ITAT allows Cost Plus Method with GP/COP for jewelry manufacturer's transfer pricing benchmarking over Berry Ratio

The ITAT Jaipur ruled in favor of the assessee regarding transfer pricing adjustment disputes. The TPO had rejected the assessee's use of Gross Profit Margin/Cost of Production as PLI and instead applied Operating Profit/Value Added Expenses (Berry Ratio) for benchmarking international transactions. The ITAT held that given the assessee's manufacturing profile, functions performed, assets employed, and risks undertaken in manufacturing and exporting colored stones and studded jewelry, the Cost Plus Method with GP/COP was the appropriate PLI. The tribunal found the assessee's transactions met arm's length requirements and directed deletion of the transfer pricing adjustment.

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Issues Involved:

1. Assessment of total income.
2. Transfer pricing adjustment.
3. Rejection of economic analysis in TP documentation.
4. Rejection of Cost Plus Method (CPM) and application of Berry ratio.
5. Violation of Rule 10B(2) by rejecting certain comparables.
6. Application of new filters and introduction of new comparables.
7. Correct computation under Berry Ratio.
8. Benefit of proportionate adjustment.
9. Denial of natural justice.
10. Levy of interest u/s 234A/234B/234C.
11. Initiation of penalty proceedings u/s 274 r/w 271(l)(c).

Summary:

Assessment of Total Income: The assessee contested the assessment of total income at INR 57,36,47,429 against the returned income of INR 28,11,30,040.

Transfer Pricing Adjustment: The Transfer Pricing Officer (TPO) proposed and the Assessing Officer (AO) confirmed a transfer pricing adjustment of INR 29,25,17,385 for international transactions with Associated Enterprises (AEs), which was upheld by the Dispute Resolution Panel (DRP).

Rejection of Economic Analysis in TP Documentation: The TPO, AO, and DRP rejected the economic analysis carried out by the assessee in its Transfer Pricing (TP) documentation prepared in compliance with Section 92D of the Act read with Rule 10D of the Rules.

Rejection of Cost Plus Method (CPM) and Application of Berry Ratio: The TPO rejected the Cost Plus Method (CPM) considered by the assessee as the Most Appropriate Method (MAM) and applied the Berry ratio with Operating Profit/Value Added Expenses (OP/VAE) as the PLI under the Transactional Net Margin Method (TNMM). The DRP upheld this application.

Violation of Rule 10B(2) by Rejecting Certain Comparables: The TPO, AO, and DRP were found to have violated Rule 10B(2) by rejecting certain functionally comparable companies identified by the assessee in its TP documentation.

Application of New Filters and Introduction of New Comparables: The TPO, AO, and DRP introduced new filters and comparables without sharing the entire search process with the assessee.

Correct Computation under Berry Ratio: The TPO, AO, and DRP disregarded the assessee's submissions for considering the correct computation of OP/VAE under the Berry Ratio for the assessee as well as the alleged comparable companies.

Benefit of Proportionate Adjustment: The TPO, AO, and DRP did not allow the benefit of proportionate adjustment to the assessee, restricting the adjustment to the value of international transactions.

Denial of Natural Justice: The TPO did not provide an opportunity for hearing/responding to the show-cause notice proposing the impugned transfer pricing adjustment, and the DRP rejected the assessee's objections on this ground, denying the principle of natural justice.

Levy of Interest u/s 234A/234B/234C: The AO erred in levying interest under section 234A/234B/234C of the Act.

Initiation of Penalty Proceedings u/s 274 r/w 271(l)(c): The AO erred in initiating penalty proceedings under Section 274 read with Section 271(l)(c) for concealment/furnishing inaccurate particulars of income.

Decision:

The Tribunal found that the TPO's adoption of the Berry ratio was inappropriate given the assessee's manufacturing activities. The Tribunal upheld the use of the Cost Plus Method (CPM) with Gross Profit/Cost of Production (GP/COP) as the appropriate PLI. The transfer pricing adjustment of Rs 29,25,17,385/- was directed to be deleted, and the appeal of the assessee was allowed.

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