9911796707
|
Home
Forgot password New User/ Regiser ⇒ Register to get Live Demo
2015 (5) TMI 850 - AT - Income TaxValidity of transfer pricing adjustment - whether income of the assessee holding that the assessee s calculation of 4.84% of (profit before tax)/total cost is window dressed? - AO/DRP international transaction entered into by the assessee for the purpose of job work to be purchase and sale - Held that - 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. 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 . 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. 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 assesse - Decided in favour of assesse. Most Appropriate Method (MAM) for calculating the arm s length price of the international transaction entered into by the assesse - held that - 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 unless the revenue authorities are able to demonstrate the fallacies in application of standard methods. - Decided in favour of assesse. 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 ₹ 9,50,31,469/- made on account of applicability of MAM. - Decided in favour of assesse. Addition is with respect to the charges of facility, freight and insurance made by the assesse - Held that - 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 2014 (10) TMI 278 - BOMBAY HIGH COURT . We thus delete the second addition of ₹ 176,66,900/- on account of provision of facility, freight and insurance. - Decided in favour of assesse.
Issues Involved:
1. Validity of the transfer pricing adjustment of Rs. 11,26,98,369. 2. Determination of whether the assessee is a 'job worker' or a 'manufacturer'. 3. Inclusion of the cost of gold in the operating cost. 4. Applicability of the Cost Plus Method (CPM) and Comparable Uncontrolled Price (CUP) method versus the Transactional Net Margin Method (TNMM). 5. Reimbursement of facility, freight, and insurance charges. Detailed Analysis: 1. Validity of the Transfer Pricing Adjustment: The core issue revolves around the validity of the Rs. 11,26,98,369 transfer pricing adjustment made by the Assessing Officer (AO) and the Transfer Pricing Officer (TPO). The AO treated the international transaction of job work entered into by the assessee as 'purchase and sale' and included the cost of gold in the cost base. The TPO proposed an increase in the total income of the assessee for the international transaction undertaken by the assessee, which was upheld by the Dispute Resolution Panel (DRP). 2. Determination of Whether the Assessee is a 'Job Worker' or a 'Manufacturer': The assessee argued that it is a job worker for its Associated Enterprise (AE) and not a manufacturer. The assessee imported pure gold bars on a Free of Cost (FOC) basis from its AE and converted them into jewelry as per the AE's specifications. The assessee was only entitled to making charges at the rate of $0.65 per gram of gold. The AO and TPO, however, treated the transaction as 'purchase and sale', leading to the inclusion of the cost of gold in the operating cost. 3. Inclusion of the Cost of Gold in the Operating Cost: The assessee contended that the value of gold imported and exported is only a 'pass-through cost' and should not be part of the operating cost. The AO and TPO included the cost of gold in the cost base while computing the arm's length price of the international transaction. The Tribunal found that the assessee is not the owner of the gold and is only entitled to job charges, thus the cost of gold should not be included in the operating cost. 4. Applicability of CPM and CUP Method vs. TNMM: The assessee relied on the CUP method to benchmark its international transactions, providing external comparables with respect to transactions carried out by parties in Delhi. The TPO, however, rejected the CUP method and applied the TNMM method. The Tribunal held that the CUP method, being a direct method, is more appropriate in this case and the TNMM method should not be applied. The Tribunal found that the comparables selected by the TPO were not appropriate as they were engaged in retail business, unlike the assessee who was engaged in a business-to-business model. 5. Reimbursement of Facility, Freight, and Insurance Charges: The assessee argued that the charges for facility, freight, and insurance should not be considered as income. The assessee provided evidence of insurance policies and argued that reimbursements cannot be considered income under Section 4 of the Income Tax Act. The Tribunal agreed with the assessee, finding that the reimbursements should not be included in the income and deleted the addition of Rs. 176,66,900 made on this account. Conclusion: The Tribunal concluded that the assessee is a job worker and not a manufacturer. The cost of gold should not be included in the operating cost, and the CUP method is the most appropriate method for determining the arm's length price. The Tribunal deleted the additions made by the AO and TPO, allowing the appeal in favor of the assessee. The Tribunal also held that reimbursements for facility, freight, and insurance should not be considered as income.
|
