ITAT Jaipur rules berry ratio inapplicable for transfer pricing in jewellery manufacturing

The Jaipur bench of the Income Tax Appellate Tribunal (ITAT) delivered a ruling regarding transfer pricing, determining that the berry ratio is inapplicable to a jewellery manufacturing enterprise. The tribunal evaluated the operational profile of the taxpayer, which is engaged in the creation and production of jewellery items, and concluded that standard intermediary metrics do not fit actual manufacturing activities. No specific section numbers, dates, or numerical threshold amounts are stated in the source text. The berry ratio, defined as the ratio of gross profit to operating expenses, is typically deployed to evaluate the profitability of trading or distribution entities that do not perform significant manufacturing operations or add substantial value through production.

Under established transfer pricing principles, taxpayers engaged in genuine manufacturing undertake considerable operational risks, deploy capital assets, and transform raw materials, thereby requiring a distinct profit-level indicator rather than a distributor-focused metric. The old administrative practice of uniformly applying intermediary benchmarks to all business models has faced judicial pushback, as authorities now must align benchmarks with the actual functional profile, assets, and risks of the tested party. Tax professionals and chartered accountants representing manufacturing clients should review benchmarking studies to ensure that inappropriate profit-level indicators are excluded from transfer pricing documentation.

Practitioners must verify whether current audits rely on distributor-focused ratios for producers and prepare strong functional and economic analyses to challenge misapplied metrics. Watch for subsequent jurisdictional rulings regarding manufacturing benchmarks, and ensure compliance documentation accurately reflects the distinct nature of production activities to protect clients from arbitrary transfer pricing adjustments.