Transfer pricing under section 80-IA(10) needs objective proof of arranged profits; comparables and section 10AA recomputation followed.

Section 80-IA(10) adjustment could not be sustained without objective material showing a close connection, an arranged course of business and profits above ordinary levels; the record did not establish those foundational facts, so the adjustment failed. On comparables, Neysa Jewellery Ltd. was excluded because abnormal financial stress and audit qualifications made it an unreliable comparator, Goldiam Jewellery Ltd. was included because no cogent basis for exclusion was shown, and Inter Gold (India) Pvt. Ltd. was excluded because related party transactions remained a valid comparability filter. Any transfer pricing impact had to be reflected by recomputing the section 10AA deduction, not as a standalone addition to total income.

---

---

Issues: (i) whether the transfer pricing adjustment made in the context of section 80-IA(10) could be sustained without establishing close connection, an arranged course of business and ordinary profits; (ii) whether the exclusion and inclusion of comparables, including Neysa Jewellery Ltd., Goldiam Jewellery Ltd. and Inter Gold (India) Pvt. Ltd., was justified; and (iii) whether the adjustment had to be given effect only while recomputing deduction under section 10AA rather than as an addition to total income.

Issue (i): whether the transfer pricing adjustment made in the context of section 80-IA(10) could be sustained without establishing close connection, an arranged course of business and ordinary profits.

Analysis: Section 80-IA(10) is an anti-abuse provision and its application requires foundational facts to be proved on objective material. The adjustment could not rest merely on the existence of transactions or on a comparison of margins. The record did not show reliable material to demonstrate that the course of business with the concerned overseas entities was so arranged as to yield more than ordinary profits or to establish what the ordinary profits in such business would be. The surrounding facts, including consistency of results across years, also supported the assessee.

Conclusion: The adjustment under section 80-IA(10) was unsustainable and this issue was decided in favour of the assessee.

Issue (ii): whether the exclusion and inclusion of comparables, including Neysa Jewellery Ltd., Goldiam Jewellery Ltd. and Inter Gold (India) Pvt. Ltd., was justified.

Analysis: Neysa Jewellery Ltd. was shown to be under abnormal financial stress, with defaults, settlement with bankers and adverse audit qualifications, and therefore did not reflect normal business conditions. Goldiam Jewellery Ltd. satisfied the export filter and no cogent basis for exclusion was established. Inter Gold (India) Pvt. Ltd., however, had significant related party transactions, and the related party filter was treated as a necessary comparability safeguard; the request to dilute that filter was declined. Laxmi Dia Jewels Pvt. Ltd. had already been rejected by the assessee itself and required no further adjudication.

Conclusion: Neysa Jewellery Ltd. was directed to be excluded, Goldiam Jewellery Ltd. was directed to be included, and the exclusion of Inter Gold (India) Pvt. Ltd. was upheld.

Issue (iii): whether the adjustment had to be given effect only while recomputing deduction under section 10AA rather than as an addition to total income.

Analysis: Any adjustment to the eligible profits of the SEZ undertaking had a direct bearing on the quantum of deduction under section 10AA. The assessment had therefore to be aligned with recomputation of the deduction in accordance with the transfer pricing result, rather than treated as a standalone addition without such linkage.

Conclusion: The Assessing Officer was directed to recompute deduction under section 10AA in accordance with law, and this issue was decided in favour of the assessee.

Final Conclusion: The appeal succeeded on the core challenge to the transfer pricing adjustment and on the consequential treatment of deduction under section 10AA, while the comparability analysis was accepted only in part.

Ratio Decidendi: An adjustment under section 80-IA(10) requires proof of close connection, a rearranged course of business, and excess profits on objective material; comparables affected by abnormal financial conditions are unreliable, while related party transactions remain a valid comparability concern.

---