Vaibhav Global Ltd. Vs ACIT (ITAT Jaipur)
Summary: The Income Tax Appellate Tribunal (ITAT), Jaipur Bench, in Vaibhav Global Ltd. Vs ACIT, partly allowed the assessee’s appeal for AY 2017-18, deleting transfer pricing adjustments aggregating to ₹51.61 crore relating to international sales and purchases, corporate guarantees and outstanding receivables. The assessee, engaged in manufacturing and exporting gemstones and jewellery, had challenged the Transfer Pricing Officer’s adoption of the Berry ratio instead of the Cost Plus Method (CPM) for benchmarking transactions with associated enterprises. Following its decision for AY 2016-17, the Tribunal held that the Berry ratio was inappropriate for a manufacturing business involving substantial production costs, assets, inventories and commercial risks. Since the assessee’s operating profit-to-cost-of-production ratio of 7.26% exceeded the comparable benchmark of 6.30%, the Tribunal deleted the principal adjustment of ₹48.31 crore. It also deleted a corporate guarantee commission adjustment of ₹95.29 lakh, considering the security available against the overseas associated enterprise’s borrowing and the absence of a demonstrated financial burden on the assessee. Further, the Tribunal deleted notional interest of ₹2.35 crore on outstanding receivables, holding that the assessee consistently extended credit of up to 180 days to both associated enterprises and unrelated customers without charging interest. However, objections concerning delayed communication of the assessment order and the Document Identification Number (DIN) were dismissed without adjudication on merits, as related proceedings were pending before the Rajasthan High Court. Interest under Sections 234B and 234C was treated as consequential, while the challenge to initiation of penalty proceedings under Section 270A was considered premature. The appeal was accordingly partly allowed.
1. The Income Tax Appellate Tribunal, Jaipur Bench “A”, partly allowed the appeal filed by Vaibhav Global Limited for Assessment Year 2017-18 against the assessment order dated 24 March 2022 passed under Section 143(3) read with Section 144C(13) of the Income-tax Act, 1961. The assessee, engaged in manufacturing and exporting gold jewellery studded with precious and semi-precious stones, had declared total income of Rs. 19,49,76,120. The final assessment determined income at Rs. 71,11,27,562 after incorporating transfer pricing adjustments totalling Rs. 51,61,51,441. The principal disputes concerned the application of the Berry ratio to manufacturing transactions, notional corporate guarantee commission, interest on outstanding receivables, and objections relating to the validity and communication of the assessment order.
2. During scrutiny proceedings, the Assessing Officer referred the assessee’s international transactions to the Transfer Pricing Officer under Section 92CA. The assessee had adopted the Cost Plus Method (CPM), using gross profit margin relative to cost of production as the profit level indicator, for benchmarking transactions with associated enterprises. The TPO rejected this approach on the ground that the assessee purchased goods from, and sold goods to, related parties, potentially affecting both the cost and revenue sides of its transactions. Instead, the TPO applied an operating profit-to-value-added-expenses indicator under the Transactional Net Margin Method, commonly described in the proceedings as the Berry ratio. The TPO initially proposed an adjustment of Rs. 57,96,99,844 on international sales and purchases, besides separate adjustments for corporate guarantees and receivables.
3. The assessee objected before the Dispute Resolution Panel, challenging the method selected by the TPO and the comparability analysis. Following the DRP proceedings, the adjustment relating to international sales and purchases stood at Rs. 48,31,00,309. The other adjustments comprised Rs. 95,29,675 towards notional corporate guarantee commission and Rs. 2,35,21,457 towards interest on receivables. Before the Tribunal, the assessee argued that the authorities had disregarded its manufacturing functions, substantial investment in fixed assets, processing activities, inventory requirements and commercial risks. It also maintained that the same transfer pricing controversy had already been decided in its favour for AY 2016-17 in ITA No. 97/JP/2021, decided on 7 February 2022.
4. The Tribunal examined the assessee’s functional profile and the comparative information for AYs 2016-17 and 2017-18. It observed that the company continued to perform significant manufacturing functions involving procurement, product design, processing, production and export of gemstones and jewellery. Its associated enterprises primarily undertook downstream marketing, sales and distribution functions. The assessee employed manufacturing facilities, machinery, inventories, personnel and other assets and assumed risks associated with production, inventory, credit, foreign exchange and business operations. The Tribunal found no material change in the relevant functions, assets and risks compared with the preceding assessment year. Consequently, the reasoning adopted in the earlier decision continued to apply.
5. On the principal transfer pricing issue, the Tribunal held that the Berry ratio was inappropriate for the assessee’s manufacturing and export operations. It explained, by reference to the earlier decision, that the indicator may be suitable in certain low-risk trading or distribution arrangements where operating expenses adequately represent the functions performed and risks assumed. It was not appropriate to disregard substantial material costs and manufacturing functions in the assessee’s circumstances. The Tribunal further recorded that the average profit level indicator of the TPO’s comparable companies was 6.30%, whereas the assessee’s operating profit-to-cost-of-production ratio was 7.26%. Since the assessee’s result exceeded the comparable benchmark, the Tribunal concluded that its transactions satisfied the arm’s length requirement and deleted the adjustment of Rs. 48,31,00,309.
6. The assessee also challenged the notional corporate guarantee commission of Rs. 95,29,675 arising from a guarantee furnished in connection with borrowing by an overseas associated enterprise. It submitted that the guarantee was issued in its capacity as a shareholder to support the business activities of the group and did not result in any expenditure or financial burden. The assessee questioned the TPO’s reliance on commercial bank guarantee rates and the additional risk premium used to determine the notional commission. It further referred to decisions in its own earlier assessment years and argued that the transaction had to be evaluated according to its actual commercial and financial circumstances rather than by mechanically adopting bank guarantee pricing.
7. Examining the corporate guarantee issue, the Tribunal considered the borrowing arrangements, security available to the lending bank and financial position of the associated enterprise. The loan was supported by security over inventory, receivables and other assets, and the associated enterprise had also provided additional security arrangements. The Tribunal noted that the outstanding borrowing as of 31 March 2017 was approximately GBP 1.50 million, while the combined value of specified supporting assets exceeded GBP 9.70 million. It distinguished the decision in PCIT v. Redington (India) Ltd. on the facts and concluded that the guarantee did not create a financial burden affecting the assessee’s profits, income, losses or assets in the circumstances examined. Accordingly, the corporate guarantee adjustment of Rs. 95,29,675 was deleted.
8. The remaining substantive transfer pricing dispute concerned an adjustment of Rs. 2,35,21,457 for notional interest on outstanding receivables from associated enterprises. The TPO had treated amounts remaining unpaid beyond 60 days as unsecured loans and applied an interest rate of 5.475%, calculated using six-month LIBOR with an additional markup. The assessee contended that the normal credit period in its business extended to 180 days and was applied uniformly to associated enterprises and independent customers. It submitted that no interest was charged on delayed collections from unrelated customers either. The assessee also referred to Reserve Bank of India guidelines and commercial practices in the gems and jewellery export industry to support the longer credit period.
9. The Tribunal accepted the assessee’s contention concerning uniform credit terms. It found no adequate basis for the TPO’s adoption of an arbitrary 60-day period when the assessee extended credit of up to 180 days to both associated and unrelated customers. The Tribunal also observed that the assessee did not charge interest on delayed receivables from either category. Relying particularly on CIT v. Indo American Jewellery Ltd. and the reasoning in GSS Infotech Ltd., it held that the Assessing Officer was not justified in making a separate notional interest addition where the assessee’s treatment of associated and unrelated debtors was uniform. The adjustment of Rs. 2,35,21,457 was therefore deleted.
Other Grounds and Final Decision
The assessee separately challenged the assessment order on the grounds of delayed communication and absence of a valid Document Identification Number, referring to CBDT Circular No. 19/2019. The Revenue explained that technical difficulties in the ITBA system had necessitated a manually issued order and that a separate DIN had been generated on 24 March 2022. The Tribunal recorded that the assessee had also approached the Rajasthan High Court in D.B. Civil Writ Petition No. 9166/2022. It dismissed the relevant grounds without deciding their merits, observing that the High Court’s decision would govern the parties. The ground concerning interest under Sections 234B and 234C was treated as consequential, while the ground concerning initiation of penalty proceedings under Section 270A was rejected as premature. The appeal was consequently partly allowed.
Cases Discussed
- Vaibhav Global Ltd. v. ACIT, ITA No. 97/JP/2021, order dated 7 February 2022 (ITAT Jaipur) — Earlier assessment-year decision followed regarding the inapplicability of the Berry ratio to the assessee’s manufacturing operations and the arm’s length benchmarking of international transactions. Related TaxGuru coverage.
- Sumitomo Corporation India Pvt. Ltd. (Delhi High Court) — Discussed in the reproduced reasoning concerning circumstances in which the Berry ratio may appropriately be applied. Related judgment discussing the precedent.
- Mitsubishi Corporation India Pvt. Ltd. (ITAT) — Referred to in connection with the possible application of the Berry ratio to low-risk, high-volume trading activities without significant value addition.
- PCIT v. Redington (India) Ltd. (Madras High Court) — Distinguished while examining the financial risks and commercial circumstances of the corporate guarantee furnished by the assessee.
- Siro Clinpharm Pvt. Ltd. v. ITO — Referred to in the discussion of corporate guarantee transactions and the authorities relied upon by the DRP.
- GSS Infotech Ltd. v. ACIT, ITA No. 497/Hyd/2015 (ITAT Hyderabad) — Relied upon regarding the arbitrary adoption of a short credit period for export receivables. Related judgment reproducing the precedent.
- CIT v. Indo American Jewellery Ltd., ITA No. 1053 of 2012 (Bombay High Court) — Applied to delete notional interest where the assessee followed uniform credit and interest policies for associated and unrelated debtors. Related TaxGuru coverage.
- CIT (International Taxation)-1 v. Brandix Mauritius Holdings Ltd., ITA No. 163/2023, order dated 20 March 2023 (Delhi High Court) — Cited by the assessee in support of its challenge concerning the assessment order and DIN; the Tribunal recorded the Supreme Court’s interim stay and did not adjudicate the merits.
