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TMI Blog2016 (3) TMI 1445X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee. Hence, the direction given by CIT for making addition on account of excess manufacturing cost is therefore vacated. Sales made to related parties at lower prices - Addition u/s 40A(a)(2) - Similar disallowance was deleted by the Gujarat High Court in the case of CIT v. Indu Nissan Oxo Chemical Industries Ltd. [ 2015 (2) TMI 818 - GUJARAT HIGH COURT] .wherein the disallowance made u/s. 40A(2)B) in respect of payments made to the directors were deleted by the High Court, observing that the recipient of payments was taxed at maximum rate and therefore there was no avoidance or evasion of taxes as envisaged u/s 40A(20(b) of the Act. In view of the above, we are of the view that CIT was wrong in invoking provisions of Sec. 40A(a)(2) and doubting the sales made by the assessee to its sister concern, M/s Anjali Jewellers. Hence, on this issue revision cannot be made by CIT u/s 263 of the Act. Loss of gold incurred by the company in the course of manufacture of jewellery - After considering the details documents for AYs 2011-12 2012-13, more specifically the quantitative details of gold and jewellery manufactured, the AO accepted the reasonableness of melting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0.2014. Assessment was framed by JCIT, Range-10, Kolkata u/s 143(3) of the Act vide his order dated 18.03.2013 for assessment year 2010-11. 2. The only issue in this appeal of assessee is against the revision order passed u/s 263 of the Act by Ld. CIT-IV Kolkata revising the assessment framed by the AO u/s. 143(3) of the Act. For this, assessee has raised following 12 grounds:- 1. For that on the facts and in the circumstances of the case, the revision order u/s. 263 be cancelled since it was passed without complying with conditions precedent and improperly holding that the assessment order passed was erroneous and prejudicial to the interests of Revenue when n fact it was not so. 2. For that on the facts and in the circumstances of the case, the CIT was unjustified in setting aside the entire assessment and directing passing of de nove assessment when the show cause notice issued was only for specific grounds. 3. For that on the facts and in the circumstances of the case, the CIT s order u/s. 263 directing AO to make addition of Rs.11,66,78,994/- being alleged excessive manufacturing loss be held to be unsustainable as no show cause notice on this issue was issued and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the details of professional fees, conveyance expenses, establishment expenses, investment in building as well as administrative selling expenses be held unsustainable since no show cause in that regard was issued and no specific error in the AO s order in that regard was proved by the CIT. 12. For that on the facts and in the circumstances of the case, the CIT s order directing AO to verify allowability of discount allowed by examining the customers to whom payments are made be held to be unsustainable since no show cause notice on this issue was given and the direction being impracticable is liable to be cancelled. 3. Briefly stated facts are that assessee is engaged in the business of manufacturing and trading of jewellery and following the mercantile system of accounting. For the relevant AY 2010-11, the assessee filed its return of income on 30.09.2010 and assessment was framed by JCIT, Range-10 Kolkata u/s. 143(3) of the Act after issuing notices u/s. 143(2) and 142(1) of the Act along with a detailed questionnaire dated 18.10.2012. The assessee produced complete books of accounts along with bills and vouchers of sales and purchases and stock register. The AO made cer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erest income which was fully accounted for in the assessee s books. 5. In respect to the information of AIR, the AO during the course of assessment proceedings asked the assessee to reconcile but from the notice u/s. 142(1) of the Act it is clear that AO had not required the assessee to reconcile any AIR information. Even the show cause notice is silent as to what AIR information was available in the records, which was not reconciled by assessee. As regards to another allegation, the company has reported to manufacturing loss of 72.02 kg. of gold and no enquiry was conducted about the reasonableness of such loss. The assessee explained that though loss of 72. Kg. of gold is substantial in numeric terms but such loss cannot be considered to be in relative terms seeing the size of the business of assessee. It was explained that in the business of manufacture of gold jewelleries, the gold is purchased either in pure form i.e. 24 carats or it is purchased of lesser cartage. Jewelleries however cannot be made in 24 carat gold. The jewelleries are manufactured in gold having 22 carats or less. In order to manufacture jewelleries, gold is required to be melted in fire and in the proces ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of revenue. Same is required to be examined by AO u/s. 40A(2)(b) and addition on suppression of profit in the hands of assessee is to be considered. e) Examine the loss of gold of 72.09 kg worth Rs.10,87,26,931.99 by calling for the details of evidences of different types of ornaments actually manufactured. Examination of the parties / Kariganrs is to be made their receipts including gold may be examined u/s. 194C. f) During the course of assessments proceedings the assessee has submitted some details along with forwarding letter dated December, 3 2012 before the assessing officer. During the curse of discussion in 263 proceedings the documents filed by the assessee before the AO was verified. It appears form Annexure-E the assessee has made huge payment to its sister concern M/s Anjali estate and developers. The Assessing Officer has called the details of the expenditure and assessee has submitted the expenditure above Rs.1 lakh. The Assessee has also enclosed 7 bills along with Annexure-B. The 1st three bills are prepared on the different dated but received only on 8th January, 2010 by the assessee. Bills available on record assessee as under: Date ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... professional charges of Rs.8,17,868/-. Similarly, the conveyance expenses claimed Rs.10,90,235/- while as per details submitted total of conveyance charge comes to Rs.51,485/- i) During the course of 263 proceedings it was noticed and discussed that certain expenses were increased exorbitantly which have no justification with reference to increase from preceding year. Such items are establishment charges increased from Rs.73,35,080/- to Rs.1,68,52,923/-. Administrative, selling and other charges, from 5.7% to 12.33% and increase of 72 items in miscellaneous expenses. Similarly investment in building Rs.88,69,006/-. These issues were remained to be verified. j) The claim of discount allowed to the buyers amounting to Rs.1,50,01,453/-. Without justification of business expediency. The AO must ask assessee to produce these parties and examine genuineness of such huge expenditure. The assessee must be asked to identify recipients and prove the genuineness and amount paid is verifiable from returns of the recipients. 8. From the above facts, it emerges that CIT has revised the assessments on the following issues: a) Directed the AO to make addition of Rs.11,66,78,994/- on a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ances of the case. We find that following first three issues are interrelated and the Ld. Counsel for the assessee has explained three issues. Excess manufacturing cost claimed by the assessee; Sales made to related parties at lower prices; Loss of gold incurred by the company in the course of manufacture of jewellery First of all the assessee explained that the AO had called for the quantitative details of purchases, sales, opening balance and closing balance of gold which was furnished by the assessee but CIT opined that the details of manufacturing activities carried out by the assessee were not examined and therefore the assessment order suffered from lack of enquiry. The assessee explained before us that the quantitative details of gold were in fact provided by the tax auditor in Annexure-F to the Tax Audit report and complete quantitative details of gold were furnished at the time of filing of return itself and this was examined and considered by AO prior to framing of assessment and said details are part of the assessment records. Ld. Counsel argued that it is only with reference to the quantitative details available in the assessment records, the CIT cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oper context. From the audited accounts of the assessee and the quantitative details furnished in Annexure F of the tax audit report, it shall be observed that the quantity and the cost of gold consumed (in terms of 22 cts) during the year was as follows:- Opening stock 57,979 gms Purchases 13,67,216 gms 14,25,195 gms Less: Closing stock 89,211 gms Gold consumed 13,35,984 gms The cost of gold of 13,35,985 gms as per assessee s books was Rs.191,36,05,009/- which resulted in average per gram cost of 1432.35 The melting loss which the assessee incurred in the process of making jewellery was 72,019 gms and therefore the net recovery of the gold for selling purposes was 12,63,966 gms (13,35,985 72,019). The melting loss of 72,019 gms out of consumption of 13,35,984 in % terms worked out at 5.05%. In the circumstances when cost of melting loss was factored into costing then average cost of gold sold worked out at Rs.1504.68 per gm (Rs.1432.35 x 1.505) In addition to per gram ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge cost of labour per gram Rs.49.33 / gm From the above stated facts the final picture that emerges in respect of peer gram of gold jewellery and ornaments sold is as follows: Average cost of gold metal sold Rs.1513.67 / gm Average labour wages for making of gold jewellery Rs. 49.33 / gm Average packing charge (only retail customers) Rs. 6.68 / gm Rs.1569.38 / gm 11. Ld. Counsel also explained that as per the practice followed by the jewelers in West Bengal, when an invoice is issued by the jeweller to his customer the invoiced value is broken and disclosed by way of following two component: Cost of metal, Making charges This break up is only to let know the customer the rate of gold on the date of sale which the jewerller has adopted. The component of making charge shown in the invoice has no relation whatsoever with actual cost incurred by the jeweler. Accordingly he argued that in such circumstances it is wrong for the CIT to presume that making charges recovered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rongly considered loss of gold to be part of manufacturing cost , which in his is opinion was recovered by the assessee in form of making charges from customers but the melting loss of gold which arose in the course of manufacturing of ornaments formed part of the purchase cost of gold and therefore recovered from customers as part of the metal value and not making charges . The average cost of gold sold after taking in the melting loss was Rs.1432.35 per gm., which after taking into account the melting loss stood increased to Rs1504.68 per gm. The melting loss was recouped by the assessee from its customers in the form of price for metal component which was always disclosed separately in the sale invoice. The melting loss was never recovered from customers as component of making charges which was separately shown in the sale invoice. The average per gram metal sales value recovered from M/s Anjali Jewellers was at Rs.1550 per gm. whose corresponding cost per gram was Rs.1504.68. This factual data proves that even after melting loss of gold was factored into costing of gold metal component the average per gm. cost of gold at Rs.11,504.68 was less than Rs.1550 per gm. whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uring cost recouped by way of marking charges . Hence, we are of the view that testing charges were part of manufacturing cost but these were not recouped in the form of making charges but metal sale value and accordingly, it should not have considered testing charges of Rs.1,20,11,512/- for ascertaining the costs incurred vis- -vis the making charges billed to customers. 15. In regard to the packing charges of Rs.55,72,914/- were exclusively incurred it sales made to retail customers. The jewellery was always sold to M/s Anjali Jewellers in unpacked condition. M/s Anjali Jewellers thereafter incurred packaging costs. Ld. Counsel for the assessee explained that it manufactured jewellery in bulk quantities for M/s Anjali Jewelleers. The final packaging of the jewellerey was done by M/s Anjali Jewellers at its own cost and at its own showrooms. This is verified from the fact that for the relevant year M/s Anjali Jewellers incurred packing costs of Rs.18,56,983/- with reference to the sale of Rs.83,58,00,993/-. The assessee explained that packing charges of Rs.55,72,915/- pertained only to sales made to retail customers in the circumstances the packing charges should be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11,512 F. TOTAL (C+D+E) 192,56,16,521 TOTAL 6,23,51,872 Cost of gold / gm (F A1) 1523 / gm Direct Mfg. cost as % of sales 2.56% We find from the above table that the direct manufacturing cost (excluding metal cost) as a percentage of sales was actually only 2.56% and not 7.75% as computed by the CIT. As can be seen from above, the melting loss of gold and testing charge was erroneously considered in the revision order to be part of making charges . These expenses in fact formed integral part of the metal cost and recouped by the assessee from the customers in the form of metal sale value . Further the packing charges did not pertain to the sales made to M/s Anjali Jewellers and therefore the same was not considered in the overall analysis of costs as above. 16. Further, in the revision order at page 6, CIT took into account the statement giving component wise break-up of invoiced price in respect of sales made to M/s Anjali Jewellers and other retail customers. From the side statement CIT ob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed from the assessee in bulk. Promoters / Directors of the assessee and partners of the said firm belong to same family the assessee as well as the firm are regular assessee and pay tax on their income at the same rate. In order to have centralized control, enjoy economies of sale, avoid duplication of functions and achieve overall cost reduction; precious metal is first purchased by the assessee. The metal purchased is then given to karigars along with designs and ornaments are made as per the quantity requirements of assessee as well as the partnership form. The ornaments sourced from the assessee by the said firm are then marketed and sold to retail customers through the showrooms of the firm. All expenses on setting up and operating showrooms, marketing and selling of the jewellery from such show rooms are incurred and borne by the said partnership firm. In the circumstances the assessee could not have charged similar level of making charges from M/s Anjali Jewellers as it charged to its retail customers. Sufficient margins had to be allowed to M/s Anjali Jewellers being a bulk consumer engaged in retiling to recoup its own marketing establishment costs and earn profit on s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m M/s Anjali Jewellers were therefore fair and reasonable and the assessee did retain profit margin while selling jewelleries to the related party and the assessee declared no excessive manufacturing cost. Further, sales made to related party, M/s Anjali Jewellers were in bulk (representing 26.91% of total sales). Apart from the bulk sales to M/s Anjali Jewellers, the assessee did not make any bulk sale to any other institutional customer. It is a well understood commercial maxim that bulk sale to a single customer entail economics of scale, which have to be passed on to the customer; thereby resulting in lower operating margin for the manufacturer. 18. In view of the above factors, and the above cited functional and operational differences are taken into account, then disparity between the making charges charged to M/s Anjali Jewellers and the retail customers stand explained. We have already considered that the manufacturing costs (2.56%) actually incurred by the assessee compared favourably with making charges (3.48%) recovered from M/s Anjali Jewellers. The figure of 7.75% computed by CIT in the revision order suffered factual infirmities. Taking into account the correct fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gencies such as A.J. Hall marking Centre, G.N. Hallmarking Refinery Pvt. Ltd. Rahul hallmarks Pvt. Ltd. all the payments were made through proper banking channel and subjected to TDS u/s. 194J of the Act, wherever applicable. Complete details thereof had already been submitted in the course of original assessment u/s. 143(3) of the Act, which is also enclosed at page 88 of the APB. In the circumstances the correctness and genuineness of testing refining charges stood firmly established and therefore no disallowance / addition on its account was warranted and, hence, the same cannot be subject matter of revision u/s 263 of the Act. 21. As regards to details of consumption of packing material of Rs.55,72,914/-, the assessee has filed complete details before the AO during assessment proceedings.. The same are enclosed at page 87 of APB in% terms packing expenses formed only 0.32% of sales of Rs.175,18,82,567/- to Retail customers. These expenses were neither excessive nor unreasonable and therefore no part thereof could be directed to be disallowed. And, hence, the same cannot be subject matter of revision u/s 263 of the Act. 22. As regards melting loss of gold of Rs.10,87, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the communication issued by the All India Gems Jewellery Trade Federation, wherein it was confirmed that percentage of wastage in making of jewellery ranges between 2% to 10%. The median value comes to 6%. The melting loss of 5.05% incurred by the assessee was thus commensurate with the permitted wastage as per standard trade limits. Reference was further made to the Handbook of Procedures published by the Director General of Foreign Trade, Ministry of Commerce 7 Industry, Government of India dated 19.04.2007. at page 76 of the Handbook, the Ministry of Commerce Industry has prescribed the standard wastage limits in the gem jewellery industry. The standard wastage in manufacture of plain gold jewellery studded / ornamented jewellery is notified at 3.5% 9% respectively. The assessee is engaged in the business of manufacture and marketing of both plain as well as studded jewellery. The melting loss of 5.05% incurred by the assessee in manufacture of such jewellery therefore was also commensurate with the standard wastage limits of 3.5% - 9% prescribed by the Director General of Foreign Trade, Ministry of Commerce Industry, Government of India. 23. From the above facts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s appeal of assessee is as regards to the sales made to related parties, the CIT is of the view that the sales to sister concern were not at arm s length and therefore the AO should have examined the sale transactions in light of Sec. 40A(2) of the Act. 26. In this regard, the assessee explained that Sec. 40A(2)(b) of the Act is applicable only to expenditure and not sales/income and therefore the invocation of the revisionary powers by Ld. CIT on its issue is prima facie erroneous and legally unjustified. Ld. Counsel explained that it is well understood that Sec. 40A(2) of the Act mandates disallowance of excessive payments towards expenditure and it is not applicable to an item of income. In the circumstances provisions of Sec. 40A(2)(b) had no application to the present case. Ld, Counsel also placed reliance on the decision of Hon'ble Allahabad High Court in the case of CIT v. Bhargav book Depot (40 taxman.com 213) wherein it has been held that where the transaction with related concern did not involve any payment or expenditure, provisions of Sec. 40A(2)(b) cannot be invoked. Hon'ble High Court held as under: Sir Ashok Kumar submitted that there is no justific ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he facts stated in earlier paragraphs, it shall be observed that the average sales price to M/s Anjali Jewellers worked out to Rs.1606 per gram whereas the costs incurred by the assessee was Rs.1563 per gram. The assessee therefore earned a net margin of Rs.43 per gram sold to M/s Anjali Jewellers. in view of these facts he argued that CIT s finding that the sales made to M/s Anjali Jewellers were at prices lower than the cost and thereby inference that assessee deliberately incurred loss was erroneous and unjustified. We find that it is not a case that lower price was being charged in order to avoid tax and / or the arrangement between the assessee and the sister concern was a sham. One may wish to look at the sales made to related party to ascertain whether the assessee in conjunction with its related party avoided paying taxes by shifting profits in the form of lower sale value to sister / related concerns. In the preset case prices at which sales were made to M/s Anjali jewelers did not result in avoidance or evasion of taxes. Nor it even resulted in reduction of overall tax liability of the Group. It was not an arrangement between the assessee and its sister concern which ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e which showed that there was no intention to deceive or evade any tax in the circumstances the High Court deleted the disallowance made u/s. 40A(2)(b) of the Act. Similar disallowance was deleted by the Gujarat High Court in the case of CIT v. Indu Nissan Oxo Chemical Industries Ltd. 45 taxman. Com 478 (Guj) wherein the disallowance made u/s. 40A(2)B) in respect of payments made to the directors were deleted by the High Court, observing that the recipient of payments was taxed at maximum rate and therefore there was no avoidance or evasion of taxes as envisaged u/s 40A(20(b) of the Act. In view of the above, we are of the view that CIT was wrong in invoking provisions of Sec. 40A(a)(2) and doubting the sales made by the assessee to its sister concern, M/s Anjali Jewellers. Hence, on this issue revision cannot be made by CIT u/s 263 of the Act. 30. In regard to the direction of CIT in point (e) of his revision order directing examination of loss of gold of 72.019 kgs. It was explained that loss of gold was already considered by CIT as part of the alleged excess manufacturing cost. Disbelieving such loss to be genuine, directions were given at Point (a) of the impugned order to m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 006/AED/10-11 was dated 25.04.2010 but had been received by the assessee on 30.03.2010. According to Ld. CIT the aforesaid bill was bogus and had been claimed to avoid tax on profits. 32. It was explained by assessee that admittedly the assessee had booked the bill of Rs.22,44,870/- bearing number 006/AED/10-11 on the last date of the financial year 2009-10. However, the aforesaid bill was not claimed as an expense or deduction by the assessee in the relevant year. The assessee explained that it had transferred an aggregate sum of Rs.24,87,140/- out of Repairs Maintenance to accounting Head of Deferred Revenue Expenditure which inter alia included the aforesaid bill amount of Rs.22,44,870/-. The assessee explained that the bill of Rs.22,44,870/- bearing number 006/AED/10-11 pertained to repair carried out at Ballygunge Showroom which was unfinished ad incomplete. In arriving at its taxable income declared in the return the assessee did not claim deduction for Rs.22,44,870/- as an expense but carried forward the invoiced amount to the subsequent year. As a consequence Ld. CIT s directions to verify and disallow the expense of Rs.22,44,870/- is unsustainable. The as ..... X X X X Extracts X X X X X X X X Extracts X X X X
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