Vaibhav Global Limited Vs DCIT (ITAT Jaipur)
Summary: The Income Tax Appellate Tribunal (ITAT), Jaipur, in Vaibhav Global Limited Vs DCIT, partly allowed the assessee’s appeals for AYs 2020-21 and 2021-22, granting substantial relief on transfer pricing adjustments, notional interest on receivables, share buyback taxation and other additions. The Tribunal rejected the Transfer Pricing Officer’s adoption of the Berry ratio for benchmarking transactions of the jewellery manufacturer, holding that its manufacturing functions, production costs, assets and business risks made the ratio inappropriate. It accepted the assessee’s Cost Plus Method, which had been followed and accepted in earlier years, and directed deletion of the principal transfer pricing adjustments of ₹136.32 crore and ₹141.06 crore for the respective assessment years. The Tribunal also deleted notional interest adjustments of ₹96.04 lakh and ₹1.09 crore on outstanding receivables from associated enterprises, considering the assessee’s uniform credit policy for associated and unrelated customers. For AY 2020-21, it deleted a provident fund disallowance of ₹19.69 lakh because the statutory due date fell on a Sunday and payment was made on the next working day. It further accepted the assessee’s challenge to the disputed ₹72 crore share buyback amount under Section 115QA, considering the steps undertaken before the statutory cut-off date. For AY 2021-22, the Tribunal deleted an addition of ₹3.97 lakh under Section 69C based on uncorroborated diary entries, while a separate addition of ₹2.44 lakh was not pressed. Both appeals were accordingly partly allowed.
1. The Income Tax Appellate Tribunal, Jaipur Bench “A”, partly allowed two appeals filed by Vaibhav Global Limited against assessment orders for Assessment Years 2020-21 and 2021-22. The common order dated 30 June 2025 was passed by Judicial Member Dr. S. Seethalakshmi and Accountant Member Rathod Kamlesh Jayantbhai. The appeals challenged assessments framed under Section 143(3) read with Section 144C(13) of the Income-tax Act, 1961, following directions issued by the Dispute Resolution Panel. The disputes principally concerned transfer pricing adjustments on transactions with associated enterprises, notional interest on outstanding receivables, provident fund contributions, additional tax on share buybacks and unexplained expenditure. The Tribunal considered the issues separately while applying its findings on common questions to both assessment years.
2. Vaibhav Global Limited was engaged in manufacturing and exporting coloured gemstones and jewellery studded with precious and semi-precious stones. Its manufacturing operations were situated in Jaipur and Mumbai, while its associated enterprises operated in several overseas jurisdictions. For AY 2020-21, the company declared income of Rs. 115,97,35,540, whereas the assessment determined income at Rs. 325,44,82,409. The disputed transfer pricing adjustment totalled Rs. 137,27,79,147, comprising Rs. 136,31,75,249 relating to international sales and purchases and Rs. 96,03,898 representing notional interest on receivables. The assessment also involved provident fund disallowance of Rs. 19,68,509 and additional tax issues concerning a share buyback involving Rs. 71,99,99,211.
3. For AY 2021-22, the assessee challenged assessed income of Rs. 152,04,41,812 against returned income of Rs. 9,82,71,110. The principal transfer pricing dispute involved an adjustment of Rs. 141,06,22,743 on transactions with associated enterprises, besides Rs. 1,09,25,934 attributed to notional interest on outstanding receivables. The assessee also disputed additions of Rs. 3,97,000 and Rs. 2,43,927 under Section 69C. The Tribunal observed that the major transfer pricing and receivables issues were substantially similar to those arising in AY 2020-21. It therefore considered the first appeal in detail and applied its findings, where relevant, to the second appeal.
4. The principal transfer pricing controversy concerned the appropriate method and profit level indicator for benchmarking international transactions. The assessee contended that the Cost Plus Method, using gross profit relative to cost of production, had consistently been accepted in earlier years. The Transfer Pricing Officer rejected the assessee’s analysis and adopted a Berry ratio-based approach, using operating profit relative to value-added expenses. The assessee maintained that this approach disregarded its manufacturing functions, raw material costs, production activities and associated business risks. It also challenged the rejection of comparables and the selection of alternative companies without adequate functional analysis under the applicable transfer pricing rules.
5. The Tribunal examined the assessee’s functional profile, earlier assessments, judicial decisions and the principles governing selection of transfer pricing methods. It observed that the assessee was engaged in manufacturing activities and could not be treated merely as a low-risk distributor or intermediary. The Tribunal considered the use of the Berry ratio inappropriate in the circumstances, particularly because manufacturing and production costs were material to the company’s operations. It also noted that the Cost Plus Method had been accepted in the assessee’s earlier years, including in proceedings before the Tribunal. The Revenue authorities had not adequately justified departing from that approach. Consequently, the Tribunal allowed the assessee’s grounds challenging the principal transfer pricing adjustments for both assessment years.
6. Another issue concerned notional interest on outstanding receivables from associated enterprises. For AY 2020-21, the Revenue calculated an adjustment of Rs. 96,03,898 using a six-month LIBOR-based rate with an additional 400 basis points. The assessee argued that its normal credit period extended up to 180 days and applied to both associated enterprises and unrelated customers. It submitted that no interest was charged on delayed payments from unrelated customers either, and that the credit policy reflected the commercial practices of its export business. The assessee further maintained that the impact of receivables had already been considered in the profitability of its principal transactions.
7. The Tribunal considered the treatment of receivables in the assessee’s earlier proceedings and the evidence concerning uniform credit terms. It noted that the Revenue had not successfully distinguished the relevant facts or controverted the assessee’s submissions. Following the reasoning adopted in the earlier decisions, the Tribunal deleted the notional interest adjustment of Rs. 96,03,898 for AY 2020-21. The same reasoning was applied to AY 2021-22, resulting in relief against the adjustment of Rs. 1,09,25,934. The Tribunal thus accepted the assessee’s challenge to the separate interest additions in the circumstances recorded in the order.
8. For AY 2020-21, the assessee also challenged disallowance of provident fund contributions amounting to Rs. 19,68,509 under Section 36(1)(va). The relevant statutory due date fell on Sunday, 15 December 2019, and the payment was made on the following day, 16 December 2019. The Dispute Resolution Panel had directed the Assessing Officer to examine the effect of the public holiday under the General Clauses Act. Before the Tribunal, the assessee produced calendar evidence supporting its contention, and the Department did not dispute the relevant dates. The Tribunal held that the disallowance could not be sustained and directed its deletion.
9. The Tribunal further examined the additional tax dispute under Section 115QA concerning the company’s buyback of shares. The Assessing Officer considered the buyback taxable because the formal public announcement under the SEBI buyback regulations was made on 7 August 2019, after the statutory cut-off date of 5 July 2019. The assessee contended that substantial steps had already been undertaken before the cut-off date and that the legislative changes and related conditions could not retrospectively prejudice actions completed on the basis of the information then publicly available. After examining the legislative background, public announcements and relevant judicial principles, the Tribunal accepted the assessee’s position and directed deletion of the disputed amount of Rs. 71,99,99,211. Since the principal issue was decided in the assessee’s favour, the alternative contention concerning computation of distributed income did not require a separate finding.
10. In AY 2021-22, the Tribunal separately considered additions under Section 69C arising from documents recovered during search or survey proceedings. The addition of Rs. 3,97,000 was based on rough entries in an employee’s diary concerning proposed expenditure on information technology-related items. The assessee explained that the entries reflected preliminary negotiations and that the transaction was ultimately settled and recorded at a different amount. The Tribunal found that the rough notings, unsupported by sufficient corroborative evidence, could not independently justify treating the amount as unexplained expenditure. It therefore directed deletion of Rs. 3,97,000. However, the assessee did not press its challenge to the separate addition of Rs. 2,43,927, and that ground was not allowed.
11. The Tribunal accordingly partly allowed both appeals. Relief was granted on the principal transfer pricing adjustments and notional interest on receivables for both assessment years. For AY 2020-21, the Tribunal additionally deleted the provident fund disallowance and accepted the assessee’s challenge concerning Section 115QA. For AY 2021-22, the addition of Rs. 3,97,000 based on rough diary entries was deleted, while the separate Rs. 2,43,927 issue was not pressed. Other general grounds were treated as not pressed where so recorded. The order illustrates the importance of functional comparability in transfer pricing, consistency in credit terms, evidence supporting disputed additions and examination of the applicable legislative framework.
Cases Discussed
- CIT v. Cotton Naturals (I) (P.) Ltd., 276 CTR 445 (Delhi High Court, 2015) — Considered in the context of arm’s length interest rates for foreign currency transactions.
- CIT v. Indo American Jewellery Ltd., ITA No. 1053 of 2012 (Bombay High Court) — Relied upon in connection with uniform credit terms and notional interest on receivables.
- ACIT v. Bagadiya Brothers Private Limited (ITAT Ahmedabad) — Discussed regarding the limited applicability of the Berry ratio and the relevance of functional analysis.
- GSS Infotech Ltd. v. ACIT, ITA No. 497/Hyd/2015 (ITAT Hyderabad) — Referred to regarding credit periods and outstanding receivables.
