Assessee is KBS Creations
Assessee, a company engaged in gems and jewellery, primarily manufacturing and export of diamond-studded jewellery.
The assessee has one unit in a Special Economic Zone (SEZ) (SEEPZ-SEZ) claiming deduction under Section 10AA, and another unit outside the SEZ supplying diamonds to the SEZ unit.
For AY 2021-22, KBS Creations claimed a Section 10AA deduction after reporting an SDT with its AE. The AO referred the case to the TPO, who proposed a downward TP adjustment of about INR 11 crore (revised to ₹10.98 crore by the DRP). The key issue was whether an “arrangement” causing “more than ordinary profit” under Section 80IA(10) existed before the TP adjustment.
Assessee's Contentions | Revenue's Contentions | ITAT's Judgement |
|---|---|---|
TP proceedings were invalid as the AO failed to establish the required “arrangement” causing “more than ordinary profit” under Section 80IA (10). | Under the proviso to Section 80IA(10), profits from a reported SDT must be determined based on the arm’s length price. | The ITAT emphasized that Section 80IA (10) applies only if an arrangement designed to shift profits exists between the AE parties. |
Reporting an SDT in Form 3CEB doesn’t trigger Section 80IA (10) or justify direct TPO reference without meeting its conditions. | DRP upheld the AO’s decision to refer the case to the TPO, rejecting the assessee’s preliminary objection since SDT reporting signals TP risk. | A higher profit margin by itself cannot trigger the anti-abuse provisions without evidence of a deliberate arrangement. |
Consistent operating profits across years show no inflated or “more than ordinary” profit due to any arrangement. | TPO applied strict filters (turnover, export, RPT) for selecting comparables, which the DRP largely accepted. | TPO can determine ALP under Section 80IA (10) proviso for SDTs only if an arrangement is first established. |
TPO erred by rejecting the assessee’s arm’s length profits and using unsuitable comparables, resulting in an unrealistically low profit. | Internal comparables, such as the assessee’s own margins from later years, are not valid benchmarks for controlled transactions. | ITAT followed the jurisdictional High Court ruling in Schmetz India, which held that genuine extraordinary profits should not be penalized by reworking tax holiday claims. |
Mumbai ITAT ruled that a Transfer Pricing adjustment under Section 80IA (10) cannot be made without first establishing a specific "arrangement" between connected parties.
