THE issues before the bench are - Whether trading addition on account of low Gross Profit is justifiable where the assessee is engaged in the job work and the GP rate depended on the nature of job work assigned only by the Principal and Whether addition on account of freight and octroi expenses is justified where the expenditure was claimed by the assessee on purchase of consumable and store material. And the answer favours the assessee.
Facts of the case
ITA No. 2809/Ahd/2010 (Assessee’s appeal)
The assessee company derives income from the business of job work of manufacturing of alloys, steel casting as in past. The assessee had declared Gross Profit at 22.57% as against gross profit of 26.37% for the preceding year. The A.O. gave reasonable opportunity of being heard on this issue as GP declined compared to preceding year. AO observed that the assessee was not maintaining the stock register of raw materials required for its manufacturing activities, due to whichthe valuation of closing stock was not verifiable in quantum as well as in valuation. After applying Section 145(3), trading addition was made on account of low Gross Profit. In appeal, CIT(A) confirmed the addition.
Assessee submitted that similar additions were made by the A.O. in A.Y. 03-04 & A.Y. 06-07 and GP addition in both years was deleted by CIT(A) and ITAT. It was submitted that assessee’s books of account were audited which had been furnished in Form No. 10CCB along with return and books were wrongly rejected u/s. 145 as no defects were pointed out. It was submitted that reason of declined GP was explained before both the authorities.
ITA No. 3091/Ahd/2010 (Revenue’s appeal)
A) As per the terms of agreement, "Incoming raw material, FREIGHT AND OCTROI will be paid by AIAE. Freight on final dispatch of casting will be borne by AIAE". The A.O. gave reasonable opportunity of being heard, which was considered by him but not found convincing to him on the ground that the assessee was working for AIAE Ltd. only, which was the holding company of assessee. It did not have any job work for others. Similar additions were made by the A.O. in A.Y. 02-03, A.Y. 05-06 & A.Y. 06-07, which were deleted by the CIT(A) under the same head as this expenditure was borne AIAE Ltd. as per the agreement;
In appeal, CIT(A) deleted the addition by following order of ITAT in assessment year 2003-04 wherein ITAT deleted the disallowance by observing that the department had not pointed out as to whether this freight and octroi was paid in respect of raw materials brought from the principal or finished goods supplied back to the principal.
B) The assessee claimed shortage on account of burning loss/ process loss @ 10.60%. A.O. added back excess burning loss of 5.6%. A.O. analyzed the Audit Report of Principal i.e. AIA Engineering Ltd., wherein the burning loss has been shown. The A.O. opined that no process loss had been declared by the holding company for whom assessee manufactures alloys. Whatever quantity produced was for the AIA Engg. And whatever raw material supplied was also for them and accordingly whatever loss/shortage shown was also in respect of them. Therefore, the Tax Auditors of AIA Engg. had correctly declared in the shortage as ‘burning loss’. The assessee could not produce any internal records or reconciliation regarding day-to-day manufacturing activity and qualification of loss. During the course of survey processing u/s. 133A, books of accounts found were impounded. After verification of stock registers, the A.O. observed that the assessee got production @ 92% and shortage @ 8%, but these entries were made on estimate basis as held by the A.O. The conversion charges depend upon the production. The A.O. held that assessee did not maintain proper record and register for day-to-day manufacturing activities. The assessee had not maintained the complete qualitative details of raw materials consumed in production day-to-day and shortages/loss occurring a each stage of manufacturing process. The similar additions were made in preceding year and books of account were rejected u/s. 145 of the IT Act for the year under consideration. The assessee’s claim shortage/loss on account of burning / process loss @ 10.60% was found abnormal, which was taken @ 5% in earlier year. Thus, the difference 5.60% was found an excess conversion charges. AO made addition under the head ‘suppressed conversion charges’. In appeal, CIT(A) deleted the addition by considering the past history of the case.
Revenue contended that since similar additions were made in earlier year, additions made by the A.O. should be confirmed. In respect of addition on account of suppressed conversion charges, revenue contended that as per the agreement between the assessee and its Principal, the raw material and store shortage on account of burning loss in conversion was to be borne by the Principal and not by the assessee. The loss in conversion was burning loss and not process loss. The Production Manager and the Melting Engineer had admitted that the burning loss @ 5%.
Assessee argued that CIT(A) was right in deleting the addition by considering the past history of the case and favourable decision by this Court in A.Y. 02-03, 05-06 & 06-07. Assessee contended that it manufactured alloy steel castings from various types of scrap and ferro alloys and it involves various processes and at each stage there was loss of weight. The actual loss incurred during all the processes ranges between 10% to 12%. The admission made by the employees of the company @ 5% was not clear whether it was for burning loss or process loss. Further, the assessee had not been provided with the copy of the statement. It was submitted that in the earlier years, on identical issues the ITAT had set aside the issue to the file of the Assessing Officer for re-examination.
Having heard the parties, the tribunal held that,
++ there was a decline in the GP rate compared to preceding year but converging charges in gross have been increased substantially. The raw material is supplied by the sister concern which has been processed by the assessee on job work basis on behalf of the sister concerned, namely, AIA Engineering Co. Ltd. The A.O. had not brought on record that assessee’s job receipt compared to other parties of similar nature of work, were booked on lower rates. The A.O. had admitted in assessment at page nos. 12 & 13 that the assessee maintains stock register in respect of raw material and production as prescribed by the Central Excise Department, wherein day today raw material issued and finished product are entered;
++ the A.O. has not controverted the fact that assessee is engaged in the job work and not doing any manufacturing activity for its own purposes and trading of goods. The entire revenue is dependent upon its Principal who decided the rate at which the job had to be performed. The GP rate is depend on what type of job work assigned by the Principal. During the year, average job work realized has fallen compared to preceding year. The entire job work was also subjected to TDS. The stock register was impounded by the Department and was in possession with the department which could be examined by the A.O. at the time of assessment. The assessee had maintained day-to-day stock register. The assessee does not have any stock for its own. The entire raw material was given by the Principal which after manufacturing returned back the same to the Principal. The entire burning loss belonged to the Principal and not the assessee. The burning loss has not been claimed in the account. The assessee wholly depended on the job work of the Principal. No outside job work was performed by the assessee. Therefore, we do not find any reason to confirm the order of CIT(A). Accordingly, we allow the assessee’s appeal;
A) ++ the identical issue has been decided by the Co-ordinate Bench in assessee’s own case and facts are same in the current year. The CIT(A) had deleted the addition on the basis of Co-ordinate Bench decision by observing that the Department has not pointed out as to whether this freight and octroi was paid in respect of raw material brought from the Principal or finish goods supplied back to the Principal, whereas CIT(A) held that freight and octroi expenditure claimed by the assessee has incurred on purchase of consumable and store material, cannot be disturbed. The CIT(A) found the facts of the current year are same as in A.Y. 03-04. The assessee submitted reply to the A.O. on 10.11.2009 which has been reproduced by the A.O. and the assessee had explained all the expenditures claimed under the head ‘freight inward & octroi, freight outward and coolie/ cartage’ and it has been submitted before the A.O. that freight inward includes expenditure only in respect of store and consumable material, which was consumed by the assessee. Freight inward did not comprise of any freight paid for raw material on behalf of the Principal. The total consumables purchased during the year was Rs.2.07 crore which includes refractories, ramming mass etc. Octroi of Rs. 7.02 lacs was paid on the stores and consumables purchased during the year. Freight outward was incurred for loading, unloading and freight for moving the used moulding sand and other scrap materials out of factory premises to be taken to a remote place for disposal. Coolie / cartage was paid for loading, unloading and freight for moving the castings in process for job work outside our factory premises for such job work and bringing it back to the factory. These submissions had not been controverted by the A.O. He simply relied upon the agreement between the assessee and Principal. The freight and octroi expenditure shown in the agreement was for incoming the raw material and on sending back casting was borne by the Principal. Thus, both the expenses are different. Therefore, we confirm the order of the CIT(A);
B) ++ we have heard the rival submissions and perused the material on record and gone through the Co-ordinate Bench decision for A.Y. 06-07 in ITA No.1851/Ahd/2009, wherein identical issue has been set aside to the A.O. for re-examination. The present facts of the assessee are pari materia with A.Y. 06-07. Thus, we also set aside this issue to the A.O. for de novo. The Revenue’s appeal on this ground is allowed for statistical purpose.
A) As per the terms of agreement, "Incoming raw material, FREIGHT AND OCTROI will be paid by AIAE. Freight on final dispatch of casting will be borne by AIAE". The A.O. gave reasonable opportunity of being heard, which was considered by him but not found convincing to him on the ground that the assessee was working for AIAE Ltd. only, which was the holding company of assessee. It did not have any job work for others. Similar additions were made by the A.O. in A.Y. 02-03, A.Y. 05-06 & A.Y. 06-07, which were deleted by the CIT(A) under the same head as this expenditure was borne AIAE Ltd. as per the agreement;
In appeal, CIT(A) deleted the addition by following order of ITAT in assessment year 2003-04 wherein ITAT deleted the disallowance by observing that the department had not pointed out as to whether this freight and octroi was paid in respect of raw materials brought from the principal or finished goods supplied back to the principal.
B) The assessee claimed shortage on account of burning loss/ process loss @ 10.60%. A.O. added back excess burning loss of 5.6%. A.O. analyzed the Audit Report of Principal i.e. AIA Engineering Ltd., wherein the burning loss has been shown. The A.O. opined that no process loss had been declared by the holding company for whom assessee manufactures alloys. Whatever quantity produced was for the AIA Engg. And whatever raw material supplied was also for them and accordingly whatever loss/shortage shown was also in respect of them. Therefore, the Tax Auditors of AIA Engg. had correctly declared in the shortage as ‘burning loss’. The assessee could not produce any internal records or reconciliation regarding day-to-day manufacturing activity and qualification of loss. During the course of survey processing u/s. 133A, books of accounts found were impounded. After verification of stock registers, the A.O. observed that the assessee got production @ 92% and shortage @ 8%, but these entries were made on estimate basis as held by the A.O. The conversion charges depend upon the production. The A.O. held that assessee did not maintain proper record and register for day-to-day manufacturing activities. The assessee had not maintained the complete qualitative details of raw materials consumed in production day-to-day and shortages/loss occurring a each stage of manufacturing process. The similar additions were made in preceding year and books of account were rejected u/s. 145 of the IT Act for the year under consideration. The assessee’s claim shortage/loss on account of burning / process loss @ 10.60% was found abnormal, which was taken @ 5% in earlier year. Thus, the difference 5.60% was found an excess conversion charges. AO made addition under the head ‘suppressed conversion charges’. In appeal, CIT(A) deleted the addition by considering the past history of the case.
Revenue contended that since similar additions were made in earlier year, additions made by the A.O. should be confirmed. In respect of addition on account of suppressed conversion charges, revenue contended that as per the agreement between the assessee and its Principal, the raw material and store shortage on account of burning loss in conversion was to be borne by the Principal and not by the assessee. The loss in conversion was burning loss and not process loss. The Production Manager and the Melting Engineer had admitted that the burning loss @ 5%.
Assessee argued that CIT(A) was right in deleting the addition by considering the past history of the case and favourable decision by this Court in A.Y. 02-03, 05-06 & 06-07. Assessee contended that it manufactured alloy steel castings from various types of scrap and ferro alloys and it involves various processes and at each stage there was loss of weight. The actual loss incurred during all the processes ranges between 10% to 12%. The admission made by the employees of the company @ 5% was not clear whether it was for burning loss or process loss. Further, the assessee had not been provided with the copy of the statement. It was submitted that in the earlier years, on identical issues the ITAT had set aside the issue to the file of the Assessing Officer for re-examination.
Having heard the parties, the tribunal held that,
++ there was a decline in the GP rate compared to preceding year but converging charges in gross have been increased substantially. The raw material is supplied by the sister concern which has been processed by the assessee on job work basis on behalf of the sister concerned, namely, AIA Engineering Co. Ltd. The A.O. had not brought on record that assessee’s job receipt compared to other parties of similar nature of work, were booked on lower rates. The A.O. had admitted in assessment at page nos. 12 & 13 that the assessee maintains stock register in respect of raw material and production as prescribed by the Central Excise Department, wherein day today raw material issued and finished product are entered;
++ the A.O. has not controverted the fact that assessee is engaged in the job work and not doing any manufacturing activity for its own purposes and trading of goods. The entire revenue is dependent upon its Principal who decided the rate at which the job had to be performed. The GP rate is depend on what type of job work assigned by the Principal. During the year, average job work realized has fallen compared to preceding year. The entire job work was also subjected to TDS. The stock register was impounded by the Department and was in possession with the department which could be examined by the A.O. at the time of assessment. The assessee had maintained day-to-day stock register. The assessee does not have any stock for its own. The entire raw material was given by the Principal which after manufacturing returned back the same to the Principal. The entire burning loss belonged to the Principal and not the assessee. The burning loss has not been claimed in the account. The assessee wholly depended on the job work of the Principal. No outside job work was performed by the assessee. Therefore, we do not find any reason to confirm the order of CIT(A). Accordingly, we allow the assessee’s appeal;
A) ++ the identical issue has been decided by the Co-ordinate Bench in assessee’s own case and facts are same in the current year. The CIT(A) had deleted the addition on the basis of Co-ordinate Bench decision by observing that the Department has not pointed out as to whether this freight and octroi was paid in respect of raw material brought from the Principal or finish goods supplied back to the Principal, whereas CIT(A) held that freight and octroi expenditure claimed by the assessee has incurred on purchase of consumable and store material, cannot be disturbed. The CIT(A) found the facts of the current year are same as in A.Y. 03-04. The assessee submitted reply to the A.O. on 10.11.2009 which has been reproduced by the A.O. and the assessee had explained all the expenditures claimed under the head ‘freight inward & octroi, freight outward and coolie/ cartage’ and it has been submitted before the A.O. that freight inward includes expenditure only in respect of store and consumable material, which was consumed by the assessee. Freight inward did not comprise of any freight paid for raw material on behalf of the Principal. The total consumables purchased during the year was Rs.2.07 crore which includes refractories, ramming mass etc. Octroi of Rs. 7.02 lacs was paid on the stores and consumables purchased during the year. Freight outward was incurred for loading, unloading and freight for moving the used moulding sand and other scrap materials out of factory premises to be taken to a remote place for disposal. Coolie / cartage was paid for loading, unloading and freight for moving the castings in process for job work outside our factory premises for such job work and bringing it back to the factory. These submissions had not been controverted by the A.O. He simply relied upon the agreement between the assessee and Principal. The freight and octroi expenditure shown in the agreement was for incoming the raw material and on sending back casting was borne by the Principal. Thus, both the expenses are different. Therefore, we confirm the order of the CIT(A);
B) ++ we have heard the rival submissions and perused the material on record and gone through the Co-ordinate Bench decision for A.Y. 06-07 in ITA No.1851/Ahd/2009, wherein identical issue has been set aside to the A.O. for re-examination. The present facts of the assessee are pari materia with A.Y. 06-07. Thus, we also set aside this issue to the A.O. for de novo. The Revenue’s appeal on this ground is allowed for statistical purpose.
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