HAVE TO FIRST CONSIDER THE APPLICABILITY OF CUP BEING A DIRECT METHOD, IN THE PRESENT CASE. THE ASSESSEE HA S PLACED ON RECORD THE INVOICES OF THE AFORESAID COMPANIES REFE RRED TO IN THE TABLE ABOVE. OUR ATTENTION WAS PARTICULARLY DRAWN T O THE INVOICE OF MEENAKSHI INTERNATIONAL, A COMPANY BASED IN DELHI W HO IS ENGAGED IN DOING JOB WORK IN SIMILAR BUSINESS CONDITIONS WI TH THE RAMADAN JEWELLERY LLC, A COMPANY BASED IN DUBAI. IT CAN BE SEEN FROM THE INVOICES REFERRED ABOVE THAT THE LABOUR CHARGES CHA RGED 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 PLA CED 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 ASSESS EE IS AT ARMS LENGTH. IT IS CLEAR FROM THE INVOICES PLACED ON REC ORD ALONGWITH THE TP REPORT THAT IN CASE OF JOB WORK AS THAT OF THE A SSESSEE, LABOUR CHARGES ARE NOT DEPENDENT ON THE DESIGNS OF THE JEW ELLERY AND LABOUR CHARGES ARE CALCULATED AS PER NET WEIGHT OF GOLD. 6.16 AS WE HAVE HELD THAT THE ASSESSEE HAS CORREC TLY APPLIED CUP METHOD TO BENCHMARK ITS TRANSACTION, TNMM BEING AN INDIRECT METHOD CANNOT BE APPLIED IN THE CASE OF THE ASSESSE E. TNMM METHOD CAN ONLY BE APPLIED WHEN DIRECT AND TRADITIO NAL METHODS ARE INCAPABLE OF DETERMINING THE ARMS LENGTH PRICE OF THE TRANSACTION. TNMM METHOD IS A PROFIT BASED METHOD WHICH MIGHT RE SULT IN POSSIBILITY OF VITIATION OF RESULTS BY NUMBER OF FA CTORS WHICH ARE NOT RELEVANT TO THE DETERMINATION OF PRICES AT WHICH IN TERNATIONAL TRANSACTIONS ARE ENTERED INTO BY THE ASSOCIATED ENT ERPRISES. IT WOULD THUS FOLLOW THAT IN A SITUATION IN WHICH THE ASSESS EE HAS FOLLOWED ONE OF THE STANDARD METHODS OF DETERMINING ALP, SUC H A METHOD CANNOT BE DISCARDED IN PREFERENCE OVER TRANSACTIONA L PROFIT METHODS I.T.A .NO.-101/DEL/2015 34 UNLESS THE REVENUE AUTHORITIES ARE ABLE TO DEMONSTR ATE THE FALLACIES IN APPLICATION OF STANDARD METHODS. 6.17 FURTHERMORE, THE METHOD ADOPTED BY THE LD. T PO 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 EN GAGED IN A BUSINESS TO BUSINESS MODEL WHOSE PROFITABILITY CANN OT BE COMPARED TO COMPANIES WHICH ARE IN BUSINESS TO CUSTOMER MODE L. MOREOVER, THE PROFITABILITY OF THE COMPARABLES RELIED UPON BY THE LD. TPO IS CALCULATED AFTER INCLUDING THE COST OF GOLD INTO TH E 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. 9,50,31,4 69/- MADE ON ACCOUNT OF APPLICABILITY OF MAM. 6.18 THE SECOND ADDITION IS WITH RESPECT TO THE C HARGES OF FACILITY, FREIGHT AND INSURANCE MADE BY THE ASSESSE E. 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 BH OLA. THE ASSESSEE HAS FURTHER PLACED ON RECORD THREE INSURAN CE 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 EX PORTED FROM DELHI AIRPORT TO DUBAI AIRPORT. III. BURGLARY POLICY. A PERUSAL OF THESE POLICIES CLEARLY SHOWS THAT IN C ASE OF ANY LOSS, THE SAME WOULD BE RECOVERED FROM THE INSURANC E COMPANY AND PAID TO THE AE. THE ASSESSEE IS ONLY RE IMBURSED BY ITS AE OF THE FREIGHT AND INSURANCE CHARGES AT T HE 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 TRANSFE R PRICING PROVISIONS UNDER CHAPTER X OF THE ACT AS HELD BY HO NBLE BOMBAY HIGH COURT IN VODAFONE VS. UOI W.P(C) 871/20 14 WHEREIN IT WAS HELD AS UNDER: 38THE CHARGE OF INCOME NOW HAS TO BE FOUND IN SEC TION 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 A CT COULD BE INVOKED. SECTIONS 4 AND 5 OF THE ACT BRINGS /CHARGE S 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 ADM ITTEDLY A CAPITAL I.T.A .NO.-101/DEL/2015 36 ACCOUNT TRANSACTION NOT SEPARATELY BROUGHT WITHIN T HE DEFINITION OF INCOME, EXCEPT IN CASES COVERED BY SECTION 56(2) (VI IB) OF THE ACT. THUS SUCH CAPITAL ACCOUNT TRANSACTION NOT FALLING W ITHIN A STATUTORY EXCEPTION CANNOT BE BROUGHT TO TAX AS ALREADY DISCU SSED HEREIN ABOVE WHILE CONSIDERING THE CHALLENGE TO THE GROUND S 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 IN SURANCE. 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 MEMBER 18.05.2015 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.