Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, DELHI BENCH ‘I’, NEW DELHI
Before: SHRI R.S. SYAL & SHRI KULDIP SINGH
This appeal by the assessee is directed against the final assessment order passed by the Assessing Officer (AO) u/s 143(3) read with section 144C of the Income-tax Act, 1961
2 I.T.A.No.137/Del/2016 (hereinafter also called ‘the Act’) on 10.12.2015 in relation to the Assessment Year 2011-12.
First issue raised in this appeal is against the addition on account of transfer pricing adjustment amounting to Rs.8,65,21,650/- towards international transaction of ‘Job work’.
Briefly stated, the facts of the case are that the assessee, an Indian company, incorporated on 01.12.2008, is engaged in the business of manufacturing and trading of gold and silver jewellery/ bars/coins and utensils etc. The assessee has its manufacturing unit located in Noida SEZ, which is eligible for benefit u/s 10A of the Act. M/s. Almowaiji Jewellers LLC (Almowaiji), a Dubai based company, engaged in the trading and manufacturing of gold and other jewellery items, is assessee’s associated enterprise (AE). The assessee showed to have purchased pure gold bars of .999 or .995 fineness on `Free
3 I.T.A.No.137/Del/2016 of Cost’ (FOC) basis from Almowaiji. Such pure gold apparently shown to have been purchased by the assessee from its AE was converted into jewellery and sold back to its AE.
The assessee reported two international transactions in Form no. 3CEB viz., ‘Import of bullion’ with transacted value of Rs.94,77,32,257/- and `Export of gold jewellery’ with transacted value of Rs.94,42,78,354/-. The assessee benchmarked these international transactions by using the Cost Plus method as the most appropriate method for determining their Arm’s Length Price (ALP) by taking CIF value in terms of Costs of gold content as per Bill of entry + Labour charges (at predetermined rates) + Freight + Insurance. The assessee mentioned in its Transfer pricing study report that Almowaiji sends pure gold of required fineness on FOC basis to the assessee. Since gold has to leave the country of its origin, the invoice has to made containing quantity of gold and its US$ value. Such invoice
4 I.T.A.No.137/Del/2016 clearly states the gold bars on FOC basis. Almowaiji passes no financial entry for the value of gold sent to the assessee and the gold is handed over, which is carried as baggage by employees of the assessee. Bill of entry containing details of invoice clearly mentions that the goods are on FOC basis. The T.P.
Study report further categorically mentions that understanding between the assessee and Almowaiji is that the assessee will convert the gold received from Almowaiji into jewellery as per their specifications and send it back to them without earning any profits or loss in US$ from the gold received, converted it and exported as jewellery, since the gold is sent by Almowaiji on FOC basis. Permissible wastage has also been mentioned in the T.P. study report which further provides that the assessee will be allowed US$ 0.65 per net weight of jewellery as `Making charges’ in addition to separate bills for freight and insurance charges at US$350/- per consignment.
5 I.T.A.No.137/Del/2016
On a reference made by the Assessing Officer to the Transfer Pricing Officer (TPO) for determination of ALP of international transaction, the TPO proceeded to reject the assessee’s contention of being a simple ‘job worker’ and also the application of Cost Plus method as the most appropriate method. During the course of proceedings before TPO, the assessee also came out with the application of Comparable Uncontrolled Price (CUP) method as the most appropriate method by giving comparable instances, which have been mentioned on page 7 of TPO’s order viz., Mizan & Co., Delhi with labour charges in US$ per gram of net weight @ US $ 0.21 to 0.52; Avisons Jewellers with labour charges @ US $ 0.43; and Meenakshi International with labour charges @ US $ 0.05 to 0.63. The assessee contended that labour charges paid to it by its AE @ US$ 0.65 per gram were higher than those charged by the above three comparables and hence at ALP. The TPO
6 I.T.A.No.137/Del/2016 refused to accept the CUP as most appropriate method and opted for the Transactional Net Margin Method (TNMM) as the most appropriate method. He calculated the assessee’s Profit Level Indicator (PLI) of Operating Profit/ Total Cost (OP/TC) at (-)
1.83% by including the amount of Sales along with Labour work charges as Operating revenue and also correspondingly taking, inter alia, the amount of `Raw material consumed’, being the invoice value gold bars received from its AE. In other words, the TPO included value of gold imported and value of jewellery sold to its AE in the calculation of the assessee’s PLI.
Thereafter, he selected certain companies as comparable, which have been listed on page 41 of his order. Average profit margin of such companies was calculated at 7.14%. By applying this profit margin, the TPO worked out transfer pricing adjustment amounting to Rs.8,65,21,650/-. That is how, the Assessing Officer made this addition as transfer pricing adjustment in his
7 I.T.A.No.137/Del/2016 draft assessment order. The assessee remained unsuccessful before the DRP, which resulted into making of an addition of Rs.8.65 crore and odd in the final assessment order, which has been assailed before us.
We have heard rival submissions and perused the relevant material on record. First issue disputed in the determination of the ALP of this international transaction is application of the most appropriate method. The assessee company initially applied Cost Plus method as the most appropriate method, but during the course of proceedings before TPO, it switched over to the CUP method. The transacted value of this international transaction was shown as its ALP under the CUP method by showing that the comparables uncontrolled transactions were at lower labour rates charged by them vis-à-vis the assessee charging higher price from its AE. The TPO rejected both the methods applied by the assessee and opted for the TNMM as the 8 I.T.A.No.137/Del/2016 most appropriate method. This leads to controversy about the selection of the most appropriate method from the CUP and the TNMM.
The ld. D.R. relied on an order passed by the Mumbai (copy placed on record) to argue that the TNMM has been accepted as the most appropriate method. He further fortified this argument by relying on certain other orders as well as to put forth that the TNMM be held as the most appropriate method.
It is manifest that the tribunal in Vijaydimon Diamond (I)
Pvt. Ltd.(supra) has accepted the TNMM as most appropriate method. However, it is important to note that assessee in that case was engaged in manufacturing of studded and plain gold jewellery and export business. When we advert to the facts of the case before us, it comes to the fore that the assessee is not engaged in manufacturing and export of gold jewellery. It is 9 I.T.A.No.137/Del/2016 simply receiving gold bars from its AE, doing job work on them and then returning jewellery in the manner ordered by the AE, after charging for job work at US$ 0.65 per net gram of jewellery. Though certain entries have been made in the accounts books of the assessee recording purchase value and sale value at the time of receipt of gold and export of jewellery from/to its AE, but this recording of value as purchase/sale is not in the capacity as an owner. The assessee is simply receiving gold bars for converting them into jewellery and then sending it back to its AE after doing the specified job work. The entries have been made in the books of accounts to complete the formalities regarding receipt of gold from Dubai and then sending the jewellery to Dubai, which, as stated, is not possible without recording the value in invoices. Even though the assessee’s AE has assigned invoice value but has neither treated the assessee as purchaser of its gold bars nor as seller of gold
10 I.T.A.No.137/Del/2016 jewellery. Neither any payment whatsoever has been made by the assessee at the time of receipt of gold nor any amount has been received from its AE at the time of sending the jewellery back. The assessee is confined to receiving the instructions from its AE for manufacturing gold jewellery and then returning the same on receipt of its job charges. Thus, the sequence of events amply indicates that the assessee did not acquire ownership rights in gold bars at the time of its receipt and nor did it pass over the any title in the gold jewellery to its AE in Dubai at the time of sending back.
The ld. A.R. has brought to our notice the order passed by the Tribunal in assessee’s own case for the immediately preceding assessment year 2010-11. A copy of such order is available on page 185 onwards of the Paper Book. In such earlier year also, no consideration was paid or received by the assessee for the value of gold and only labour charges were 11 I.T.A.No.137/Del/2016 received, as is the position during the instant year as well. The Department gave similar treatment to the transactions in the preceding year as has been given during the current year. When the matter came up for adjudication, the tribunal refused to uphold the Departmental stand of purchase of gold bars by the assessee and the consequent sale of gold jewellery to its AE.
Further observations have been made in para 6.5 of the tribunal order and a final conclusion has been drawn that the value of gold imported and exported is only a pass through cost and cannot be considered as a part of the assessee’s operating cost.
In para 6.10, it has been held : ‘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 costs of assessee’.
From the above discussion, it is clear that the tribunal in identical circumstances has held the assessee to be a simple job worker and not involved in purchasing or selling any gold/
12 I.T.A.No.137/Del/2016 jewellery. In this view of the matter, we hold that the reliance of the ld. D.R. on the case of Vijaydimon Diamond (I) Pvt. Ltd. (supra) to put forth the application of the TNMM as most appropriate method, is misconceived because that assessee was engaged in a different business, being the manufacturing of studded and plain gold jewellery and charging cost for the same.
On the other hand, the extant assessee is simply engaged in doing job work for its AE. It is discernible that the Tribunal in the immediately preceding assessment year, after treating the assessee as a job worker, has upheld the CUP as most appropriate method. Since the facts and circumstances for the instant year are admittedly similar to those of the preceding year, respectfully following the precedent, we hold that the CUP is the most appropriate method in so far as the international transaction is concerned.
13 I.T.A.No.137/Del/2016
The next issue is calculation of the ALP of this transaction under the CUP method. The assessee argued before the TPO that it received US$ 0.65 per net weight of jewellery as job charges, whereas the other job workers in jewellery under similar circumstances, have charged much less, as Mizan & Co., Delhi, charging US$ 0.21 to 0.52 per gram of net weight and Meenakshi International charging US$ 0.05 to 0.63 per gram of net weight. These figures have been recorded on page 7 of the TPO’s order. Similarly, the Assessing Officer has also recorded such figures in his final assessment order. None of the authorities has doubted or controverted the correctness of such figures or the comparability of these companies. When the comparable uncontrolled price charged by other job workers of gold jewellery from uncontrolled transaction is less than that charged by the assessee from its AE, such price charged automatically becomes its ALP. We find that similar issue was 14 I.T.A.No.137/Del/2016 also there before the Tribunal for the immediately preceding year as well. For that year also, comparable companies were Meenakshi International and Mizan & Co., being the same companies which have been discussed for this year as well. As the rates charged by these two companies were found to be less than that charged by the assessee, the Tribunal accepted the international transaction at ALP.
At this stage, it is pertinent to mention that the Revenue assailed correctness of this tribunal order before Hon'ble Delhi High Court. Vide its judgment dated 21.12.2015, a copy placed at page 315 onwards of the Paper Book, the Hon'ble High Court has upheld the Tribunal order by holding that it did not warrant any interference and no substantial question of law arises for determination from this order. In holding so, the Hon'ble High Court also discussed that the application of the TNMM, as used by the Revenue for benchmarking, was not appropriate and there
15 I.T.A.No.137/Del/2016 was a detailed analysis by the tribunal in holding the issue in favour of the assessee. Thus, it is palpable that the Tribunal in the assessee’s own case for the immediately preceding assessment year has upheld the CUP as the most appropriate method and after examination, found that the rate charged by the assessee from its AE was at ALP. Since the facts and circumstances for the year in question are mutatis mutandis similar to those of the preceding year, we order for deletion of addition of Rs.8.65 crore by holding that the international transaction is that of job work and not that of purchase and sale ; the CUP method is the most appropriate method; and that the price charged by the assessee from its AE under the CUP method is at ALP. This ground is, therefore, allowed.
The only other issue which is involved in this appeal is the addition of Rs.1,94,53,297/- made by the Assessing Officer on account of transfer pricing adjustment in the international
16 I.T.A.No.137/Del/2016 transaction of Provisions of facility, freight and insurance.
Briefly stated, the facts apropos this issue are that the TPO found that the assessee has taken huge risk on its part by carrying gold bars / gold jewellery from one country to another for which it was not compensated by its AE. It was opined that the assessee ought to have charged 1% on account of loss of jewellery, which may occur during transit. By considering total weight of gold jewellery/bars carried away and applying 1% risk factor, with average price of Rs.1851 per gram, the TPO computed `Financial risk to be compensated by the AE’ at Rs.1,98,86,927/-. Receipt from the AE towards Insurance at Rs.4,33,630/- was reduced from the above amount, which resulted into proposing transfer pricing adjustment of Rs.1,94,53,297/-. The Assessing Officer proposed addition for this sum in the draft order. When the matter went before the DRP, it approved, in principle, the action of the TPO by holding
17 I.T.A.No.137/Del/2016 that 1% was to be taken as value of services provided by the assessee. It was further noticed that the TPO had not reduced the amount received by the assessee from its AE in respect of the charges of freight and insurance. Accordingly, the TPO was directed : ‘to reduce the reimbursement and limit the addition to the remaining amount’. The Assessing Officer made the above addition in his final assessment order as the amount proposed by TPO was calculated after reducing the amount of insurance receipt by the assessee from its AE. The assessee is aggrieved against this addition.
We have heard rival submissions and perused the relevant material on record. Without going into the details of this issue, we find that similar issue was there before the tribunal for the immediately preceding year. The Tribunal has discussed it in para 6.18 onwards of its order by noticing that the loss, if any, would be recovered from the insurance company and paid to the 18 I.T.A.No.137/Del/2016 AE. That is how, the tribunal deleted similar addition made at Rs.1,76,66,900 for the preceding year. Though ld. D.R. relied on the order passed by TPO, but could not point out any distinguishing feature in the facts of the current year vis a vis the immediately preceding year, which has been decided by the tribunal. As the view favourable to the assessee taken by the Tribunal on this issue has been approved by the Hon'ble Delhi High Court by holding that no substantial question of law arises, respectfully following the precedent, we order for the deletion of addition of Rs.1.94 crore and odd made by the AO.
In the result, appeal filed by the assessee is allowed.
Order pronounced in the open court on 22nd Mar., 2016.