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2015 (5) TMI 850 - ITAT DELHI

2015 (5) TMI 850 - ITAT DELHI - TMI - Validity 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 asse .....

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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 .....

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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. - Dec .....

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fter 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 f .....

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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. - I.T.A .No.-101/Del/2015 - Dated:- 18-5-2015 - SHRI I. C. SUDHIR AND SHRI B. C. MEENA, JJ. For the Appellant : Sh .....

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gnored 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 .....

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bars imported and the jewellery exported. The Ld. AO failed to appreciate the business model of the assessee and despite producing the details of insurance policies, freight expenses etc., the same were completely ignored for no reason whatsoever. 6. The Ld. AO failed to consider that 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 .....

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the assessee in the transfer pricing study and thereby making a transfer pricing adjustment to ₹ 11,26,98,369/- to the income of the appellant by holding that assessee s calculation of 4.84% of (profit before Tax)/total cost is window dressed and further the assessee company is not being compensated by its AE for the risk for carrying gold bars/gold jewellery from one country to another. 9. That the Ld. DRP/AO erred in rejecting cost plus method adopted by the assessee, and has wrongly app .....

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e other 12 companies who are having a distinguishable FAR analysis, whose detailed justification have been submitted by the appellant during the course of the proceedings. 11. The Ld. AO erred in calculating the operating revenue at 108% of operating costs by incorrectly including cost of gold 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 whi .....

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ssee 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.). 17. That the assessee has .....

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se of appeal. 2. We have heard and consider the arguments advanced by the parties, and have gone through the orders of the authorities below, material available on record and the decisions relied upon. 3. The relevant facts in brief are that the assessee company is engaged in the business of manufacturing and trading of Gold & Silver Jewellery etc. During the year the assessee company entered into international transaction with Associate Enterprises (in short AE ) M/s AL-MOWAI-JI Jewellers L .....

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y the assessee. The assessee was asked to show cause as to why and upward adjustment of ₹ 11,26,98,369/- to the income of the assessee should not be made being be difference in Arm s Length Price as determined by the TPO. The assessee responded the said show cause notice with detailed reply to which the TPO did not agree on several aspects. The assessee was thereafter served with the draft assessment order against which the assessee raised objections before the ld. DRP. The ld. DRP after c .....

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,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 a .....

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ts and bill of entry duly verified by the custom authorities. c) Furthermore, no custom duty is required to be paid either by the assessee. d) As no consideration is passed for the value of gold and the same being a pass through cost only, the foreign exchange fluctuation bears no financial impact on the assessee. e) The foreign exchange fluctuation for the making charges received by the assessee from its AE are accounted for in the profit and loss account. 4.2. The learned AR submitted that onl .....

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) c. Sutlej Cotton Mills Ltd., 116 ITR 1 (SC) (Para 3, 4, 10) 4.3. The learned AR submitted further that the assessee does not separately invoice the jewellery items exported to AE i.e. assessee does not charge the AE for specific designs. 4.4. The learned AR pointed out that the assessee does not have any right to dispose of the gold. The AE remains the owner of the gold sent to the assessee. It is settled law that a property cannot have two owners. He placed reliance on the following decisions .....

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at the making charges are not linked to the value of the gold, had this been the situation the making charges would have reduced in case of depreciation of gold value. Furthermore, detailed designs of jewellery were also submitted before the Ld. TPO/DRP. 4.8. The learned AR contended that the Ld. TPO has arbitrarily applied the TNMM method. CUP being a direct method should have been preferred over TNMM. The Assessee applied CUP method: a. By comparing the making charges charged by Non-related pa .....

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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 assesse .....

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o consideration for comparison. The assessee has given detailed reasons (at page 32 of Vol-II) as to why the comparable chosen by the Ld. TPO are not applicable to the case of the assessee. It is pertinent to mention here that the assessee is earning a return on capital employed @ 51.16%. After the impugned adjustment, the return on investment comes to 7087%, which is inconceivable. 4.11. The learned AR argued that the second addition is of ₹ 1,76,66,900/- with respect to the risk of carri .....

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AR contended that reimbursements can never come within the ambit of income under Section 4 of the Act and therefore of income cannot be deemed under Chapter X of the Act. He cited decision in the case of Vodafone Vs. UOI, W.P. 871/2014 (Para 38) in support. 4.14 The learned AR submitted that the assessee being a job worker is entitled to exemption under Section 10A of the Income Tax Act, 1961. Reliance is placed on the judgment rendered by the Hon ble Delhi High Court in CIT Vs. Lovlesh Jain, IT .....

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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 Exc .....

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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 prepared, what should be the size of items, what is the design pattern, what should be the purity, what should be the weight that implies that everything is left at the discretion of the assessee. 5.3 The Ld DR argued that no evidence has been submitted with regard to the business model followed by the Dubai based AE. 5.4 He contended that the entr .....

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order in 22 Karat gold jewellery. 1. Mix Weight Sets. 2. Kashti Rings with Sheesha 3. Kantge & Bracelets 4. Guluband Sets 5. Chain Sets, 6. Kursi Sets 7. Jhumki & Tops The total order is for 15 Kilo of pure gold of 99.50% fineness. 5.6 The Ld. DR Further submitted that nothing is mentioned about quantity of different items, designs to be followed ( Indian, traditional, modern etc.) and it is also silent with regards to use of various other precious/ semi precious stones like addition of .....

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the TP Study itself, the assessee company has made an attempt to apply CUP method for the justification and benchmarking of international transactions. The Ld. DR contended that CUP method is not applicable in the case of the assessee as a) The taxpayer himself states that making charges are different from design to design and also differs region to region, so on what basis, the Assessee Company has adopted the application of CUP method, where jewellery purchased by AE form non-related parties l .....

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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 a .....

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after, the Ld. DR further contended that the cost base adopted by the assessee was very narrow and it did not include the cost of gold into the cost base. He argued that since the assessee is a manufacturer, the cost of raw material ought to have been included in the operating cost. The Ld DR relied upon the computation done by the Ld. TPO of the arm s length price of the international transactions entered into by the assessee which worked out as under:- Particulars Amt in Rs. Operating Cost (A) .....

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rdingly relied upon the computation done by the Ld. TPO as under: Total grams of gold (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 .....

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been assessed at ₹ 11,31,23,817/- by the Department. 2. M/s. Almowaiji Jewellers LLC (AE) sends a list of plain jewellery items required by them to the assessee containing the purity of gold and weight of items. - Based on the above order, Almowaiji send pure gold bars of .999 or .995 fineness on FOC (free of cost) basis. Since the gold has to leave the country of origin and enter port of destination, an invoice is made containing the quantity, fineness and USD value of Gold bars along wit .....

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bove invoice and duties etc. Since the unit of the assessee is situated in NSEZ, the assessee is not required to discharge any duty with regard to the same. The BOE also clearly states that the goods are on FOC (Free of Cost) basis. It is further relevant to note that no customs duty on the gold imported is to be paid by the assessee, which is evident from the documents placed on record. - As per the terms of understanding between the assessee company and Almowaiji: - (a) The assessee is require .....

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g permissible wastage) would be equivalent to $ value of gold imported FOC. (c) Permissible wastage for .875 fineness jewellery is about .57% and for 0.917 fineness is about .327% of the net weight of jewellery exported as mentioned in the invoice raised by the assessee. (d) The assessee is allowed $0.65 per net weight of jewellery (irrespective of fineness) as mentioned in the invoice raised as making charges. Additionally, the assessee shall also separately bill for freight and insurance charg .....

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uld 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 .....

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lthough FOC), the assessee s liability for any loss of such gold, it s obligation to convert the same into specified jewellery and resend to Almowaiji, and lastly internal controls, the assessee company books the same as purchase at a conversion rate mentioned in the BOE and credits Almowaiji. Conversely, at the time of sending the jewellery back to Almowaiji, the assessee company raises an export invoice and the same is recorded in INR at the conversion rate mentioned on the shipping bill and d .....

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ach consignment. 6.2 At the outset, we shall deal with the nature of work carried out by the assessee and decide as to whether the assessee is a job worker or a manufacturer . It is an admitted fact that the assessee imports pure gold bars of .999 of .995 fineness on FOC (free of cost) basis from its AE. The same is evident from the bill of entry, custom document, import invoice of the assessee company in the relevant assessment year. The assessee is required to convert the gold received from AE .....

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s. The assessee has stated that 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 .....

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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, it cannot be said that the international transaction entered into by the assessee is of purchase and sale . It is apposite to refer to the judgment rendered by the Hon ble Bombay High Court in CIT Vs. Gopal Purohit, 336 ITR 287 (Bom) wherein the Hon ble Court held that the subs .....

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question of law is raised. The appeal is accordingly dismissed. The aforesaid proposition of law further finds force from the judgment rendered by the Hon ble Supreme Court in Kedarnath Jute Manufacturing, 82 ITR 363 (SC) and Sutlej Cotton Mills Ltd, 116 ITR 1 (SC). 6.5 It is difficult to conceive how a transaction is said to be having the character of purchase and sale when the cost of raw material is not passed between the parties. Even the AE does not pass any financial entry in its books of .....

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y verified by the custom authorities at the time of import of gold and export of jewellery. Also, it can be seen from the custom documents, no custom duty is required to be paid by the assessee or by its AE for the value of gold imported and jewellery exported. 6.6 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 .....

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t 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 .....

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is a job worker. The Ld. AR on the other hand had rebutted the contention made by the Ld. DR and relied upon the judgment rendered by the Hon ble jurisdictional High Court in the case of CIT Vs. Lovlesh Jain ITA No. 1223/2011. We are in agreement with submission made by the assessee that section 10A exemption can be given to a job worker. It is relevant to extract the following portions of the aforesaid judgment relied upon by the assessee. 2. The contention of the Revenue in these appeals is t .....

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derived profits and gains as are derived by an undertaking from export of articles/things. (ii) The assessee is not an undertaking engaged in manufacture or production of articles or things. Conversion of standard gold into ornaments is not manufacture or production of articles or things. The assessee did not manufacture or produce articles/things. 5. This appeal pertains to the Assessment Year 2007- 08. 5.2 The facts as recorded by the Assessing Officer in the case of Lovlesh Jain are that the .....

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as not manufacturing ornaments/ jewellery and was not an exporter as he was paid making charges for the job work/services 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 .....

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l 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/s Onrich at Dubai and to a third person at London on instructions from M/s Onrich, Dubai. The gold imported into India was of 0.995 purity and was required to be converted into jewellery of 2 .....

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and the assessee had received making charges. 6.3 The CIT (Appeals) held that the conversion of raw gold or gold bars into jewellery amounts to manufacture. He also held that whether or not assessee‟s activity was manufacture or not, was independent of the question of ownership of the gold. He relied upon decisions of the Gujarat High Court in CIT versus J.B. Kharwar& Sons,[1987] 163 ITR 394 and the Madras High Court in Taj Fire Works Industries, [2007] 288 ITR 92. 8. Section 10A/10B o .....

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995, whereas the ornaments have a purity level of 22 carats or lower. Purity is reduced by mixing other metals like silver, copper, etc. This is necessary to give strength and durability to the ornaments as gold with 0.999/0.995 purity is very soft and tends to bend or break easily. The contention of the Revenue is that conversion of standard gold into ornaments does not amount to manufacture or production of articles or things as the primary material is the same, i.e. gold, and no new product w .....

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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 v .....

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a commodity or article fit for use, which it is otherwise not fit, the change/process falls within the meaning of the word manufacture . 6.9 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. It is relevant to refer to the judgment rendered .....

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de to third party vendor/media agencies. It is not in dispute that the assessee is engaged in undertaking advertising services for its customers/associate enterprises in the capacity of an agent. As part of its business operation, the assessee facilitates placement of advertisement for its associate enterprise in the print/electronic etc. media and for that purpose, the assessee is required to make payment to third parties for rendering of advertisement space on behalf of its customers or associ .....

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ut by third party vendors in the name of ultimate customers and beneficiary of advertisement. We have gone through the invoices and purchase orders from third party vendors and find that they contain customers name, and all the terms of advertisement are finalized after 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 .....

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ECD 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 agency function itself, or alter .....

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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 assessee. 6.11 The next issue which is to be decided as to which is the Most Appropriate Method (MAM) for calculating the arm s length price of the international transaction entered into by the assessee. The assessee has relied upon CPM and CUP method to benchmark its international transacti .....

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by Labour charges charged to Invoice no/Date Total Net Weight LABOUR CHARGES CLAIMED Labour Charges in $ per gm of Net Weight USD/INR, based on BOB value of exports Mizan & Co, Delhi New Kailash Jewellery House, New Delhi 30.05.2009 1040.03 20801 0.42 47.29 Mizan & Co, Delhi New Kailash Jewellery House, New Delhi 17.09.2009 1302 19530 0.31 48.35 Mizan & Co, Delhi New Kailash Jewellery House, New Delhi 20.09.2009 2357 58930 0.52 48.35 Mizan & Co, Delhi New Kailash Jewellery House .....

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ted supplier s to Almowaiji. Party Name Address Invoice no/Date Total Net Weight LABOUR CHARGES CLAIMED Labour Charges in $ per gm of Net Weight Unigold International Pte.Ltd. No.2 Little Road, Singapore 536981 DUB 020286 1014.7 609 0.60 Unigold International Pte.Ltd. No.2 Little Road, Singapore 536981 DUB 020287 5390 3511 0.65 Moro Moda Jewellery Limited Room No.1202,Capitol Centre,5-19,Jardine's Bazar,Causeway bay,Hongkong A0215/09 1495 822 0.55 Edge Well SDN. BHD 6, Lorong Perusahaan Maju .....

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587.700 3623.23 0.55 Zenmax SDN BHD (190833A) Plot 15, Bayan Lepas Industrial Estate, Phase- IV, 1190 Bayan Lepas, Penang Inv No. 0146 Dt. 18/6/2010 678.900 187.37 0.28 CHL Jewelleries Marketing SDN BHD (524321-W) 11A & 15, Jalan Industri Beringin, Taman Perindustrian Beringin, Juru, 11100 Buklt Mertajam, Penang Inv No. 004451 Dt. 24/4/2010 1104.040 533.92 0.48 AHY Jewellery SDN BHD 101-06-09 to 101-06-11, Meena Perdana, Jalan Gurdwara, 10300 Penang, Malaysia Inv No. 2106 Dt. 27/3/2010 1326. .....

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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 record of Mizan & Co., Delhi to New Kailash Jew .....

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ave 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 .....

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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 S .....

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ola. 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 insur .....

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