The Jaipur Bench of the Income Tax Appellate Tribunal (ITAT) has deleted transfer pricing adjustments aggregating approximately ₹105.06 crore on transactions undertaken by the assessee with its associated enterprises, holding that the Berry ratio was unsuitable for benchmarking the business of a full-fledged jewellery manufacturer.
The bench of Kuldip Singh (Judicial Member) and Prakash (Accountant Member) also deleted a separate ₹6.94 crore adjustment towards notional interest on outstanding export receivables for assessment year 2019-20. However, it demanded the corresponding ₹3.14 crore interest adjustment for assessment year 2022-23 for verification of whether associated enterprises and unrelated customers received comparable treatment.
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The Bench further directed the Assessing Officer to recompute book profits under Section 115JB without adding transfer pricing adjustments, including any interest adjustment that may survive the fresh examination. The common order was pronounced on September 23, 2026.
The appellant/assessee manufactures and exports coloured gemstones and studded jewellery through units at Jaipur and Mumbai. Its exports are primarily made to associated enterprises located in the United States, United Kingdom, Hong Kong, Thailand, Japan and Indonesia.
The appeals concerned final assessment orders for assessment years 2019-20 and 2022-23, passed following directions issued by the Dispute Resolution Panel (DRP).
For assessment year 2019-20, the company benchmarked its international transactions using the Cost Plus Method, with gross profit to cost of production of 16.13% as its profit level indicator. For assessment year 2022-23, it adopted the Transactional Net Margin Method (TNMM), using operating profit to operating cost of 5.07%.
The Transfer Pricing Officer (TPO) rejected these indicators on the premise that the company both purchased from and sold to related parties, making the cost and revenue sides controlled. Instead, the officer applied TNMM using operating profit to value added expenses, described in the order as the Berry ratio.
After giving effect to the DRP’s directions, the final sales-related adjustments stood at ₹28,76,98,590 for assessment year 2019-20 and ₹76,28,92,873 for assessment year 2022-23. Separate adjustments were also made for notional interest on export receivables.
The central question was whether a profit indicator excluding material costs could reliably measure the arm’s length return of a jewellery manufacturer that procures valuable inputs, maintains inventory, employs manufacturing assets and bears commercial risks.
The Tribunal found that the company undertook procurement, product conceptualisation, designing, production scheduling, manufacturing, quality control and warehousing. It owned the plant, machinery and infrastructure necessary for these activities and bore risks relating to materials, inventory, independent customer credit and manufacturing defects.
It therefore characterised the company as a manufacturer in the full sense, rather than a trader, intermediary or service provider.
Material costs were especially significant. For assessment year 2019-20, revenue from operations was ₹480.40 crore, while materials consumed amounted to ₹302.52 crore and purchases of stock in trade to ₹16.02 crore. For assessment year 2022-23, the corresponding material and stock purchases together amounted to ₹323.80 crore against operating revenue of ₹489.10 crore.
The Tribunal noted that material costs formed more than two-thirds of operating costs in both years. Excluding these costs from the profit base also excluded the capital deployed in valuable inventory and the risks associated with holding it.
Relying on the Delhi High Court’s decision in Sumitomo Corporation India (P.) Ltd. v. CIT, the Tribunal explained that the Berry ratio has limited applicability. Its suitability depends on whether operating expenses adequately capture the functions performed and risks assumed, and whether the value of goods has a direct role in generating profits.
Those conditions were not satisfied here.
The price of jewellery depended on the gemstones, diamonds and precious metals used in it. Procurement and holding of those inputs involved substantial funding and risk. The company also operated manufacturing infrastructure at several locations and had financial exposure to the goods it produced.
The Tribunal rejected the reasoning that raw materials merely passed into the finished product and their costs became neutralised in the selling price. That approach was inconsistent with the DRP’s own finding that employees cut, calibrated and polished the materials to manufacture studded jewellery.
The Tribunal also found that the Revenue’s premise that both sides of the transactions were controlled was not supported by the actual purchase profile.
For assessment year 2022-23, purchases from associated enterprises amounted to ₹40.23 crore against total material and stock-in-trade costs of ₹323.80 crore. For assessment year 2019-20, the company had stated that associated-enterprise purchases constituted only 25.34% of total purchases, a position the DRP had not found incorrect.
Consequently, the bulk of the cost base was uncontrolled.
The Tribunal held that the TPO had not explained why a limited proportion of related-party purchases justified removing the entire material and production cost from the benchmarking base.
Earlier coordinate benches had rejected the Berry ratio in the company’s own cases. The Tribunal found no material change in its functional profile that justified a different result.
It also disapproved the DRP’s approach of maintaining the departmental position because a Revenue appeal concerning an earlier year was pending before the High Court.
Applying the Supreme Court’s ruling in Union of India v. Kamlakshi Finance Corporation Ltd., the Bench emphasised that subordinate authorities must follow appellate decisions unless their operation has been suspended by a competent court. No such suspension had been brought to its notice.
The Tribunal further noted that the authorities had not demonstrated that the company’s transactions fell outside the arm’s length range when tested using an appropriate profit indicator. Once the Berry ratio was rejected, the sales-related adjustments lacked a surviving basis.
It accordingly directed deletion of both adjustments, totalling ₹1,05,05,91,463.
The TPO had treated export receivables outstanding beyond 60 days as warranting an interest adjustment. The company maintained that its standard credit period was 180 days for both associated enterprises and unrelated customers, and that it charged interest from neither category.
Following earlier decisions in the company’s own cases, the Tribunal rejected the substitution of a 60-day credit period and held that no interest could be imputed on receivables realised within 180 days.
For delays beyond that period, it examined actual invoice realisations.
For assessment year 2019-20, several associated-enterprise invoices were realised after 375 to 379 days. However, invoices raised on unrelated customers on the same date were also realised after 377 days without interest. Another unrelated customer paid after 291 days.
The Tribunal found uniformity in the treatment of associated and unrelated customers and deleted the entire ₹6,94,01,760 interest adjustment for that year.
The Tribunal reached a different procedural outcome for assessment year 2022-23 because the invoice details produced before it contained only associated-enterprise transactions. These showed delays extending up to 134 days beyond the agreed 180-day period, but did not permit a comparison with unrelated customers.
The Bench held that parity was a factual matter requiring proof for each assessment year.
It recognised that an associated-enterprise receivable falls within the statutory scope of an international transaction. However, the relevant inquiry was whether the related customer received a benefit that an independent customer would not have received.
The ₹3,14,04,878 adjustment was therefore set aside and remanded to the AO/TPO for fresh verification.
The company must furnish complete invoice-wise export details for associated and unrelated customers, including realisation dates, reconciled with its books. If unrelated customers were not charged interest and the invoice-value-weighted average realisation period for associated enterprises did not exceed that for unrelated customers, no adjustment would be made.
If that test failed, interest would be computed only on associated-enterprise invoices realised beyond 180 days, for the period exceeding those 180 days.
The Tribunal rejected the TPO’s addition of 400 basis points over six-month LIBOR. It found that a trade receivable overdue by a few months could not be equated with an external commercial borrowing having a three-to-five-year maturity. No comparable uncontrolled transaction supported the mark-up.
The company had produced a Punjab National Bank document showing availability of foreign-currency packing credit at six-month LIBOR plus 1.85%. The Tribunal considered this an actual uncontrolled borrowing rate connected with the company’s export cycle.
Using the LIBOR figure adopted by the TPO, that produced a rate of 2.106%. However, because the bank document dated from May 2018, the AO/TPO must verify whether the same spread applied during financial year 2021-22 and substitute the applicable spread if it differed.
The Tribunal also rejected the company’s request for an additional 60 interest-free days beyond the agreed 180-day period. Its separate claim for setting off early realisations was rejected because those realisations would already be reflected in the weighted-average comparison.
The Tribunal separately found that the Assessing Officer had added the transfer pricing adjustments to book profits despite an express DRP direction against doing so.
The DRP had directed that only adjustments permitted under Section 115JB could be made while computing book profits for Minimum Alternate Tax. Transfer pricing adjustments were to affect normal income alone.
The Bench held that the DRP’s directions were binding under Section 144C(10), and the assessment had to conform to them under Section 144C(13).
It consequently directed recomputation of book profits for both years without any transfer pricing addition, including interest on receivables that might be recomputed following remand.
The appeal for assessment year 2019-20 was allowed, while the appeal for assessment year 2022-23 was partly allowed for statistical purposes.
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