What You See isn’t What You Pay: ITAT Rules High Tag Prices in Jewellery is Sales Strategy, Not Tax Evasion, Deletes Addition [Read Order]

The Mumbai Bench of the Income Tax Appellate Tribunal ( ITAT ) has held that high/inflated “tag prices” displayed on jewellery items are part of a common sales and marketing strategy in the high-end jewellery business and cannot, by themselves, be treated as evidence of suppressed sales or tax evasion.

The fact is that the Income Tax Department relied on data extracted from “Cascade” software used by the assessee, Begani Jewels, for inventory management.

The Department compared the tag prices recorded in Cascade with the actual sale prices recorded in Tally, the accounting software, and alleged suppression of sales on the ground that jewellery was sold at prices far lower than the tag values.

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Based on this difference, additions were made under Section 28 of the Income Tax Act by estimating higher gross profit and treating part of the differential as unaccounted income.

The assessee explained that Cascade software was never used for accounting or financial reporting but only for inventory tracking, display pricing, and customer reference.

The tag price, it was argued, was an artificially inflated reference price fixed for marketing and negotiation purposes, while the actual sale price was always recorded in Tally after finalisation of the deal and issuance of a signed invoice.

According to the assessee, such pricing practices are widely prevalent in the luxury and diamond jewellery segment, where final prices depend on multiple factors including design, quality, customer profile, market trends, and negotiation.

The Tribunal noted that the Department did not find any material during search to establish that jewellery was actually sold at the inflated tag prices. Also, it depended on the valuation report prepared by the Department’s own registered valuer, which showed that the market value of jewellery stock was substantially lower than the aggregate tag prices recorded in Cascade. This, according to the ITAT, strongly corroborated the assessee’s explanation that tag prices were not realisable sale prices.

The ITAT also found fault with the Assessing Officer’s methodology of arbitrarily applying a 50% reduction to tag prices and treating the balance as suppressed sales. It observed that this approach led to absurd and commercially unrealistic results, with gross profit margins exceeding 40% on sales and nearly 70% on cost, figures which were completely inconsistent with industry norms.

Comparable data produced by the assessee showed average gross profit margins of around 13-16%, which the Tribunal found to be reasonable and aligned with disclosed results.

Further, the bench of Amit Shukla, Judicial Member and Girish Agrawal, Accountant Member pointed out that no enquiry was conducted from customers to verify the actual sale consideration, despite the Assessing Officer acknowledging that the assessee had a limited clientele.

It also noted that no undisclosed assets or incriminating material were found during the search which could support the allegation of large-scale suppression of sales.

The appellate tribunal said that the revenue cannot sit in the armchair of a businessman to decide pricing strategy and concluded that commercial decisions on pricing fall within the legitimate domain of business discretion.

In the absence of any evidence showing that sales were actually made at the inflated tag prices, the difference between reference prices and final sale prices could not be treated as undisclosed income.

Accordingly, the Tribunal deleted the entire addition sustained by the lower authorities and allowed the assessee’s appeals in full, while dismissing the Revenue’s cross-appeals.

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