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TMI Blog2015 (5) TMI 850X X X X Extracts X X X X X X X X Extracts X X X X ..... onal 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 pref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nds: 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. 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld received on FOC basis from AE in operating cost. 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.). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngth Price and the price charged by the assessee. 4. The learned AR submitted that first addition made by the Department is of ₹ 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) 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d over TNMM. The Assessee applied CUP method: 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 ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 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 prepare ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erent 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 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d (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 ₹ 1,581/- per gram Financial Risk to be compensated by AE to Assessee Company ₹ 18033485/- Receipt shown by assessee on this account ₹ 366585/- Adjustment proposed for Risk ₹ 176,66,900/- 6. We find that the issues raised in the grounds revolves around the validity of transfer pricing adjustment of ₹ 11,26,98,369 to the income 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 ₹ 4,25,448/-, which is exempted u/s 10A of the Act, whereas the income has been assessed at ₹ 11,31,23,817/- by the Department. 2. M/s. Almowaiji Jewellers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ately 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 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 ₹ 2,66,722 as freight and insurance charges and received ₹ 3,66,585 (@ $350 per consignment) from its AE. The assessee had already placed on record three insurance policies: i. Import policy of ₹ 20 crores for gold imported from Dubai Airport to Delhi Airport. (Pg.88, Vol-I) ii. Export policy of ₹ 20 crores for jewellary exported from Delhi Airport to Dubai Airport. (P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt 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 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 va ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces 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 was exported to M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 to rates charged by some of the non-related supplier s to Almowaiji. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urdwara, 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 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 gold. Further, it can be seen from the invoices placed on reco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee. The assessee has drawn our attention to the bills of travel from Delhi to Dubai and 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 ₹ 20 crores for gold imported form Dubai Airport to Delhi Airport. II. Export policy of ₹ 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 Sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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