Berry Ratio Transfer Pricing Jewellery Manufacturer ITAT Jaipur 2026

What Happened?

The Income Tax Appellate Tribunal (ITAT) Jaipur has delivered a major victory for a jewellery manufacturer by deleting transfer pricing (TP) adjustments totalling ₹105 crore for Assessment Year 2022-23. The tribunal rejected the application of the Berry ratio—a profit margin benchmark used by tax authorities—finding it unsuitable for full-fledged jewellery manufacturers engaged in genuine manufacturing operations. Additionally, the tribunal remanded the issue of receivables interest calculation and excluded transfer pricing adjustments from Minimum Alternate Tax (MAT) computation.

Background & Legal Context

What is Transfer Pricing and Berry Ratio?

Transfer pricing (TP) refers to the pricing of transactions between related parties—such as associated enterprises, subsidiaries, or group companies. Under Section 92 of the Income Tax Act 2025 (previously Section 92 of the 1961 Act), all such related-party transactions must follow the Arm's Length Principle (ALP). This means the price should be the same as what unrelated parties would charge in comparable circumstances.

The Berry ratio is a transactional net margin method (TNMM) that compares a company's operating profit margin to its total assets or sales. Tax authorities often use this method to benchmark profitability, especially for trading or distribution businesses.

Why Berry Ratio Was Applied Here

The Jaipur tax authority had applied the Berry ratio to the jewellery manufacturer, arguing that this method provided an objective benchmark for evaluating whether the company's profit margins were at arm's length. The authority used this ratio to propose significant upward adjustments, claiming the company's profits were below what comparable entities earned.

The ITAT's Key Finding

ITAT Jaipur held that the Berry ratio is not applicable to full-fledged manufacturing businesses. The tribunal reasoned that:

• Manufacturing entities have fundamentally different cost structures than trading or distribution entities
• The value addition in manufacturing makes simple margin-based benchmarks unreliable
• Berry ratio is primarily designed for businesses with minimal value-added functions
• A jewellery manufacturer's unique production processes, raw material quality control, and craftsmanship cannot be adequately captured by generic profit margin benchmarks

This judgment aligns with the Transfer Pricing Guidelines under Rule 10B of the Income Tax Rules 2025, which require selection of the most appropriate method based on the nature of the business and functions performed.

Receivables Interest and MAT Issues

The tribunal also remanded the assessment year 2022-23 receivables interest issue back to the tax authority, indicating that the calculation methodology needs reconsideration. Furthermore, the tribunal excluded the transfer pricing adjustments from MAT (Minimum Alternate Tax) computation, which is calculated under Section 115JH of the Income Tax Act 2025.

What Does This Mean for You?

For Jewellery Manufacturers

If you are a jewellery manufacturer with related-party transactions, this ruling provides significant relief:

• Berry Ratio Challenge is Now Weaker: Tax authorities cannot easily justify using Berry ratio to challenge your profit margins. If they attempt this in your case, you now have strong ITAT precedent to defend your position.
• Appropriate Method Selection: You should ensure your TP documentation uses more suitable benchmarking methods, such as Comparable Uncontrolled Price (CUP) method or Cost Plus method, depending on your specific functions and risks.
• Documentation is Critical: Detailed functional analysis showing your manufacturing functions, assets employed, and risks assumed becomes even more important to support method selection.
• MAT Impact: If you were facing additional tax burden due to TP adjustments being added to MAT computation, this ruling provides relief on that front as well.

For Trading Companies vs Manufacturers

It's important to note that this ruling is specific to full-fledged manufacturers. Trading companies, distributors, and entities performing minimal value-added functions may still face Berry ratio scrutiny. The distinction lies in actual manufacturing functions performed and value created.

For Related-Party Transactions

Whether you are buying from or selling to related parties, this ruling emphasizes that TP methods must match your business reality:

• If you are a toll manufacturer (contract manufacturing for others), your functions differ from an integrated manufacturer
• If you import raw materials from related parties and manufacture, your cost structure analysis becomes critical
• Documentation should clearly articulate the value chain and where value is added

Assessment Year 2025-26 and Beyond

For ongoing assessments in AY 2025-26 and AY 2026-27, this precedent will influence how tax authorities approach TP adjustments for jewellery manufacturers. However, authorities may still try different benchmarking methods or challenge the applicability of this ruling to your specific case, making robust TP documentation essential.

What Should You Do Now?

Immediate Action Items:

• Review Your TP Documentation: If you have a pending assessment with Berry ratio adjustments, engage a TP specialist to evaluate if this ruling applies to your case and prepare a strong contention.
• Amend Your Filing (if applicable): If you filed your return without proper TP documentation or with inadequate functional analysis, consider filing a belated return or application under Section 154 of the Income Tax Act 2025 for correction before the authority initiates reassessment.
• Strengthen Documentation: Even if you haven't been selected for TP scrutiny, maintain comprehensive TP documentation including:
  • Functional analysis (functions performed, assets employed, risks assumed)
  • Economic analysis and benchmarking study using industry-comparable data
  • Contemporaneous documentation as required under Section 92D of the IT Act 2025
• Ongoing Compliance: Ensure your TP documentation specifically addresses why Berry ratio or similar margin-based methods are unsuitable for your manufacturing business.
• Assess Receivables Interest Issue: With the tribunal remanding the receivables interest calculation, work with your auditor to ensure accurate interest computation for AY 2022-23 and apply the corrected methodology to subsequent years.

If You Are Under Assessment:

• Cite this ITAT Jaipur ruling in your response to the Assessing Officer
• Provide detailed functional analysis to distinguish your business as a full-fledged manufacturer
• If already assessed with Berry ratio adjustments, appeal before ITAT with reference to this judgment

Key Takeaways

• Berry ratio is not applicable to full-fledged jewellery manufacturers—ITAT Jaipur has clearly held that margin-based benchmarks are unsuitable for manufacturing businesses with genuine value addition.
• ₹105 crore TP adjustment deleted—This substantial relief demonstrates the importance of challenging inappropriate TP methods with proper functional analysis and legal precedent.
• Appropriate method selection is key—Use CUP method, Cost Plus method, or other TNMM methods suitable for manufacturers, backed by robust documentation under Section 92D.
• MAT computation relief—Transfer pricing adjustments need not inflate your MAT liability, as the tribunal excluded them from MAT calculation under Section 115JH.
• Strong precedent for AY 2025-26 and beyond—Jewellery manufacturers now have a powerful ITAT judgment to defend themselves against arbitrary Berry ratio adjustments in ongoing assessments.

Important Note: This ruling applies specifically to circumstances where a company is engaged in genuine, full-fledged manufacturing. If your business has mixed functions (manufacturing + trading) or if you are a toll manufacturer, the applicability may differ. Seek professional advice before relying on this judgment.

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