Berry Ratio Unsuitable For Manufacturers And Interest Imputed

Berry Ratio Unsuitable For Manufacturers And Interest Imputed Only On Differential Credit Period Delays

Issue

Whether the Berry ratio (Operating Profit / Value Added Expenses) under TNMM is an appropriate Profit Level Indicator (PLI) for benchmarking international transactions of an entity with a full-fledged manufacturing profile.
Whether interest can be imputed on delayed receivables from Associated Enterprises (AEs) when the credit period delay and non-interest charging policy are applied uniformly to both AEs and non-AEs.
Whether transfer pricing adjustments can be added back to the net profit while computing book profit under Section 115JB for Minimum Alternate Tax (MAT) calculation.

Facts

Business Profile: The assessee-company is engaged in manufacturing and exporting coloured gemstones and studded jewellery through manufacturing units at Jaipur and Mumbai.
Benchmarking Method Adopted: For AY 2019-20, the assessee benchmarked sales/purchases with AEs using Cost Plus Method (CPM) with GP/COP as PLI (16.13%). For AY 2022-23, it applied Transactional Net Margin Method (TNMM) with OP/OC as PLI (5.07%).
TPO’s Rejection: The TPO rejected the assessee’s chosen PLIs for both years on the ground that both sales and purchases were with related parties, applying TNMM using the Berry ratio (OP/VAE) as PLI instead, despite acknowledging the assessee’s material-intensive manufacturing activities.
Interest on Receivables: The TPO treated receivables outstanding beyond 60 days as a separate international transaction and imputed interest at six-month LIBOR plus 400 basis points. The assessee maintained a uniform credit policy and non-charging of interest for both AEs and non-AEs up to a credit period of 180 days.
MAT Computation Discrepancy: The Dispute Resolution Panel (DRP) directed the Assessing Officer (AO) to compute Section 115JB book profit strictly as per statutory adjustments, excluding transfer pricing additions. However, the AO added the transfer pricing adjustment while computing book profits and charged MAT accordingly for AY 2022-23.

Decision

Rejection of Berry Ratio for Manufacturers: The Berry ratio (OP/VAE) is inappropriate for entities with full-fledged manufacturing operations and material-intensive cost structures. The assessee’s choice of PLI (CPM with GP/COP for AY 2019-20 and TNMM with OP/OC for AY 2022-23) should govern the ALP determination (decided in favor of assessee).
Uniform Credit Policy Negates Interest Imputation: Receivables from AEs cannot be subjected to interest imputation if delays and non-interest policies are applied uniformly to non-AEs. No interest is imputable on realizations within the 180-day credit period.
Verification Remand for AY 2022-23 Receivables: For AY 2022-23, since invoice-wise realization details for AEs and non-AEs were absent from the record, the matter was restored to the AO/TPO to verify uniform treatment and determine applicable LIBOR spread terms for FY 2021-22 (partly in favor of assessee / matter remanded).
Exclusion of TP Adjustments from Section 115JB: Transfer pricing adjustments are not among the permissible additions listed in Section 115JB. The AO was directed to recompute book profit for both assessment years without adding any transfer pricing adjustments (decided in favor of assessee).

Key Takeaways

Inapplicability of Berry Ratio to Manufacturing: The Berry ratio is suitable primarily for distribution/intermediary entities with low value-add; it cannot be applied to full-fledged manufacturing operations with significant raw material and processing costs.
Parity Between AEs and Non-AEs: Interest on delayed AE receivables cannot be imputed unless the Revenue establishes that the AE was granted a commercial benefit or relaxed credit terms not extended to unrelated third parties.
Strict Computation under Section 115JB: Book profit for MAT calculation must strictly follow statutory adjustments under Section 115JB; transfer pricing adjustments belong exclusively to the recomputation of normal taxable income.

IN THE ITAT JAIPUR BENCH ‘B’

Vaibhav Global Ltd.

Deputy Commissioner of Income-tax

Kuldip Singh, Judicial Member
and Prakash, Accountant Member

IT Appeal Nos. 323 & 326 (JPR) of 2026
[Assessment years 2019-20 and 2022-23]

SEPTEMBER 23, 2026

Vinod Gupta, Adv. for the Appellant. Shravan Kumar Meena, CIT for the Respondent.

ORDER

Prakash, Accountant Member.- These two appeals by the Assessee are directed against the final assessment orders passed by the Assessing Officer (hereinafter referred to as “the AO”), namely the order dated 22.01.2026 under section 147 read with section 144C(13) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) for the assessment year 2019-20 and the order dated 21.01.2026 under section 143(3) read with section 144C(13) of the Act for the assessment year 2022-23. Both orders were passed in pursuance of two separate directions dated 29.12.2025 issued by the learned Dispute Resolution Panel-1, New Delhi (hereinafter referred to as “the learned DRP”) under section 144C(5) of the Act. As the issues are common, the appeals were heard together and are disposed of by this common order.

2. The grounds of appeal raised by the Assessee before us in the memorandum of appeal in Form No. 36 for the assessment year 2019-20 (ITA No. 323/JPR/2026) read as under:

Under the facts and circumstances of the case and in law, the Ld. TPO and Honble DRP erred on facts and in law in proposing an adjustment of amount of Rs. 28,76,98,590 to the income of the appellant on account of alleged difference in Arms Length Price (ALP) of the International Transaction of sale and purchase made to/from Associated Enterprises (AEs) during the relevant year. Further, the Ld. TPO and Honble DRP has erred on facts and in law in proposing adjustment of Rs. 6,94,01,760 to the income of the appellant on Outstanding Receivables and charging notional interest thereon. Further, the Ld. AO has erred on facts and in law in adjusting the amount of Rs.35,71,00,350 (28,76,98,590 plus 6,94,01,760) to the income of the appellant.

Under the facts and circumstances of the case and in law, the Ld. TPO, Ld. AO and the Honble DRP erred in rejecting 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. In doing so, the Ld. TPO, Ld. AO and the Honble DRP failed to discharge the statutory onus to establish that any of the conditions Specified in clause (a) to (d) of Section 92C(3) of the Act has not been satisfied.

Under the facts and circumstances of the case and in law, the Ld. TPO and Ld. AO erred in not complying with the direction of the Honble DRP regarding the computation of OP/VAE margin whereby the Honble DRP has strictly direct to re verify the same as per annual report and the Safe Harbour Rules.

Under the facts and circumstances of the case and in law, the Ld. TPO, Ld. AO and the Honble DRP erred in rejecting the Cost Plus Method (CPM) considered by the appellant as the Most Appropriate Method (MAM) with Gross Profit Margin/Cost of Production (GP/COP) as the Profit Level Indicator (PLI), without giving any cogent reason.

Under the facts and circumstances of the case and in law, the Ld. AO, Ld. TPO and the Honble DRP erred in not appreciating that CPM has consistently been accepted by the revenue authorities in the prior years as the most appropriate method with GP/COP as the PLI and there being no change in the facts and circumstances of current year vis a vis prior years. Additionally, the Ld. AO, Ld. TPO and the Honble DRP erred in not appreciating that CPM has been upheld as the Most Appropriate Method in Appellants own cases by Honble ITAT, Jaipur in A.Y. 2016 17, 2017 18 and 2020 21.

Under the facts and circumstances of the case and in law, the Ld. TPO, Ld. AO and the Honble DRP erred in applying Berry ratio with Operating Profit/Value Added Expenses (OP/VAE) 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 Honble DRP also failed to appreciate that Berry ratio is 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 appellants own case, Berry Ratio was rejected as PLI in the A.Y. 2016 17, 2017 18, 2020 21 and 2021 22 by the Honble ITAT, Jaipur.

Under the facts and circumstances of the case and in law, the Ld. AO, the Ld. TPO and the Honble DRP erred in making an addition of Rs. 6,94,01,760 to the income of the Appellant by considering the receivables outstanding beyond stipulated time of the Appellant as an international transaction.

Under the facts and circumstances of the case and in law, the Ld. AO, the Ld. TPO and the Honble DRP erred in arbitrarily computing an interest, at 6 months LIBOR (1.839 percent) plus a mark up of 400 basis points, i.e., 5.839 percent, on outstanding receivables without appreciating that that outstanding receivables are not a separate international transaction but a result of the primary international transaction undertaken by the Appellant and without giving benefit of early realization from AEs.

Without prejudice to the above grounds, under the facts and circumstances of the case and in law, the Ld. AO, the Ld. TPO and the Honble DRP erred in adopting an ad-hoc period of 60 days to determine overdue receivables from the AEs for the purpose of treating such overdue receivables in nature of interest free unsecured loans. In doing so, the Ld. AO, the Ld. TPO and the Honble DRP grossly erred in ignoring that (a) Appellant has granted a credit period of up to 180 days to both AEs as well as nonAE third parties (b) Appellant has not charged any interest on delayed receivables from third parties as well (c) not charging any interest on delayed receipts is a generally accepted practice for companies engaged in similar business segment as the Appellant (d) the 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.

10.

Under the facts and circumstances of the case and in law, the Ld. AO, the Ld. TPO erred in calculating total income of appellant by adding back transfer pricing adjustment to book profits under Section 115JB of the Act thereby failing to adhere to the direction of the Honble DRP.

3. The ten grounds raised in Form No. 36 for the assessment year 2022-23 (ITA No. 326/JPR/2026) are on the same lines, the adjustments challenged being Rs 76,28,92,873 on sale to the Associated Enterprises (hereinafter referred to as “the AEs”) and Rs 3,14,04,878 as notional interest on receivables, aggregating to Rs 79,42,97,751. The points of difference are these. Ground no. 2 challenges the rejection of the Profit Level Indicator (hereinafter referred to as “the PLI”) of Operating Profit to Operating Cost (OP/OC) adopted by the Assessee. Ground no. 3 challenges the Berry ratio. Ground no. 4 is an alternative plea that under the Transactional Net Margin Method (hereinafter referred to as “the TNMM”) with OP/OC as the PLI, the margin of the Assessee falls within the arm’s length range on the final set of comparables. Ground no. 5 challenges the rejection of the comparables of the Assessee. Grounds no. 6 to 8 challenge the notional interest. Ground no. 9 pleads that the orders in the Assessee’s own case for the earlier years were not followed. Ground no. 10 is identical to ground no. 10 for the assessment year 2019-20.

Facts of the case

4. Briefly stated, the facts of the case are that the Assessee is a company engaged in the manufacture and export of coloured gemstones and studded jewellery, with manufacturing units at Jaipur and Mumbai. It exports its products mainly to its AEs located in the U.S.A., the U.K., Hong Kong, Thailand, Japan and Indonesia. For the assessment year 2019-20, the return filed on 06.07.2020 declared a total income of Rs 23,23,42,010. Consequent to a search under section 132 of the Act, a notice under section 148 of the Act was issued on 24.03.2023 and the Assessee filed a return on 15.04.2023 declaring the same income. For the assessment year 2022-23, the return filed on 22.11.2022 declared a total income of Rs 22,59,50,880 and the case was selected for scrutiny. In both years, the AO made a reference under section 92CA(1) of the Act to the Transfer Pricing Officer (hereinafter referred to as “the TPO”), who passed orders under section 92CA(3) of the Act on 30.10.2024.

5. In its transfer pricing study, the Assessee benchmarked the sale and purchase transactions with its AEs under the Cost Plus Method (hereinafter referred to as “the CPM”) with Gross Profit to Cost of Production (GP/COP) of 16.13% as the PLI for the assessment year 2019-20, and under the TNMM with OP/OC of 5.07% as the PLI for the assessment year 2022-23. The TPO rejected the PLI of the Assessee in both years on the reasoning that the Assessee purchases from and sells to related parties, so that both the cost side and the revenue side are tainted. The TPO applied the TNMM with the Berry ratio, that is, Operating Profit to Value Added Expenses (OP/VAE), as the PLI. The TPO also treated the receivables from the AEs outstanding beyond 60 days as a separate international transaction and imputed interest at six month LIBOR plus 400 basis points, being 5.839% for the assessment year 2019-20 and 4.256% for the assessment year 2022-23.

6. The learned DRP upheld the Berry ratio, directed the inclusion and exclusion of certain comparables, directed the TPO to verify the computation of margins and to restrict the adjustment to the international transactions, and upheld the interest on receivables beyond 60 days at six month LIBOR plus 400 basis points. The learned DRP also directed the AO not to add the transfer pricing adjustment to the book profit under section 115JB of the Act. The TPO gave effect to the directions on 07.01.2026. The position is summarised below:

Particulars	A.Y. 2019-20 (Rs)	A.Y. 2022-23 (Rs)
Returned income	23,23,42,010	22,59,50,880
Adjustment on sale to AEs as per TPO order dated 30.10.2024	1,11,79,45,620	1,90,78,18,559
Interest on receivables as per TPO order dated 30.10.2024	8,22,77,901	3,14,04,878
Adjustment on sale to AEs after DRP directions	28,76,98,590	76,28,92,873
Interest on receivables after DRP directions	6,94,01,760	3,14,04,878
Total adjustment in the final assessment order	35,71,00,350	79,42,97,751
Arm’s length OP/VAE applied in the final order	46.46%	62.42%
Particulars	A.Y. 2019-20 (Rs)	A.Y. 2022-23 (Rs)
Total income assessed under the normal provisions	58,94,42,355	1,02,02,48,630
Book profit computed under section 115JB of the Act	76,27,79,765	1,91,96,84,950

7. Aggrieved, the Assessee is in appeal before us in both the years.

Submissions

8. The learned Authorised Representative (hereinafter referred to as “the learned AR”) submitted that the functional profile of the Assessee has not changed and that the Berry ratio has been rejected by the Coordinate Benches of this Tribunal in the Assessee’s own case in Vaibhav Global Ltd. v. Dy. CIT 196 ITD 526 (Jaipur – Trib.)/(ITA No. 97/JP/2021) for the assessment year 2016-17, Vaibhav Global Ltd. v. ACIT IT (TP) Appeal No. 4 (JP) of 2022, dated 5-6-2024] for the assessment year 2017-18 and Vaibhav Global Ltd. v. Dy. CIT [2025] 176 (Jaipur – Trib.)/(ITA Nos. 1144 & 1485/JP/2024) for the assessment years 2020-21 and 2021-22. On the interest on receivables, the learned AR submitted that the Assessee allows a credit period of 180 days uniformly to AEs and non-AEs and charges no interest from either, and relied on the same orders. As directed by the Bench, the learned AR placed on record the invoice wise list of realisation and delay for AEs and non-AEs. In the alternative, the learned AR filed written submissions that, if any adjustment is warranted, (i) the rate should not exceed six month LIBOR plus 1.85%, being the rate at which the Assessee availed foreign currency packing credit from Punjab National Bank, that is, 3.689% for the assessment year 2019-20 and 2.106% for the assessment year 2022-23; and (ii) since the learned DRP has itself held a delay of 60 days to be reasonable, the delay should be reckoned only after the normal credit period of 180 days, so that interest can run only on receivables outstanding for more than 240 days.

9. The learned Departmental Representative (hereinafter referred to as “the learned DR”) supported the orders of the TPO and the directions of the learned DRP.

Findings on the adjustment on sale to AEs (grounds no. 1 to 6 for A.Y. 2019-20 and grounds no. 1 to 5 and 9 for A.Y. 2022-23)

10. We have heard the rival submissions and perused the material on record. The only basis of the adjustment in both years is the substitution of the PLI of the Assessee by the Berry ratio. The reason given by the TPO, and affirmed by the learned DRP, is that both sales and purchases are controlled transactions and that the raw material passes into the final product with a change only of size, shape and form.

11. Before turning to the precedents, it is necessary to notice the nature of the business of the Assessee as it emerges from the record. The TPO has recorded in paragraph 2 of the orders under section 92CA(3) of the Act for both years that the Assessee is engaged in the manufacture and export of coloured gemstones and studded jewellery, that its manufacturing units are located at Jaipur and Mumbai, and that it processes stones, diamonds and other raw materials into rings, bracelets, pendants and the like. The learned DRP has itself recorded in paragraph 6.6 of its directions that at the manufacturing locations at Mumbai and Jaipur the employees of the Assessee work upon the raw material and subject it to processing by cutting, calibrating and polishing to manufacture studded jewellery. The functional analysis placed by the Assessee before the TPO and the learned DRP, which neither authority has disputed, shows that the Assessee runs a gemstone and diamond processing unit at Adarsh Nagar, Jaipur, a 100% export oriented unit at Sitapura, Jaipur with chain and jewellery divisions, a jewellery manufacturing unit in the Special Economic Zone at Sitapura, a jewellery unit at SEEPZ, Mumbai and a diamond division at Bharat Diamond Bourse, Mumbai. It performs the functions of procurement of raw material, product conceptualisation and designing, production scheduling, manufacturing, quality control and warehousing, owns the plant, machinery and infrastructure required for these functions, and bears the risks relating to material, inventory, credit on independent sales and manufacturing defects. According to the submission of the Assessee before the learned DRP, based on its audited accounts, its tangible fixed assets stood at Rs 39.85 crore as on 31.03.2019, the major part being plant and machinery. The Assessee is thus a manufacturer in the full sense, and not a trader, an intermediary or a service provider.

12. The cost structure of the Assessee, as it appears from the working of the TPO himself, is equally telling. For the assessment year 2019-20, against revenue from operations of Rs 480.40 crore, the cost of materials consumed is Rs 302.52 crore and the purchase of stock in trade is Rs 16.02 crore, whereas the value added expenses adopted by the TPO as the base of the Berry ratio are only Rs 123.19 crore, comprising employee benefit expenses of Rs 43.76 crore, depreciation of Rs 3.83 crore and other expenses of Rs 75.60 crore. For the assessment year 2022-23, against revenue from operations of Rs 489.10 crore, the cost of materials consumed is Rs 294.53 crore and the purchase of stock in trade is Rs 29.27 crore, whereas the value added expenses worked out by the TPO are Rs 146.84 crore. Material cost thus forms more than two thirds of the operating cost in both years. Gemstones, diamonds, gold and silver are high value inputs. The Assessee buys them on its own account, holds them as inventory, deploys its funds in them and carries the risk of price and of obsolescence till the jewellery is sold. The Berry ratio leaves this entire cost, and the capital and risk that go with it, out of the base on which the return is measured.

13. The premise of the TPO, that the cost side is as tainted as the revenue side, is also not borne out by the record. The sales are, no doubt, predominantly to the AEs. As per the table of international transactions in the order of the TPO for the assessment year 202223, the sales to the AEs aggregate to Rs 425.12 crore out of the revenue from operations of Rs 489.10 crore. The purchases from the AEs in that year, however, aggregate to only Rs 40.23 crore, as against the cost of materials consumed and stock in trade of Rs 323.80 crore. For the assessment year 2019-20, the Assessee stated before the learned DRP that its sales to the AEs were 93.45% of its total sales while its purchases from the AEs were only 25.34% of its total purchases, the AEs merely facilitating procurement from certain countries, and the learned DRP has not found this to be incorrect. The bulk of the cost base, namely the material bought from unrelated parties, the wages of the workmen and the manufacturing expenses, is therefore uncontrolled. Rule 10B(1)(e)(i) of the Income Tax Rules, 1962 requires the net profit margin to be computed in relation to costs incurred, sales effected, assets employed or any other relevant base. Where the revenue is controlled but the cost is substantially uncontrolled, the total cost is the relevant and reliable base. The TPO has not explained why a small proportion of purchases from the AEs justifies the removal of the entire material and production cost from the base.

14. The circumstances in which the Berry ratio can be used were examined by the Hon’ble Delhi High Court in Sumitomo Corporation India (P.) Ltd. v. CIT 387 ITR 611 (Delhi), the very decision on which the learned DRP has relied. The Hon’ble High Court held in paragraphs 45 and 47 as under:

“45. Traditionally, the denominator of the ratio only comprised of selling, general and administration expenses. However, the Treasury Legislation of USA also included depreciation as a part of the Operating Expenses used as a denominator in the berry ratio. As is apparent, Berry ratio has limited applicability; it can be used effectively only in cases where the value of goods have no role to play in the profits earned by an Assessee and the profits earned are directly linked with the operating expenditure incurred by the Assessee. In other words, the operating expenditure incurred by the Assessee effectively captures all functions performed and risks undertaken by the Assessee. Thus, in cases where an Assessee uses intangibles as a part of its business, Berry ratio would not be an apposite PLI as the value of such tangibles would not be captured in the operating cost and, therefore, it would not be appropriate to compute the ALP based on net profit margin having regard to the operating cost as a relevant base. Similarly, Berry ratio would not be an appropriate PLI for determining ALP in cases of Assessees who have substantial fixed assets since the value added by such assets would not be captured in Berry ratio.

47. In our prima facie view, the third reason stated by the TPO, that is, the rate of commission paid to the Assessee is based on the value of the goods, would be a valid reason to reject the use of Berry ratio because Berry ratio can only be applied where the value of the goods are not directly linked to the quantum of profits and the profits are mainly dependent on expenses incurred. The fundamental premise being that the operating expenses adequately represent all functions performed and risks undertaken. For this reason Berry ratio is effectively applied only in cases of stripped down distributors; that is, distributors that have no financial exposure and risk in respect of the goods distributed by them.”

15. Tested on these principles, the Berry ratio cannot be applied to the Assessee. First, the value of the goods has a direct role in the profits of a jewellery manufacturer, since the jewellery is priced with reference to the gemstones, diamonds and precious metal that go into it. Secondly, the operating expenses do not capture all the functions performed and risks undertaken, because the procurement and holding of high value material, which is the largest deployment of funds and the principal risk of the Assessee, lies outside the value added expenses. Thirdly, the Assessee employs plant and machinery and manufacturing infrastructure at several locations, and the value added by these assets is not captured in the ratio. Fourthly, the Assessee is the opposite of a stripped down distributor, since it has full financial exposure in respect of the goods. The learned DRP has reproduced paragraph 45 of the judgment in paragraph 6.3 of its directions but has not applied any of these tests to the facts. Its reasoning that the raw material goes as such into the final product and that its cost gets neutralised in the sale price cannot be reconciled with its own finding that the material is cut, calibrated, polished and made into studded jewellery by the employees of the Assessee. If the cost of material were merely passed through, the Assessee would bear no inventory or price risk, which is not the case of the Revenue. We also find that the table of value addition relied on by the learned DRP forms part of its directions for the assessment year 2021-22, which it has applied to the years before us on the footing that the facts are more or less similar, without examining the accounts of the relevant years. Nothing has been placed before us to show that the judgment in Sumitomo Corporation India (P.) Ltd. (supra) has been reversed or departed from.

16. The unreliability of the Berry ratio on the facts of this case is also visible from the record. For the assessment year 2019-20, the TPO worked out the arm’s length OP/VAE at 120.87% in the order under section 92CA(3) of the Act, and the figure fell to 46.46% when the directions of the learned DRP on comparables and on computation were given effect to. For the assessment year 2022-23, the figure fell from 140.48% to 62.42%. The OP/VAE of the Assessee was computed by the TPO in those orders at 30.17% and 10.56% for the two years. A ratio that moves so widely with the composition of the set of comparables, whose material intensity and product mix differ, does not provide the most reliable measure of the arm’s length price, which is the test laid down in Rule 10C(1) of the Income Tax Rules, 1962 for selecting the most appropriate method.

17. We now turn to the orders of the Coordinate Benches in the Assessee’s own case, where the same reasoning of the TPO and the learned DRP was examined. In Vaibhav Global Ltd. (supra), after noting that the TPO and the learned DRP had not disputed that the Assessee is a manufacturer which performs the functions of procurement, designing, manufacturing, sales and after sales service, employs the requisite assets and bears inventory, credit, product, market and foreign exchange risks, the Bench held in paragraph 12 as under:

“12. Since there is no change in the facts, therefore, respectfully following the decision of bench in assessee’s own case for AY 2016-17, it remains the same that assessee is a manufacturer performing all the entrepreneurial functions and thus application of berry ratio is not justified in the instant case.”

18. The same view was taken in paragraphs 10.2 to 10.6 of Vaibhav Global Ltd. (supra), where the adjustments for the assessment years 2020-21 and 2021-22 were deleted. The Bench there also recorded that, even if the TNMM is taken as the most appropriate method, the PLI has to be OP/OC and not the Berry ratio.

19. In the years before us, the TPO has recorded the same business profile of the Assessee as in the earlier years. The learned DRP has not pointed out any change in the functions performed, assets employed or risks assumed. It has, in paragraph 6.5 of its directions for both the years, applied its own findings for the assessment year 2021-22 on the footing that the facts have remained more or less similar.

20. The learned DRP declined to follow the orders of the Tribunal only because the appeal of the Revenue for the assessment year 2016-17 is pending before the Hon’ble High Court. Pendency of an appeal does not dilute the binding force of the order of a Coordinate Bench. Nothing has been placed before us to show that any of the above orders has been stayed, modified or reversed by a higher forum. The value addition computed by the learned DRP itself, with manufacturing expenses and depreciation on plant and machinery, shows that the Assessee processes the raw material through its own manufacturing set up. It is not a case of goods bought from one AE and sold on to another without processing, which is the situation in which the Berry ratio is considered useful. The cost of material and the cost of production therefore cannot be kept out of the cost base.

21. The learned DRP has stated in paragraph 6.6 of its directions that it was confirming the action of the TPO “to maintain consistency in departmental stand” since the appeal of the Revenue for an earlier year is pending before the Hon’ble High Court. This approach is contrary to the law laid down by the Hon’ble Supreme Court in Union of India v. Kamlakshi Finance Corporation Ltd. (SC)/AIR 1992 SC 711, wherein it was observed in paragraph 6, among other things, as under:

“The principles of judicial discipline require that the orders of the higher appellate authorities should be followed unreservedly by the subordinate authorities.”

“The mere fact that the order of the appellate authority is not “acceptable” to the department – in itself an objectionable phrase – and is the subject matter of an appeal can furnish no ground for not following it unless its operation has been suspended by a competent court.”

22. No order of any court suspending the operation of the orders of this Tribunal in the Assessee’s own case has been brought to our notice. The TPO, the AO and the learned DRP were therefore bound to follow them on identical facts.

23. The fact that for the assessment year 2022-23 the Assessee itself adopted the TNMM, in place of the CPM followed in the earlier years, does not alter this position. The TPO has not disturbed the method. The dispute is confined to the PLI, and the PLI of OP/OC adopted by the Assessee is the very PLI which the Coordinate Bench has held to be appropriate if the TNMM is applied. The TPO and the learned DRP have not tested the margins of the Assessee, namely GP/COP of 16.13% and OP/OC of 5.07%, against the final set of comparables under the PLI of the Assessee, though the Assessee had raised a specific alternative objection on this aspect before the learned DRP in both years. No material has thus been brought on record to show that the international transactions are not at arm’s length when tested under an appropriate PLI. Once the Berry ratio goes, the adjustment is left with no basis.

24. Respectfully following the orders of the Coordinate Benches in the Assessee’s own case, and in order to maintain judicial discipline, we hold that the application of the Berry ratio is not justified. We direct the AO to delete the adjustment of Rs 28,76,98,590 for the assessment year 2019-20 and of Rs 76,28,92,873 for the assessment year 2022-23. Grounds no. 1 (to this extent), 2, 4, 5 and 6 for the assessment year 2019-20 and grounds no. 1 (to this extent), 2 and 3 for the assessment year 2022-23 are allowed. Ground no. 3 for the assessment year 2019-20, on the computation of the OP/VAE margin, and grounds no. 4 and 5 for the assessment year 2022-23, on the alternative computation under OP/OC and on the selection of comparables, become academic and are left open.

Findings on the interest on receivables (grounds no. 1, 7, 8 and 9 for A.Y. 2019-20 and grounds no. 1 and 6 to 9 for A.Y. 2022-23)

25. The issue was considered by the Coordinate Bench in Vaibhav Global Ltd. (supra) for the assessment year 2017-18 in paragraphs 27 and 28, which read as under:

“27. We have heard both the parties and perused the material available on record. The entire issue stem from action of TPO wherein vide Show Cause Notice dated 24.01.2021 the receivables which are outstanding beyond 60 days have been treated as unsecured loans advanced to AEs and accordingly interest has been imputed thereon. Further TPO has adopted a credit policy of 60 days and the outstanding beyond 60 days have been termed as unsecured loans advanced whereas assessee has been giving a standard credit period of 180 days to AEs as well as third parties. Moreover, assessee is not charging any interest on payables too. The credit policy of the assessee is in line with RBI Guidelines on foreign exchange receivables thus there is no basis with the TPO in adopting credit period of only two months. Similar view has been expressed in the decision of GSS Infotech Ltd v. ACIT Circle-2(2), Hyderabad in ITA No.497/Hyd/2015 which the assessee has relied upon.

28. Moreover, on the same credit terms export has been made to Non AEs by giving credit period of 180 days and no interest has been charged therefrom. Thus 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 v. Indo American Jewellery Ltd (ITA No.1053 of 2012 Bombay HC) is applicable in the present case also and accordingly the adjustment of interest is deleted.”

26. This was followed in paragraph 11 of the order for the assessment years 2020-21 and 2021-22. The foundation of these orders is that the Assessee allows a standard credit period of 180 days to AEs and non-AEs alike, that this period is in line with the guidelines of the Reserve Bank of India, and that the TPO had no basis to adopt a credit period of 60 days. Nothing has been placed before us to show that these orders have been reversed. Following them, we hold that the credit period of 60 days adopted by the TPO and the learned DRP cannot be sustained and that no interest can be imputed on receivables realised within the credit period of 180 days.

27. The orders of the Coordinate Benches reproduced above rest on the judgment of the Hon’ble Bombay High Court in CIT v. Indo American Jewellery Ltd. (Bombay), where it was held in paragraph 5 as under:

“5. On appeal filed by the Revenue, the ITAT upheld the order of CIT(A). While, upholding the order of CIT(A), the ITAT held that interest income is associated only with the lending or borrowing of money and not in case of sale. We express no opinion on the above reasoning of the ITAT and keep that reasoning open for debate in an appropriate case. However, in the facts of the present case, the specific finding of the ITAT is that there is complete uniformity in the act of the assessee in not charging interest from both the Associated Enterprises and Non Associated Enterprises debtors and the delay in realisation of the export proceeds in both the cases is same. In these circumstances the decision of the Tribunal in deleting the notional interest on outstanding amount of export proceeds realised belatedly cannot be faulted.”

28. The test that emerges is one of parity. A receivable from an AE is an international transaction under clause (c) of Explanation (i) to section 92B of the Act, but an adjustment is called for only if the AE has been given a benefit which an unrelated customer would not have got. What has to be seen is therefore not merely whether the AEs paid late, but whether they were treated differently from the non-AEs in the matter of delay and of interest. The Coordinate Bench of this Tribunal applied the same test in KGK Enterprises v. Asstt. CIT [2017] 88 (Jaipur – Trib.) and recorded in paragraph 53 that the Hon’ble Rajasthan High Court had affirmed this position in the case of the Assessee. Nothing has been placed before us to show that any of these judgments and orders has been reversed.

29. It was to apply this test that the Bench called for the invoice wise lists of realisation for AEs and non-AEs. For the assessment year 2019-20, the list shows a standard period of clearance of 180 days. A large number of invoices raised on the AEs in April and May 2018 were realised after 375 to 379 days from the date of invoice, and one invoice dated 23.04.2018 raised on STS Gems Limited was realised after 605 days. The same list shows that invoices dated 26.04.2018 raised on two non-AEs, Keenwell Investment Ltd. and Newlite Trading HK Ltd., were also realised on 08.05.2019, that is, after 377 days, exactly as the invoices raised on the AEs on the same date. An invoice dated 16.04.2018 raised on another non-AE, Karmafant Internet GmbH, was realised after 291 days. No interest has been charged from any of them. The delay beyond the credit period and the policy of not charging interest are thus uniform for AEs and nonAEs in this year, and the facts are on all fours with those considered in the earlier years. Respectfully following the judgment of the Hon’ble jurisdictional High Court and the orders of the Coordinate Benches in the Assessee’s own case, we direct the AO to delete the adjustment of Rs 6,94,01,760 for the assessment year 2019-20. Grounds no. 1 (to this extent), 7, 8 and 9 for the assessment year 2019-20 are allowed.

30. For the assessment year 2022-23, the position on record is different. The pages of the list placed before us contain only invoices raised on only AEs. They show delays of up to 134 days beyond the credit period of 180 days, but they contain no invoice raised on a non-AE. As noted earlier, the sales to the AEs in this year are Rs 425.12 crore out of the revenue from operations of Rs 489.10 crore. On this material we are unable to record a finding, one way or the other, that the non-AEs were allowed the same delay without interest in this year. Parity is a question of fact which has to be established for each year. We therefore set aside the adjustment of Rs 3,14,04,878 and restore the issue for the assessment year 2022-23 to the file of the AO/TPO for verification.

31. Since the matter is going back, we deal with the alternative pleas of the learned AR on the period and on the rate, so that no dispute survives on these aspects. On the period, we are unable to accept the plea that a further 60 days should be allowed after the credit period of 180 days. The observation of the learned DRP in paragraph 11.5, that a delay of 60 days is reasonable for receipt of payments against invoices, refers to the period of 60 days from the date of invoice which the TPO had adopted as the credit period. That period has been rejected in favour of the credit period of 180 days actually allowed by the Assessee. It cannot be added on top of the 180 days. An independent seller does not allow a further interest free period after its own agreed credit period has expired, unless it allows the same to all its customers. The arm’s length measure of any such latitude is the treatment given by the Assessee to its non-AEs, which the direction given below takes into account. The plea for a separate set off of early realisations is also rejected, since early realisations will be reflected in the average period of realisation to be compared under that direction.

3 2. On the rate, the TPO has himself adopted six month LIBOR since the receivables are in foreign currency. The mark up of 400 basis points has been built by him on the ceiling prescribed by the Reserve Bank of India for external commercial borrowings with an average maturity of three to five years, with a further 100 basis points added for currency risk. A trade receivable which is overdue by some months is not comparable to a term borrowing of three to five years, and the TPO has not referred to any comparable uncontrolled transaction in support of the mark up. In the Assessee’s own case, the Hon’ble Rajasthan High Court disapproved an ad hoc mark up over LIBOR and held in paragraph 11 inCIT v. Vaibhav Gems Ltd. (Rajasthan) as under:

“11. Regarding ITA no.149/2015 preferred by the assessee in view of the Delhi High Court judgment (para no.14), the international transaction is required to be accepted, therefore, tribunal has committed serious error. The assessee will be entitled for the benefit of average LIBOR rate existing at that time which was 0.79% and addition of adhoc 2% is not proper. In that view of the matter, the addition of 2% interest in the income is required to be quashed and set aside.”

33. The mark up of 400 basis points, being ad hoc, cannot therefore be sustained. The learned AR has, however, placed on record the executive summary of Punjab National Bank dated 22.05.2018 for renewal of the credit facilities of the Assessee, which shows that packing credit in foreign currency is available to the Assessee at six month LIBOR plus 1.85%, and has submitted that the rate should not exceed this rate. This spread is not ad hoc. It is the price at which an unrelated bank lends foreign currency funds to the Assessee against its export cycle, and it represents the actual cost to the Assessee of the funds which remain blocked when the AEs pay late. Being an uncontrolled rate in the same currency, and having been offered by the Assessee itself, it is a fair measure of the arm’s length compensation. We accordingly hold that, if any adjustment survives after the verification directed below, the rate shall be six month LIBOR plus 185 basis points, which on the LIBOR of 0.256% adopted by the TPO works out to 2.106%.

34. The AO/TPO shall decide the issue for the assessment year 202223 afresh with the following directions: (i) the Assessee shall furnish the complete invoice wise list of export invoices raised on AEs and non-AEs during the year with the dates of realisation, reconciled with its books of account; (ii) the AO/TPO shall verify whether the Assessee charged interest from any non-AE on invoices realised beyond 180 days; (iii) if no interest has been charged from the nonAEs and the average period of realisation of the invoices raised on the AEs, weighted by invoice value, does not exceed that of the invoices raised on the non-AEs, no adjustment shall be made; (iv) if this test is not satisfied, interest shall be computed only on the invoices raised on the AEs which were realised after 180 days from the date of invoice, for the number of days beyond 180 days, at the rate of 2.106%; (v) since the bank document on record is of May 2018, the AO/TPO shall verify from the sanction terms in force during the financial year 2021-22 whether the spread of 1.85% over six month LIBOR continued to apply to the Assessee, and if a different spread applied, that spread shall be adopted; and (vi) the Assessee shall be given a reasonable opportunity of being heard. Grounds no. 1 (to this extent), 6, 7, 8 and 9 for the assessment year 2022-23 are allowed for statistical purposes in these terms.

Findings on section 115JB of the Act (ground no. 10 in both years)

35. The learned DRP has directed in paragraph 12.1 of its directions in both years as under:

“12.1 The matter has been considered. It is a settled position of law, that only adjustments that are permitted under section 115JB, can be added back by the AO while determining book-profit for the purposes of MAT calculation. As TP adjustment is not one of the permissible adjustments specified therein, the AO should add the TP adjustment only to normal income of the assessee. This ground is disposed of subject to the directions supra.”

36. Despite this direction, the AO has added the transfer pricing adjustment of Rs 35,71,00,350 and Rs 79,42,97,751 while computing the book profit at Rs 76,27,79,765 and Rs 1,91,96,84,950 respectively, and for the assessment year 2022-23 has charged tax on the book profit so computed. Under section 144C(10) of the Act every direction of the learned DRP is binding on the AO, and under section 144C(13) of the Act the AO has to complete the assessment in conformity with the directions. The Revenue cannot be aggrieved by the directions of the learned DRP and the AO could not have departed from them. We direct the AO to recompute the book profit under section 115JB of the Act for both years without adding any transfer pricing adjustment, including the interest on receivables as may be recomputed in terms of this order. Ground no. 10 is allowed in both years.

37. In the result, the appeal of the Assessee for the assessment year 2019-20 in ITA No. 323/JPR/2026 is allowed and the appeal for the assessment year 2022-23 in ITA No. 326/JPR/2026 is partly allowed for statistical purposes.