ITAT Allows KBS Creations’ Appeal, Rules No Transfer Pricing Adjustment Without Proved ‘Arrangement’ Under Section 80IA(10) [Read Order]

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has set aside a transfer pricing (TP) adjustment of Rs. 10.98 crore and ruled that the Assessing Officer (AO) failed to establish an arrangement between the assessee and its associated enterprise (AE) as required under Section 80IA(10) of theIncome Tax Act, 1961.

Are You GST Compliant? Get the Clarity You Need on RCM - Click here

KBS Creations (assessee) a firm engaged in the manufacture and export of diamond-studded jewellery, faced scrutiny for Assessment Year (AY) 2021-22. The assessee operates a unit in the Santacruz Electronics Export Processing Zone-Special Economic Zone (SEEPZ-SEZ) which claimed a deduction under Section 10AA.

The AO referred the case to the Transfer Pricing Officer (TPO) due to reported Specified Domestic Transactions (SDTs) with its AE, alleging that the transactions resulted in more than ordinary profits.

The TPO, applying the Transactional Net Margin Method (TNMM), suggested a downward adjustment of Rs. 11.62 crore on jewellery sales to the AE, later revised to Rs. 10.98 crore after the Dispute Resolution Panel (DRP) directed the exclusion of a loss-making comparable, Neysa Jewellery Limited.

The AO added Rs. 10.98 crore to the assessee’s taxable income and rejected the assessee’s computation of revised taxable income at Rs. 56.80 crore after adjusting the Section 10AA deduction.

Aggrieved by the AO’s order, the assessee filed an appeal to the ITAT. The assessee argued that Section 80IA(10) requires the AO to demonstrate a close connection and an arrangement with the AE that produces more than ordinary profits, which the AO failed to establish.

The assessee further contended that its operating profit of 10.02% in AY 2021-22, consistent with 11.95% in AY 2022-23 and 10.58% in AY 2023-24 (when no Section 10AA deduction was claimed), indicated no extraordinary profit.

The assessee claimed the AO ignored DRP directions to recompute the Section 10AA deduction, instead making a direct addition to taxable income.

The two-member bench, comprising Pawan Singh (Judicial Member) and Girish Agrawal (Accountant Member), observed that Section 80IA(10) mandates evidence of an arrangement between the assessee and its AE to justify TP adjustments.

The tribunal observed that the AO’s reference to the TPO lacked any demonstration of such an arrangement, rendering the TP proceedings invalid. The tribunal further held that higher profits alone do not imply an arrangement, and the TPO’s benchmarking without satisfying this precondition was unsustainable.

The tribunal quashed the TP adjustment and affirmed that the assessee’s reported income and Section 10AA deduction were valid. The appeal of the assessee was allowed.

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates