ACIT, CENTRAL CIRCLE-11(2), KOLKATA, KOLKATA vs. M/S SENCO GOLD IMPEX (P) LTD., KOLKATA

O R D E R

PER S.S.Godara, Judicial Member:

GROUNDS OF APPEAL: 1) For that the Assessing Officer of the Ld. AO is wrong, arbitrary, bad in law and against the facts of the case. 2) For that thee Ld. AO was not justified in making an addition of Rs.98,87,631 on account of suppressed profit not shown by the assessee and treated the same as assessee’s income. 3) For that the Ld. AO did not take cognizance of the various facts and materials submitted to him during the assessment proceedings. 4) For that the assessee craves leave to add, alter, amend or modify all or any of the above ground/grounds of appeal at or before the time of hearing. In this regard we, on behalf of our client most humbly pray to submit as below: The Ld AO has arbitrarily made an addition which is based on his own presumptions, assumptions, surmises and conjectures etc. We are reproducing the relevant portion of the Ld. Assessing Officer's order for your ready reference (point no. 6 of the Assessment Order) ‘Considering the submission of the assessee and the facts of the case and on the basis of above discussion, it will be fair and reasonable to calculate the net profit of the assessee in respect of Head Office unit at the average rate of net profit shown by its both Head Office and SEZ units. The average rate of net profit is calculated at (5.38%+ 8.14%)/2 i.e.6.76%. Thus, the net profit of the assessee should be increased by (Average net profit i.e. 6.76% - net profit of the assessee should be increased by (Average net profit i.e. 6.76% - net profit of H.O i.e. 5.338%) i.e. 1.38% which the assessee has not shown in computing the income from Head Office. Thus the assessee has suppressed net profit of 1.38% on the turnover of the Head Office of R.71,64,95,000 which comes to Rs.98,87,631 by not showing actual net profit earned by its Head Office unit. Therefore, Rs.98,87,631 is added back to the total income of the & 247/Kol/2017 A.Y.2011-12 M/s Senco Gold Impex (Pvt) Ltd. Vs.JCIT, Range-11,Kol. Page 3 assessee as suppressed profit not shown by the assessee in respect of its Head Office Unit.’ Our submission: 1) DIFFERENT MARKETS; The Ld AO has overlooked a fact that the Company has 2 divisions namely the H.O division which mainly caters to the domestic market and the SEZ division which caters to the export market. 2) DIFERENT PRODUCTON ENVIRONMENTS: The products sold by the HO division are manufactured through independent karigars (artisans/craftsman) by way of outsourcing. Whereas the production of the SEZ division is form the Company’s factory located at the Gem & Jewellery SEZ (Manikanchan) Kolkata. the production made in the SEZ factory is done under controlled environment having strict quality control & other checks which results in lower wastage and consequently lower cost of production. 3) DIFFERENT COST OF PRODUCTION: It is a well known fact that the Cost of Production in case of outsourcing will always be higher than as compared to the cost of inhouse production because the Cost of Production from outsourcing also has the profit element of the vendor (supplier) who is producing such products which is not present in case of inhouse production. This impacts the net profit margin of the respective division. In other word, since the production of the products under the HO division is outsourced through independent karigars, the profit margins of HO division are lower as compared to profit margins of SEZ division. 4) DIFFERENT GEOGRAPHIES OF SALES a) The sales made through HO division of the company are mainly to the domestic market and the main customer is Senco Gold Ltd. Further thee profit margins in domestic market are much lower as compared to the export markets. There are certain costs like the advertisement and sales promotion of Rs.13.06 lacs and bank charges of Rs.15.00 lacs which are directly attributable to the HO unit which has also contributed to lower margin/profits in the HO unit as compared to the SEZ units. The SEZ division does not make any advertisements or sales promotion activities hence the entire such expenses is attributed to the HO division. b) The sales of the assessee company is to 2 different market segments i.e. the HO division which caters to domestic market and SEZ division which caters to export market. There is huge competition from the organized as well as unorganized sector of jewerlers in the domestic market which leads to cut throat competition in the pricing and selling of jewellery products and lowering of net profits in the HO division whereas in case of export sales the competition is very less because there are hardly any jewelers who produce and export ‘BENGAL’ type jewellery form West Bengal which is a specialty of the local artisans and is in huge demand overseas. This helps the assessee company to command a higher value addition (making charges) from the overseas customer as compared to the marking charges charged from the domestic or local customer. As a result the EZ division yields higher profit margins as compared to HO division. 5) DIFFERENT PRODUCT DESIGDNS & WASTAGES In this context it I imperative to state that the production and design sold in the domestic market and the overseas market are also different. We would also like to state that the major part of production (almost 90%) of jewerllery is by way of & 247/Kol/2017 A.Y.2011-12 M/s Senco Gold Impex (Pvt) Ltd. Vs.JCIT, Range-11,Kol. Page 4 handmade production made by these karigars hence there is no standardization of product and design. Therefore, the Cost of Production also varies based on the product and / or design which ultimtel9y impacts the net profit margins. In case of export market the products generally sold are of heavy weight jewellery in nature which have lower cost of production as compared to Light weight jewelllery which is sold in domestic market having higher cost of production as the wastage component in heavy weight jewellery is lower as compared to the light weight jewellery. Further it is worth mentioning that in case of exports the customer is supplied with design as per his choice which helps the assessee company to command higher price for customization this results in higher profit margin whereas in case of domestic sale the production is in bulk with set designs and lower prices and consequently lower profit margins.”

3. We have given our thoughtful consideration to rival contentions. Case file stands perused with the able assistance of both the parties. This assessee is a company engaged in manufacturing and export of jewellery products from SEZ unit. The Assessing Officer took up scrutiny in its case. He came across assessee’s net profits from head office @ 5.4% and that @ 8.15% pertaining to SEZ units on respective sales of ₹7,13,266/- and ₹19,32,340/-; coming to ₹38,596/- and ₹1,57,514/-; respectively. The Assessing Officer was of the view that the said varying net profit rate in the same business activity was not justified. The assessee quoted various reasons more particularly difference between domestic and export markets wherein the latter turn out to be more profitable since deriving income in foreign currency. We notice form the Assessing Officer dated 30.03.2014 that the Assessing Officer rejected all the said pleadings to estimate assessee’s net profit at an average rate of 5.38 and 8.14% which was divided by 2 coming to 6.76%. He then reduced net head office net profit @ 5.38% from 6.76% coming 1.38% which was allegedly not shown in computing head office income. He thus calculated the instant taxpayer’s net profit @ 1.8% on head office turnover of ₹71,64,95,000/- resulting in the impugned addition of ₹98,87,631/- as reduced to ₹35,82,475/- only in the CIT(A)’s findings hereunder.

4. Learned counsel representing assessee quotes case law Sargam Cinema vs. CIT Civil Appeal No. 6973 of 2009 decided on 19.10.2009 upholding tribunal’s decision. The Assessing Officer had not rejected the concerned taxpayer’s books therein before making reference to the Departmental Valuation Officer. Then comes hon'ble jurisdictional high court’s decision in M/s Swadeshi Commercial Co.Ltd. vs.