2025 (8) TMI 1034 - AT - Income Tax

Transfer pricing adjustments set aside; Berry ratio rejected; TNMM with OP/OC as PLI upheld; s.115QA and s.69C additions deleted

ITAT JAIPUR - AT set aside transfer-pricing adjustments, holding the revenue erred in applying Berry ratio and rejecting the taxpayer's functionally ... TP Adjustment made for an amount on account of Sale and Purchases made to / from Associated Enterprises (AE) - most appropriate PLI and berry ratio - AO and DRP rejected the economic analysis including the Most Appropriate Method and the filters applied by the appellant in the Transfer Pricing ('TP') documentation maintained under section 92D of the Act read with Rule 10D of the Income Tax Rules, 1962 (the Rules) and subsequently applying new filters for the purpose of identification of companies comparable to the appellant - HELD THAT:- Record reveals that while making the adjustment Ld. TPO, Ld. AO and DRP applied ‘Berry ratio’ with Operating Profit/Value Added Expenses (OP/VAB') as the PLI under The Transactional Net Margin Method (TNMM) based on conjectures and surmises, without appreciating that the appellant is engaged in manufacturing activities and therefore, purchases and cost of production ought to be included in the cost base. thereby, completely disregarding the facts of the case, the functional profile of the appellant, established legal principles and internationally accepted transfer pricing guidelines. In doing so, the Ld. TPO, Ld. AO and the Hon'ble DRP also failed to appreciate that Berry ratio can be applied only in specific circumstances, i.e. low risk procurement and distributors. Additionally, the Ld. AO has erred in applying ‘Berry Ratio’ even when in appellant’s own case, Berry Ratio was rejected as PLI in the A.Y. 2016-17 & 2017-18 by the co-ordinate bench of ITAT. Thus, we note that the Ld. TPO, Ld. AO and the DRP erred in violating the provisions of Rule 10B(2) of the Rules by rejecting functionally similar comparable Companies identified by the Appellant in its TP documentation and in arbitrarily identifying a new comparable company without conducting a methodical without considering the differences in the functions performed, assets employed, and risks assumed by such comparable company vis-a-vis the Appellant as required in accordance with Rules 10B and Rule 10C of the rules, thereby restoring to cherry-picking and unsubstantiated selection of the comparable. Even otherwise if we considered TNMM as the Most Appropriate Method in the given case, Ld. TPO, Ld. AO and DRP has to consider Operating Profit/ Operating Cost (OP/OC) as the most appropriate PLI and berry ratio. Selection of comparable and application of the PLI ( i.e. Gross Profit Margin / Cost of Production) - Considering the submission of the assessee which has not been controverted by the ld. DR and as the comparable so selected by the TPO where the median OP/COP comes to 9.99 % whereas the Margin of the assessee reported for the year under consideration at 15.43 %. Thus we are of the considered view that the assessee’s transactions with its associated enterprises meets the requirement of transaction the same at arm’s length and thereby no adjustment is warranted. Thus, based on the above discussion and on being consistent with the finding so recorded on the similar facts in [2022 (2) TMI 1446 - ITAT JAIPUR] we do not find any reason to sustain the addition on account of sales and purchases made to/from associated enterprises for an amount is directed to deleted. Based on the observation sub ground no. 1 to 8 of Ground no. II are allowed. Addition on account of Notional Interest on outstanding receivable upon which adjustment was made - We note that on account of the primary international transaction of Sale & Purchases made to/from AEs, the appellant had continuing debit and credit balances of receivables and payables respectively from its AEs during the year under consideration. On these transactions ld. TPO while dealing with the reference considered the receivables outstanding from AEs for more than 60 days as a separate ‘international transaction' and re-characterized the same as deemed unsecured interest free loan given by appellant to its AE. While doing so he assumed that an interest at the rate of 6.056% based on 6 months LIBOR plus a mark-up of 400 basis points was rate to be charged on that transaction. As regards the adopting 60 days to determine overdue receivables from the AEs for the purpose of treating such overdue receivables in nature of interest free unsecured loans, we note that the assessee in the written submission submitted that while doing so, the Ld. TPO/ AO ignored the following facts : - a) the Appellant has granted a credit period of up to 180 days to both AEs as well as non-AE third parties; b) the Appellant has not charged interest on delayed receivables from third parties as well; c) the Reserve Bank of India (‘RBI) has itself acknowledged the hardships faced by the companies (operating in similar industries) and has revised the foreign remittance guidelines related to credit period norm for jewellery exporters to 180 days; d) not charging any interest on delayed receipts is a generally accepted practice for companies engaged in similar business segment as the Appellant. The above issue has already been dealt with in the case of the assessee for A. Y. 2017-18 [2024 (6) TMI 879 - ITAT JAIPUR] as held there is complete uniformity in the act of the assessee in not charging any interest from both the AE as well as Non AE debtors and on the same delay, the assessing officer is not justified in making the addition of notional interest to the assessee's arm's length price. The ratio decided in the case of CIT Vs Indo American Jewellery Ltd [2013 (1) TMI 804 - BOMBAY HIGH COURT] is applicable in the present case also and accordingly the adjustment of interest is deleted. Addition of PF payment made u/s 36(1)(va) on account of delay in making the payment with in the due date prescribed - AO confirmed the addition in violation of the direction of the ld. DRP. On this issue ld. AR of the assessee vide continuation to the written submission has also filed placed on record the copy of the calendar stating that 15th December 2019 being Sunday and Holiday the payment was made on 16th December fully covered with the direction of the DRP. Ld. DR did not controvert this fact and therefore, considering that fact we see no reason to sustain the addition of Rs. 19,68,509/- and thereby the same is directed to be deleted. Based on this observation ground no. IV raised by the assessee is allowed. Action of the ld. AO invoking provision of section 115QA of the Act and thereby making the additional tax on the distributed income in relation to buy back of shares - Upon reading the above proposed amendment, notes on amended clause with that of the public announcement made by the Hon’ble Finance Minister in the public domain, the assessee reached to the destination and concluded the transaction which was made public. Accordingly reading that provision in that terms that what is available in public domain is the amendment made, notes on clause and guidelines given by the Hon’ble Finance Minister and the alleged proviso applied in the case of the assessee not available in the public domain till it become the law. What is available as on 05.07.2019 till 08.08.2019 duly complied by the assessee and the revenue cannot enforce the proviso was not in public domain and therefore, condition mentioned in the proviso which was not known to the assessee till 08.08.2019 the condition of that cannot be expected to be applied which was not known to the assessee. Compliance made based on the information available in public domain the assessee cannot be found at fault of the proviso which was not in public and therefore, we are of the considered view that what was not known to the assessee of the provision and compliance which were made were well within the proposed law and therefore, we direct the ld. AO to delete the addition of Rs. 71,99,99,211/- considering the fact that law, notes on clause and public announcement were compiled and proviso which was relied upon by the revenue was not made public and therefore, activities which were undertaken by the assessee based on the information available in public which till 08.08.2019 were followed and thereby cannot be considered or differentiated to tax the transaction which has retrospective effect. While reaching the conclusion we get support on the various judicial precedent cited in the written submission that the accrual of right on the repeal provision cannot be taken away. Even otherwise the assessee, before the change proposed i.e. on 05.07.2019 completed all the action which would be considered as the action of the assessee was in the public domain. Based on this observation sub ground no 1 of ground no. V raised by the assessee is allowed. Unexplained Expenses - CIT(A) sustain the addition u/s 69C treating 'Dumb Document' as unaccounted expenses - HELD THAT:- Since the assessee has already explained the complete facts which was not countered by the lower authority merely on rough noting no addition can be made even otherwise the assessee submitted that the negotiated transaction is already recorded and therefore, we direct the ld. AO to delete the addition. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether the Transfer Pricing adjustments made by tax authorities-rejecting the taxpayer's Most Appropriate Method (Cost-Plus / GP-to-Cost-of-Production) and applying TNMM with Berry Ratio (OP/VAE) and newly-selected comparables-are sustainable in law and on facts. 1.2 Whether outstanding trade receivables from associated enterprises can be re-characterised as deemed interest-free unsecured loans constituting a separate international transaction, warranting imputation of notional interest (rate taken as 6-month LIBOR plus 400 bps), and whether a 60-day credit cutoff is appropriate. 1.3 Whether provident fund contribution disallowance under section 36(1)(va) is justified where the statutory due date fell on a public holiday and deposit occurred on the next working day (application of General Clauses Act, computation of time). 1.4 Whether the tax under section 115QA on distributed income on share buy-back applies to the assessed transaction given the legislative amendment timeline and whether the proviso (public announcement before 5.7.2019 in accordance with SEBI rules) excludes the transaction - including question of substantial compliance and correct computation of 'distributed income.' 1.5 Whether additions based on seized loose/jotted pages (so-called 'dumb documents') and unexplained entries can be sustained as unexplained income/expenses under section 69C without corroborative evidence. 1.6 Ancillary issues raised but not pressed or treated as not pressed: jurisdiction under s.143(3) r.w.s.144C(13), computation of book profits for MAT (s.115JB), foreign tax credit and rate issues, and initiation of penalties under s.270A/271AAC. 2. ISSUE-WISE DETAILED ANALYSIS 2.1 Transfer-Pricing methodology, comparables, and application of Berry Ratio Legal framework: 2.1.1 Transfer-pricing provisions require determination of arm's length price by reference to most appropriate method (s.92C), with comparability factors under Rules 10B/10C and documentation obligations under s.92D/Rule 10D. International guidance (OECD/UN) on selection of Profit Level Indicators (PLIs) is relevant. Precedent treatment: 2.1.2 Tribunal's prior decisions on materially identical facts (earlier assessment years) accepted Cost-Plus with GP/COP as appropriate PLI for the taxpayer and rejected Berry Ratio; those decisions were relied upon by the taxpayer before the Tribunal in the present appeals. Interpretation and reasoning: 2.1.3 Revenue authorities replaced the taxpayer's CPM/GP-to-COP PLI with TNMM using Berry Ratio (OP/VAE), rejected majority of taxpayer-identified comparables and applied new filters. The authorities' principal rationale was that both purchases and sales were controlled (related-party), rendering cost base tainted so that Berry Ratio was more appropriate. 2.1.4 Tribunal examined taxpayer's functional profile (manufacturer with substantial processing, fixed assets, inventories, and multiple risks) and financials showing GP/COP materially higher than comparable medians. Tribunal applied OECD/UN principles: Berry Ratio is appropriate only where operating expenses capture the value-adding functions, typically for low-risk distributors/intermediaries without asset intensity or intangibles; it is inappropriate where manufacturing, asset intensity or significant risks exist. 2.1.5 The Tribunal found no cogent reason recorded by authorities to displace the CPM/GP-to-COP selection, noted continued acceptance of CPM in prior years on identical facts, and held that authorities violated Rule 10B/10C by rejecting functionally similar comparables without methodical analysis (cherry-picking). Tribunal observed numerical inconsistency in Berry Ratio medians across years (demonstrating arbitrariness). Ratio vs. Obiter: 2.1.6 Ratio: On the facts, Berry Ratio is not the appropriate PLI; CPM/GP-to-COP meets arm's-length test and prior-year findings are binding on the issue as covering identical facts. Authorities' replacement of comparables without establishing failure of statutory comparability conditions is unsustainable. Conclusion: 2.1.7 Transfer-pricing adjustment of Rs. 136.31 crores (and related total) based on Berry Ratio/TNMM and the re-selected comparables is deleted; CPM/GP-to-COP remains the most appropriate method on the presented facts. 2.2 Notional interest on outstanding receivables (recharacterisation, 60-day rule, and LIBOR+400bp mark-up) Legal framework: 2.2.1 'International transaction' is defined (s.92B) and includes lending/borrowing and receivables only within its scope where there is a substantive transaction; transfer-pricing rules permit imputation only where a bona fide separate transaction exists or where the consequences of primary transactions justify separate analysis. Comparability and CUP principles apply; RBI/industry norms on export realisation timelines are relevant for commercial practice. Precedent treatment: 2.2.2 Tribunal and High Court authorities cited by taxpayer hold that continued receivables are not automatically separate international transactions; explanationrequires pattern/analysis (Kusum Healthcare, Global Login, and other tribunal precedents). Prior Tribunal decision in taxpayer's own case (subsequent AY) deleted similar addition. Interpretation and reasoning: 2.2.3 Tribunal held the receivables arose as consequence of sale transactions (primary international transactions) and are not per se separate international transactions absent exceptional circumstances. There was no sufficient inquiry/pattern shown by TPO to warrant re-characterisation as loans. The adoption of an ad-hoc 60-day cutoff was held arbitrary: the taxpayer's standard commercial credit was up to 180 days for both AE and non-AE customers; RBI/external trade practice (9 months/180 days norms) and evidence of identical treatment of third parties undermined the 60-day benchmark. 2.2.4 On interest rate, authorities used 6-month LIBOR + 400 bps; Tribunal found the 400 bps mark-up arbitrary and inconsistent with the taxpayer's prior precedents where LIBOR alone had been accepted; further, the taxpayer's overall margins exceeded arm's-length margins, subsuming any impact of receivables timing. Ratio vs. Obiter: 2.2.5 Ratio: Receivables cannot be treated as separate loans merely because overdue; absent demonstrable differing commercial terms or pattern indicating quasi-loan behaviour, no separate ALP for notional interest should be imputed. Arbitrary 60-day policy and LIBOR+400bps markup are inappropriate. If primary transactions test yields arm's-length returns higher than comparables, separate notional interest adjustments are generally unnecessary. Conclusion: 2.2.6 Notional interest addition (Rs. 96.03 lakhs / Rs. 1.09 lakhs depending on appeal) is deleted; 60-day cutoff and LIBOR+400 basis points imputation are rejected on facts and law; the taxpayer's commercial credit policy and industry norms control. 2.3 Provident-fund disallowance under s.36(1)(va) for late deposit where due date fell on public holiday Legal framework: 2.3.1 Statutory time computation under the General Clauses Act (s.10) provides that when a deadline falls on a holiday, act done on next open day is treated as timely for Central Acts/Regulations (subject to Indian Limitation Act exceptions). Precedent treatment: 2.3.2 Tribunal and High Court decisions have allowed condonation where statutory due date fell on holiday and deposit occurred next working day; recent decisions applying General Clauses Act in tax context favor taxpayer in analogous EPF/ESIC deposit cases. Interpretation and reasoning: 2.3.3 DRP directed AO to verify whether due date was a public holiday; evidence showed the due date was a Sunday and deposit was made next working day. Tribunal applied General Clauses Act and precedent, concluding deposit was within time. Ratio vs. Obiter: 2.3.4 Ratio: Where statutory due date for deposit falls on a public holiday, deposit on next working day satisfies time computation under General Clauses Act and disallowance under s.36(1)(va) is not warranted. Conclusion: 2.3.5 Disallowance of PF contribution (Rs. 19.68 lakhs) is deleted. 2.4 Applicability of section 115QA on buy-back, proviso/public announcement, substantial compliance and computation of 'distributed income' Legal framework: 2.4.1 Section 115QA taxes distributed income on buy-back; finance amendment (w.e.f. 5.7.2019) extended tax to listed companies but an Ordinance/proviso subsequently excluded buy-backs for which a public announcement was made on or before 5.7.2019 'in accordance with SEBI (Buy-Back) Regulations.' General Clauses Act (s.6/6A) preserves accrued rights on repeal/omission; doctrine of substantial compliance and legislative intent principles guide retrospective effect and relief. Precedent treatment: 2.4.2 Authorities and courts recognize that repeal/omission does not divest accrued vested rights; substantial compliance doctrine and equitable considerations can validate relief where taxpayer acted on available public information and statutory machinery provisions are procedural. Interpretation and reasoning: 2.4.3 Facts: taxpayer initiated buy-back process before 5.7.2019 (board approvals, postal ballot, press releases, stock exchange intimation, public material) but formal SEBI-style public announcement as per SEBI schedule occurred 7-8 Aug 2019. The proviso excluding tax was inserted later (presidential assent 11.12.2019) with retrospective effect to 5.7.2019; publishing of the exact proviso language in public law post-dated the taxpayer's public disclosures. 2.4.4 Tribunal applied principles: (a) rights accrued before amendment are protected by General Clauses Act and established jurisprudence on repeal/omission; (b) legislative intent behind proviso was to relieve listed companies in transition who had publicly committed to buy-backs before 5.7.2019; (c) substantial compliance - material disclosures required by SEBI (Schedule II) had been made via postal ballot, stock exchange filings and press releases prior to 5.7.2019; (d) machinery/formality of SEBI-style public announcement is procedural and cannot defeat substantive legislative intent and taxpayer's vested rights where substantial compliance existed and amendment-text/proviso was not publicly available at relevant time. 2.4.5 Tribunal also found AO added entire buy-back consideration rather than computing 'distributed income' (consideration minus amount originally received on issue); Rule prescribing computation of amount received on issue (e.g., IPO issue price/premium) was not applied by AO. Ratio vs. Obiter: 2.4.6 Ratio: On facts of substantial pre-amendment public disclosures and the legislative history conveying relief to listed companies in transition, the application of s.115QA to tax the buy-back is not sustainable; the proviso and doctrine of vested rights/substantial compliance remove liability. Also, 'distributed income' must be computed per statutory explanation and rules (deducting amount received on issue) - AO's addition of gross consideration is incorrect. Conclusion: 2.4.7 Additional tax under s.115QA on buy-back (Rs. 71.99 crores) is deleted; if any issue remains it must be recalculated as 'distributed income' per the Explanation and rules, and taxpayer's substantial compliance and contemporaneous public disclosures bring the buy-back within the proviso. 2.5 Additions based on seized loose/dumb documents (section 69C unexplained expenses) Legal framework: 2.5.1 Section 69C permits charging unexplained investments/expenses where taxpayer fails to account; evidentiary rules require reliability, admissibility and corroboration for seized material to support additions. Judicial precedent restricts reliance on loose/single sheets lacking corroboration. Precedent treatment: 2.5.2 Numerous High Court and Tribunal rulings hold that loose/unverified jottings or seized loose pages (dumb documents) lacking corroborative evidence have little evidentiary value and cannot alone sustain additions; corroborative evidence or witnesses are required. Interpretation and reasoning: 2.5.3 Tribunal examined seized diary pages (rough jottings), absence of vendor/payee particulars, absence of corroborative vendor confirmation, and existence of a final billed amount recorded in books for one item. Tribunal held that rough jottings are non-speaking, lack head/tail, and cannot sustain addition; without independent corroboration the addition under s.69C is unsustainable. For one item where final invoice was in books, addition deleted; another head for which no argument was pressed was treated as not pressed. Ratio vs. Obiter: 2.5.4 Ratio: Additions cannot be sustained solely on the basis of loose seized jottings/dumb documents absent independent corroboration; taxpayer's explanation and documentary evidence of final billing in books defeats the addition. Conclusion: 2.5.5 Addition of Rs. 3.97 lakhs (and related) based solely on loose jottings is deleted; where corroborative invoice exists the disputed figure in books prevails; unpressed grounds treated accordingly. 2.6 Other grounds (jurisdictional, MAT/book-profits, FTC, penalty initiation) 2.6.1 These grounds were raised but not pressed or insufficiently argued and therefore not adjudicated substantively; where DRP directions existed (PF public holiday) AO was directed to follow them. Penalty/FTC/MAT contentions require separate focused adjudication if pressed. 3. OVERALL CONCLUSIONS 3.1 Transfer-pricing adjustments premised on TNMM/Berry Ratio and arbitrary comparables selection are unsustainable on the presented facts - CPM with GP/COP is the appropriate method and corresponding TP additions are deleted. 3.2 Notional interest on receivables cannot be imputed by recharacterising trade receivables as loans without demonstrable pattern/criteria; ad-hoc 60-day rule and LIBOR+400bps markup are arbitrary and disallowed. 3.3 PF disallowance where due date fell on holiday is not sustainable - deposit on next working day is timely under General Clauses Act. 3.4 Tax under s.115QA on the buy-back is not sustainable given substantial pre-amendment public disclosures, legislative history and doctrine of vested rights/substantial compliance; moreover 'distributed income' must be computed per Explanation and rules, not by adding whole buy-back consideration. 3.5 Additions founded solely on loose/seized jottings (dumb documents) without corroboration are unsustainable; evidentiary corroboration is required to support s.69C additions. 3.6 Appeals are partly allowed consistent with above conclusions; several grounds not pressed were treated as dismissed/not pressed and remain open if pressed in appropriate proceedings.