Downward Profit Adjustments Unsustainable Without Material

Downward Profit Adjustments Unsustainable Without Material Proof and Financially Distressed Comparables Must Be Excluded

Issue

Whether a profit adjustment under Section 80-IA(10) can be sustained if the Transfer Pricing Officer (TPO) fails to provide material evidence proving a close connection, an artificial arrangement, and the generation of “more than ordinary profits.”
Whether a company undergoing severe financial distress, loan defaults, and adverse audit qualifications can be considered a valid comparable under the Transactional Net Margin Method (TNMM).
Whether the TPO can exclude a comparable that satisfies the export filter without demonstrating any functional dissimilarity or financial abnormality.
Whether a comparable company can be excluded from the final transfer pricing analysis if the assessee fails to demonstrate that its Related Party Transactions (RPT) are within a tolerable, un-influential threshold.

Facts

The assessee-firm operates a Special Economic Zone (SEZ) unit in SEEPZ, manufacturing and exporting studded jewellery, and claimed a tax deduction under Section 10AA for the Assessment Year 2021-22.
Issue I: The TPO invoked Section 80-IA(10) to make a downward adjustment to the assessee’s sales, alleging that transactions with closely connected entities resulted in inflated, more than ordinary profits.
Issue II: For benchmarking under TNMM, a company included in the comparability analysis was found to be facing severe financial distress, defaulting on bank dues, carrying adverse audit remarks, and pursuing a one-time settlement with lenders.
Issue III: The TPO excluded a specific comparable company selected by the assessee from the final benchmarking set, even though the company successfully cleared the export filter.
Issue IV: A separate comparable company was evaluated for exclusion based on the Related Party Transaction (RPT) filter, as its controlled transactions potentially skewed its profitability margins.

Decision

On Section 80-IA(10) Adjustment (In favour of assessee): Held, yes. To invoke this section, the tax authority must conclusively establish a close connection, a specific arrangement, and actual excessive profit generation. Since the TPO failed to bring any material on record to prove an arrangement or define what constituted “ordinary profits,” the adjustment was set aside.
On Financially Distressed Comparable (In favour of assessee): Held, yes. Companies operating under abnormal economic circumstances, such as debt defaults and severe financial distress, do not reflect ordinary market conditions and must be excluded from the comparable set.
On Functionally Similar Comparable (In favour of assessee): Held, yes. The exclusion of the comparable was unjustified. Since the company met the export filter and the TPO failed to show any functional flaws or financial abnormalities, its inclusion was directed.
On RPT Filter Compliance (In favour of revenue): Held, yes. The application of the RPT filter is vital to prevent controlled transactions from distorting transfer pricing results. Since the assessee failed to prove that the comparable’s related party transactions were within a tolerable range, its exclusion was upheld.

Key Takeaways

Burden of Proof for Profit Shifting: The revenue cannot invoke anti-abuse provisions like Section 80-IA(10) on mere suspicion. It must present concrete empirical data showing an arrangement that artificially inflates profits in tax-exempt units.
Economic Reality in Benchmarking: Transfer pricing comparables must operate under normal business conditions. Extreme financial anomalies, like active loan defaults, render a company’s profit margins non-comparable under TNMM.
Objective Rule Application: Once a potential comparable clears primary objective filters (like the export filter) and shares functional similarities, the TPO cannot arbitrarily exclude it without showing clear financial or operational deviations.
RPT Safeguard: The RPT filter serves as a critical check. If an assessee cannot prove that a comparable’s interactions with related parties are low enough to preserve margin integrity, the company must be discarded to keep the benchmarking clean.

IN THE ITAT MUMBAI BENCH ‘H(SMC)’

Imperial Jewels

Assessment Unit, NFAC/Dy. CIT^*

Smt. Beena Pillai, Judicial Member
and OMKARESHWAR CHIDARA, Accountant Member

IT Appeal No. 5477 (Mum) of 2024
[Assessment year 2021-22]

MAY 8, 2026

Nitesh Joshi, Adv. and Ashwin Kashinath, AR for the Appellant. Pravin Salunkhe, Sr. D/R for the Respondent.

ORDER

Smt. Beena Pillai, Judicial Member.- The present appeal by the assessee is filed against final assessment order passed under section 143(3) r.w.s.144C(13) of the Act, dated 27/09/2024, for AY 2021-22, on the following grounds of appeal:-

“1. The learned Dispute Resolution Panel (‘DRP’) and Learned Transfer Pricing Officer (‘TPO’)/Assessing Officer (‘AO’) erred in making an addition of Rs. 38,49,450/- to the total income on account of Transfer Pricing adjustment to the sales made by the Appellant without appreciating that:

i. The provisions of Transfer Pricing under Chapter X of the Act are not applicable in as much as the Appellant has neither entered into any transaction with its Associated Enterprise as defined under Section 92A of the Act nor entered into any transaction falling within the ambit of ‘specified domestic transaction’ as defined under Section 92BA of the Act. The Ld. DRP/TPO failed to appreciate that the Appellant had filed Report under chapter X of the Act only as an abundant caution.

ii. The downward adjustment of sales by Rs. 38,49,450/- has been determined without fulfilling the conditions stipulated under Section 80-IA(10) r.w.s. 10AA(9) of the Act

iii. The comparables selected by the Assessee for determining Arm’s Length Price (ALP) were appropriate and the rejection of three selected comparable i.e. Inter Gold (India) Pvt. Ltd., Goldiam Jewellery Ltd. and Shangold India Limited and addition of a new comparable company by the TPO i.e. Neysa Jewellery Limited, is unwarranted and without any cogent justification.

2. The learned Assessing Officer erred in making an addition of Rs. 38,49,450/- to the total income without appreciating that the Learned Dispute Resolution Panel had directed the Assessing Officer to recompute deduction under Section 10AA on account of Transfer Pricing downward adjustment to sales made by the Appellant.

Accordingly, the Assessing Officer, at the most, ought to have disallowed the claim of deduction under Section 10AA by Rs. 19,24,725/-, being 50% of the downward adjustment to sales of Rs. 38,49,450/-.

3. The Appellant reserves the right to add, to alter or to amend the grounds of appeal.”

2. Brief facts of the case are as under:-

The assessee is a firm engaged in the business of manufacture and export of studded jewellery and is having its unit situated in SEEPZ-SEZ, Mumbai. The return of income for A.Y. 2021-22 was filed on 10/02/2022 declaring total income of Rs.5,43,22,897/-. The assessee claimed deduction u/s 10AA of the Act in respect of its SEZ unit. During the year under consideration, the assessee reported certain transactions with closely connected entities in Form 3CEB under the category of specified domestic transactions (SDT), though it was contended that no transaction with Associated Enterprises as defined u/s 92A of the Act had been entered into and the reporting was made only as a matter of abundant caution.

2.1. The case was selected for scrutiny and reference was made by the Ld.AO to the Ld.TPO u/s.92CA(1) of the Act to determine arm’s length price of such transactions. The assessee benchmarked the transactions by adopting TNMM as the most appropriate method with OP/OC as the Profit Level Indicator and had shown its margin at 6.31% as against the arithmetic mean margin of comparable companies at 3.05%, thereby contending that the transactions were at arm’s length. The Ld.TPO rejected Laxmi Dia Jewels Pvt.Ltd., selected by the assessee, by applying export revenue filter of more than 50%. Further, Inter Gold(India) Pvt.Ltd., and Goldiam Jewellary Ltd., selected by the assessee were rejected by observing that they failed RPT filter of less than 25%. The Ld.TPO introduced Neysa Jewellery Ltd. as a comparable, thereby recomputing the margin at 2.94%. The Ld.TPO thus proposed downward adjustment by making reduction in sale value at Rs.4,97,58,208/-, vide order passed u/s.92CA(3) dated 12/10/2023.

3. Pursuant thereto, the Ld.AO passed the draft assessment order dated 05/11/2023 u/s 143(3) r.w.s.144C of the Act proposing addition of Rs.4,97,58,208/- to the total income of the assessee on account of transfer pricing adjustment.

3.1. On receipt of the draft assessment order, the assessee raised objections before the Ld.DRP.

4. The DRP upheld the action of the Ld.TPO.

4.1. On receipt of the DRP direction, the Ld.AO passed final assessment order making an addition of Rs.38,49,450/- to the total income of the assessee on account of transfer pricing adjustment to sales.

Aggrieved by the final assessment order, the assessee is in appeal before the Tribunal.

5. The Ld.AR primarily submitted that the impugned transfer pricing adjustment was made without properly appreciating the factual and legal position of the case. It was submitted that the provisions of Chapter X are not applicable to the assessee as the assessee has neither entered into any international transaction with Associated Enterprises as defined u/s.92A of the Act nor any transaction falling within the ambit of specified domestic transactions u/s.92BA of the Act. It was contended that the reporting in Form 3CEB was made only as a matter of abundant caution and cannot confer jurisdiction upon the Ld.TPO.

5.1. Without prejudice, the Ld.AR submitted that the benchmarking analysis carried out by the assessee under TNMM using OP/OC as PLI was in accordance with law. He submitted that the assessee earned operating margin of 6.31% which was higher than the arithmetic mean margin of comparable companies at 3.05%, thereby establishing that the transactions were at arm’s length.

5.2. The Ld.AR submitted that the Ld.TPO erred in rejecting valid comparables selected by the assessee, namely Inter Gold India Pvt. Ltd., Goldiam Jewellery Ltd. and Shangold India Ltd., without any cogent reasons, and in including Neysa Jewellery Ltd. as a comparable despite functional dissimilarity and abnormal financial position.

5.2. The Ld.DR relied on the contrary relied on the orders of the authorities below and submitted that the assessee itself reported the transactions in Form 3CEB and therefore the applicability of transfer pricing provisions cannot now be disputed. It was submitted that the reference made by the Ld.AO to the Ld.TPO u/s 92CA was valid and the Ld.TPO rightly examined the arm’s length nature of the transactions.

5.3. The Ld.DR further submitted that the Ld.TPO carried out detailed analysis of comparables and rightly rejected companies which did not satisfy the filters such as related party transactions and export filter. It was submitted that Neysa Jewellery Ltd. was rightly selected as a comparable based on functional similarity and available data. It was also submitted that the Ld.TPO correctly recomputed the margin of comparable companies and determined the median margin at 2.94% and accordingly computed the arm’s length price. The Ld.DR contended that since the assessee’s pricing was not at arm’s length as per the revised benchmarking, the downward adjustment to sales was rightly made and the Ld.AO correctly incorporated the same in the assessment order.

We have heard the rival submissions and perused the material available on record.

6.1 Ground No. 1: Transfer Pricing Adjustment to Sales

The primary grievance of the assessee under this ground is against the transfer pricing adjustment made by the Ld. TPO on account of alleged specified domestic transactions. At the outset, the assessee has contended that the provisions of Chapter X are not applicable as it has neither entered into any international transaction with Associated Enterprises u/s 92A nor any specified domestic transaction u/s 92BA of the Act, and the reporting in Form 3CEB was made only as a matter of abundant caution. On perusal of the record, it is noted that the assessee has reported certain transactions in Form 3CEB and the Ld.AO made a reference to the Ld. TPO u/s 92CA for determination of arm’s length price.

This issue raised by the assessee in Ground no.1(i) are kept open to be contested in an appropriate circumstance.

6.2. Ground No. 1(ii)

It was submitted that, the Ld.TPO considered all the parties to be related persons under Section 40A(2)(b) of the Act while considering ‘Sales to AE’ for the purpose of ALP adjustment. It is submitted that since adjustment was made invoking the provisions of Section 80-IA(10) of the Act, the Ld.AO/TPO ought to have only considered the sales made to those entities who were related party with the assessee. However, Ld.TPO has considered all parties listed under section 40A(2)(b) of the Act as parties having close connection with the assessee. Even though, H. K. Design Inc. USA and Pure Brilliance LLC cannot be considered as entities having close connection with assessee.

6.2.1. It was submitted that, the assessee entered into transaction with following entities:

(i)

Hari Krishna Exports Private Limited

(ii)

H K Design India LLP

(iii)

Unity Jewels

(iv)

H K Design Inc USA

(v)

Pure Brillance Inc USA

6.2.2. The assessee submitted that, Hari Krishna Exports Private Limited, H K Design India LLP and Unity Jewels and appellant firm have common partners/directors and accordingly these entities are considered as entities having close connection with the assessee. The assessee also submitted that, H. K. Design Inc. USA (HKD Inc) is a foreign company incorporated in USA and Pure Brilliance LLC is 100% subsidiary of HKD Inc. It was submitted that, Shri Rajeshbhai Dholakia, a partner with 8% share in assessee is brother of Shri Hasmukhbhai Dholakia who has 100% stake in HKD Inc. The assessee submitted that, Shri Rajeshbhai Dholakia does not have any interest in the assessee and that Shri Rajeshbhai Dholakia or his brother Shri Hasmukhbhai Dholakia do not have control in assessee.

6.2.3. It was submitted thus that, there is no close connection between Imperial Jewels and HKD Inc and Pure Brilliance and accordingly, these entities cannot be considered as entities having close connection and thus the same cannot be considered for the purpose of making ALP adjustment.

6.2.4. Assessee thus submitted that based on the ALP margin of 2.94% as determined by Ld.TPO, the adjustment should be made only on the sale with closely connected entities i.e. HK Design Inc. USA, Pure Brilliance LLC, HK Design India LLP and Unity Jewels. The Ld.TPO thus proposed a downward adjustment of Rs.497,58,208/- to sales for the purpose of deduction under Section 10AA of the Act.

6.3. On receipt of the order u/s 92CA(3), the Ld.AO, in the draft assessment order, added the amount of adjustment of Rs. 497,58,208/- to total Income instead of reducing the profit by Rs. 4,97,58,208/- and computed revised amount of deduction under Section 10AA of the Act.

Against the draft assessment order, the assessee filed objections before the DRP.

7. Before the Ld.DRP, the assessee submitted that, the objections raised regarding non-fulfillment of conditions u/s 80IA(10) of the Act that led to the downward adjustment u/s 92CA in respect of deduction under Section 10AA of the Act. The assessee submitted that, the term ‘close connection’ has not been defined under the Act. Any person having “significant influence” or “control” may be characterized as a person with close connection. The assessee further submitted that, in accounting parlance, “Control” means ownership direct or indirect of more than half of the voting power of an enterprise or control of composition of Board and significant influence means participation in the financial and or operating policy decisions of the enterprise but not control of those policies.

7.1. The DRP, however, based on the report filed by the assesse in Form 3CEB rejected the arguments advanced by the assessee that, it does not have any close connection with HK Designs Inc. USA and Pure Brilliance LLC USA.

On receipt of the draft assessment order, Ld.AO passed the final assessment order by making disallowance to the claim of 10AA at Rs. 38,49,450/-.

Aggrieved by the order of the Ld.AO assessee is in appeal before this Tribunal.

8. Before this Tribunal, the Ld.AR without prejudice submitted that, this is the 8th year of claim under section 10AA of the Act. Accordingly, the assessee is eligible for 50% of profit as deduction. It is submitted that if the variation of Rs. 4,97,58,208/- is considered, the amount of deduction allowable under Section 10AA of the Act would be Rs. 1,91,96,255/- as against deduction claimed of Rs. 4,37,59,341/-. The Ld.AR submitted that, the ALP adjustment will have to be restricted to Rs. 38,49,450/-. He also submitted the computation as under:

Particulars		As per Return Income	As per of TPO/AO	As per Appellant’s submissions
Business Income before ALP adjustment	A	8,86,44,658	8,86,44,658	8,86,44,658
Less: Downward adjustment of sales	B		(4,97,58,208)	(38,49,450)
Adjusted Business Income	C= “A-B	8,86,44,658	3,88,86,450	8,47,95,208
Proportion of Export to Total Turnover	D	98.73%	98.73%	98.73%
Proportionate Income eligible for Deduction u/s. 10AA	E= “C*D	8,75,18,682	3,83,92,509	8,37,18,128
Deduction u/ s. 10AA (50%)	E*50%	4,37,59,341	1,91,96,255	4,18,59,064

In view of the above, it was prayed that suitable directions be issued to the Ld.TPO/AO to recompute the amount of deduction allowable under Section 10AA of the Act by determining the ALP adjustment by considering the sales of Rs. 12,14,34,721/- which have been made to entities having ‘close connection’ as against total sales of Rs. 156,96,72,156/- reported by the assessee.

8.1. Be that as it may, the Ld.AR vehemently submitted that in the absence of close connection between the assessee with H.K. Design Inc. USA and Pure Brilliance, a transfer pricing adjustment cannot be made based on the provisions of Section 80IA(10). He placed reliance on the submissions made by the assessee in this regard in the written submissions filed before this Tribunal on various dates as well as before the authorities below.

8.2. Grounds 1(iii): The assessee has challenged both the rejection and inclusion of comparables.

It is observed that the assessee adopted TNMM as the most appropriate method and demonstrated its margin at 6.31% as against the comparable mean of 3.05%. The Ld.TPO rejected Laxmi Dia Jewels Pvt.Ltd., selected by the assessee, by applying export revenue filter of more than 50%. Further, Inter Gold(India) Pvt.Ltd., and Goldiam Jewellary Ltd., selected by the assessee were rejected by observing that they failed RPT filter of less than 25%. The Ld.TPO introduced Neysa Jewellery Ltd. as a comparable, thereby recomputing the margin at 2.94%. The Ld.TPO thus proposed downward adjustment by making reduction in sale value at Rs.4,97,58,208/-.

8.3. It was submitted that all the comparables selected by the assessee are engaged in the business of manufacture of jewellery and are operating from SEZ units, thereby exhibiting a comparable functional and economic profile.

8.4. In respect of Neysa Jewellery Ltd., the Ld. AR submitted that though the said company is engaged in the business of jewellery, it cannot be considered as a valid comparable in view of its abnormal financial position. Referring to the annual report, the Ld. AR pointed out that the company has defaulted in repayment of substantial dues to banks and has been unable to realise its export receivables or discharge its import payables. It was further submitted that the company had entered into a One Time Settlement with its bankers in the preceding year on account of such defaults. However, the financial stress has continued in subsequent years as well, with the company still unable to realise export receivables or remit import dues. The auditors have also consistently made adverse qualifications in this regard. It was thus contended that these factors clearly demonstrate that the company is not operating under normal business conditions, which is further substantiated by its negative operating margin of (-0.41%) as computed by the Ld. TPO. Accordingly, it was submitted that Neysa Jewellery Ltd. ought to be excluded from the set of comparables.

8.5. The Ld. AR further submitted that Laxmi Dia Jewels Pvt. Ltd. had already been suo moto rejected by the assessee itself on the ground that it did not satisfy the export filter of more than 50%, and therefore, the reiteration of such rejection by the Ld. TPO does not advance the benchmarking analysis.

8.6. In so far as Goldiam Jewellery Ltd. is concerned, the Ld. AR submitted that the said company has export sales of approximately 98% during the relevant financial year, thereby fully satisfying the export filter. It was also submitted that the turnover of the said company for F.Y. 2020-21 is Rs. 211.08 crore, which is within a reasonable range and does not render it incomparable with the assessee. Accordingly, it was contended that the rejection of such comparables by the Ld. TPO is unjustified.

8.7. In respect of Inter Gold (India) Pvt. Ltd., the Ld. AR submitted that the said company is engaged in the business of manufacture of jewellery and operates from an SEZ, with export sales of approximately 99% during the relevant year. Its turnover for F.Y. 2020-21 is Rs. 570.81 crore. It was contended that the functions performed by Inter Gold, including designing, procurement of raw materials and manufacturing processes, are broadly similar to those of the assessee, and both cater predominantly to the USA market, thereby operating under a similar business environment.

8.7.1. The Ld.AR further submitted that while the RPT filter is applied to ensure that margins are not influenced by related party transactions, no fixed threshold is prescribed under the Act or OECD guidelines, and the tolerance range may vary depending on availability of comparables. It was submitted that in the present case, out of a universe of 239 companies, only 18 companies are operating in SEZs, thereby significantly restricting the pool of comparables. In such circumstances, strict application of RPT filter would unduly eliminate otherwise functionally comparable entities. The Ld.AR thus submitted that Inter Gold (India) Pvt. Ltd. ought not to have been rejected.

8.8. The Ld.AR further submitted that during the transfer pricing proceedings, the assessee had proposed Shangold India Ltd. as an additional comparable. It was contended that the said company is engaged in the business of manufacture and sale of jewellery, with approximately 77% of its sales attributable to exports. The turnover of the company for F.Y. 2020-21 is Rs. 51.94 crore, and it operates from an SEZ. Accordingly, it was submitted that Shangold India Ltd. is functionally comparable to the assessee and ought to be considered as a valid comparable. It was submitted that the Ld.AO/TPO included Shangold India Ltd in the final list.

8.9. Further, During the course of hearing, it was brought to our notice that the assessee’s SEEPZ unit, eligible for deduction under section 10AA of the Act, was set up in the previous year relevant to A.Y. 2014-15. It was submitted that the present issue has arisen only in A.Ys. 2020-21, 2021-22 (year under consideration) and 2022-23. In so far as A.Y. 2020-21 is concerned, though a transfer pricing adjustment was initially proposed by the Ld. TPO, the same did not survive in the final assessment order pursuant to directions of the Ld. DRP excluding certain comparables. For A.Y. 2022-23, it was submitted that the matter is presently pending adjudication before the Tribunal. It was further pointed out that in A.Y. 2017-18, on a similar reference made by the Ld. AO to the Ld. TPO, the transactions of the assessee were accepted to be at arm’s length.

8.10. It was also submitted that the deduction under section 10AA is available for a limited period of ten years, which has expired in A.Y. 2023-24. Notably, even after the expiry of the tax holiday period, the gross profit and net profit margins of the undertaking have remained consistent and have not shown any decline. This, in our view, negates any presumption of profit shifting or artificial inflation of profits during the eligible period and further supports the arm’s length nature of the transactions.

We have perused the submissions advanced by both sides in light of records placed before us.

9. It is noted that before considering the arguments of the Ld.AR in respect of Ground No. 1(ii), it is necessary to consider the provisions under Section 80IA(10), which reads as under:-

“Where it appears to the Assessing Officer that, owing to the close connection between the assessee carrying on the eligible business to which this section applies and any other person, or for any other reason, the course of business between them is so arranged that the business transacted between them produces to the assessee more than the ordinary profits which might be expected to arise in such eligible business, the Assessing Officer shall, in computing the profits and gains of such eligible business for the purposes of the deduction under this section, take the amount of profits as may be reasonably deemed to have been derived therefrom:

Provided that in case the aforesaid arrangement involves a specified domestic transaction referred to in section 92BA, the amount of profits from such transaction shall be determined having regard to arm’s length price as defined in clause (ii) of section 92F.”

9.1. From the above, it is noted before proposing any adjustment under Section 80-IA(10) of the Act, the Ld. TPO is required to establish the foundational requirements prescribed therein. Section 80-IA(10) can be applied only where it is demonstrated that, owing to a close connection between the assessee carrying on the eligible business and any other person, or for any other reason, the course of business between them is so arranged that the business transacted produces to the assessee more than the ordinary profits which might ordinarily arise in such eligible business. In the present case, the adjustment has been proposed in respect of the transactions entered into by the assessee with H.K. Design Inc. and Pure Brilliance LLC, USA.

9.2. Thus, following essential conditions are required to be cumulatively established before any adjustment can be proposed under Section 80-IA(10) is that;

(i)

there must exist a close connection between the assessee and H.K. Design Inc. and/or Pure Brilliance LLC;

(ii)

the Ld. TPO must bring material on record to establish that the course of business was so arranged between the parties;

(iii)

such arrangement must have resulted in the assessee deriving more than ordinary profits from the eligible business; and

(iv)

the opinion of the Ld. TPO must be founded on cogent material and objective analysis, and not merely on presumptions or comparison of profit margins in isolation.

9.3. It is observed that Section 80-IA(10) is an anti-abuse provision and, therefore, its application necessarily requires a clear finding, supported by tangible material, that the affairs between the parties were deliberately arranged so as to inflate the profits of the eligible undertaking beyond ordinary commercial levels. Mere existence of transactions between the assessee and H.K. Design Inc. and Pure Brilliance LLC, or higher profitability of the eligible unit, in the absence of any evidence of manipulation of prices or artificial arrangement of transactions, cannot lead to an automatic inference that the conditions prescribed under Section 80-IA(10) stand attracted. The statute contemplates formation of an opinion based on objective material demonstrating that the profits disclosed by the assessee are not ordinary profits arising from legitimate business operations, but are the consequence of a prearranged course of business.

9.4. We further note that the Ld. TPO has not brought on record any reliable benchmarking analysis or comparable industry material to demonstrate as to what, in the facts of the present case and in relation to the transactions with H.K. Design Inc. and Pure Brilliance LLC, constituted the “ordinary profits” of such business. In the absence of such foundational exercise, the adjustment proposed under Section 80-IA(10) remains unsupported by the statutory requirements of the provision. Efficiency in operations, commercial prudence, economies of scale, market conditions, or business expertise may legitimately result in higher profit margins and, by themselves, do not justify an adverse inference under Section 80-IA(10).

9.5. We have also considered the submissions of the Ld.AR recorded in paras 6.9 to 6.10 herein above, and find considerable merit in the factual matrix placed on record. It is evident that the issue under consideration has not arisen in a consistent or recurring manner across the years. In A.Y. 2017-18, the transactions were accepted by the Ld.TPO to be at arm’s length, and in A.Y. 2020-21, though an adjustment was initially proposed, the same did not survive in the final assessment order pursuant to the directions of the Ld. DRP. This indicates that the assessee’s pricing has broadly been found to be at arm’s length in comparable circumstances.

9.6. The Bench had called for the statement of gross profit and net profit earned by the eligible undertaking from A.Y. 2014-15 up to A.Y. 2025-26. The Ld. AR has submitted the same. Further, the fact that the deduction under section 10AA was available only for a limited period up to A.Y. 2023-24, and that the profit margins of the undertaking have remained stable even after the expiry of the tax holiday period, materially weakens any allegation of profit shifting or artificial inflation of profits during the eligible period. In absence of any contrary material brought on record by the Revenue, these surrounding circumstances lend further support to the assessee’s contention that the transactions are at arm’s length. Accordingly, these factors reinforce our conclusion on merits.

Accordingly, Ground No. 1(ii) raised by the assessee stands allowed.

10. For completeness of the case, thought academic at this stage, in so far as alleged comparable Neysa Jewellery Ltd. is concerned, we find considerable merit in the submissions of the Ld. AR. The material placed on record, particularly the annual report, indicates that the said company is facing significant financial distress, having defaulted in repayment of bank dues and being unable to realise export receivables or discharge import payables. The fact that the company had entered into a One Time Settlement with its bankers and that such financial stress continued in subsequent periods, coupled with adverse audit qualifications, clearly demonstrates that it is not operating under normal business conditions. This is further corroborated by its negative operating margin of (-0.41%). It is a well-settled principle that companies affected by abnormal financial circumstances cannot be considered as valid comparables, as their margins do not reflect ordinary business conditions. Accordingly, we direct that Neysa Jewellery Ltd. be excluded from the set of comparables.

10.1. With regard to Laxmi Dia Jewels Pvt. Ltd., it is observed that the said company was already suo motu rejected by the assessee on account of not satisfying the export filter of more than 50%. The reiteration of such rejection by the Ld. TPO does not call for any separate adjudication, as the said company does not form part of the final set of comparables.

10.2. In respect of Goldiam Jewellery Ltd., we find merit in the contention of the Ld. AR that the said company satisfies the export filter, having export sales of approximately 98% during the relevant year. Further, its turnover of Rs. 211.08 crore cannot, by itself, be a ground for exclusion in absence of any demonstrated functional dissimilarity or abnormality in its financials. The Ld. TPO has not brought on record any cogent material to establish that the said company is not comparable to the assessee. Accordingly, we hold that Goldiam Jewellery Ltd. has been wrongly excluded and deserves to be included in the set of comparables.

10.3. In respect of Inter Gold (India) Pvt. Ltd. It is an undisputed position that the said company is engaged in the business of manufacture of jewellery, operates from an SEZ, and derives substantial export revenue, thereby exhibiting functional similarity with the assessee. However, it is equally well-settled that the application of the related party transaction (RPT) filter is a critical safeguard in transfer pricing analysis to ensure that the margins of a comparable are not influenced by controlled transactions. While it is true that no specific threshold is prescribed under the Act, the consistent judicial approach has been to apply a reasonable threshold so as to maintain the integrity and reliability of comparables.

10.4. In the present case, the Ld. TPO has excluded Inter Gold (India) Pvt. Ltd. on the ground that it fails the RPT filter of less than 25%. The assessee has contended that in view of limited availability of SEZ comparables, a relaxed threshold ought to be adopted. While we find merit in the argument that availability of comparables is a relevant consideration, the same cannot be stretched to dilute a fundamental comparability criterion to an extent that undermines the reliability of the benchmarking exercise. In absence of any material placed on record to demonstrate that the level of related party transactions in the case of Inter Gold (India) Pvt. Ltd. is within a tolerable range so as not to materially impact its profitability, we are inclined to uphold the exclusion of this company.

10.5. Accordingly, considering the importance of maintaining purity of comparables and in absence of sufficient justification to relax the RPT filter, we hold that Inter Gold (India) Pvt. Ltd. has been rightly excluded by the Ld. TPO.

Based on the above discussion, since the foundational requirements contemplated under the section 80IA(10) has not been established, the adjustment proposed by the Ld. TPO cannot be sustained in the eyes of law.

Accordingly Ground no.1(iii) raised by the assessee stands allowed.

11. Ground No.2: Consequential Adjustment vis-a-vis Deduction u/s.10AA

11.1. The grievance of the assessee under this ground is that the Ld. AO made an addition to total income instead of restricting the deduction u/s 10AA. The assessee has contended that even if the transfer pricing adjustment is sustained, the same would only impact the eligible profits for deduction u/s 10AA and cannot result in addition to total income.

11.2. We find merit in the contention of the assessee that any adjustment in respect of eligible business profits of SEZ unit would have a direct bearing on the quantum of deduction u/s 10AA. The Ld.AO is directed to recompute the deduction u/s 10AA, in accordance with law after giving effect to the outcome of transfer pricing proceedings.

Accordingly, Ground No. 2 is allowed for statistical purposes.

12. Ground No. 3 is general in nature and does not require separate adjudication.

In the result, the appeal filed by the assessee stands partly allowed.