ACIT, MUMBAI vs DNJ CREATION LLP, MUMBAI

PER PAWAN SINGH, JUDICIAL MEMBER;

This appeal by revenue and cross-objection therein by assessee are

directed against the order of ld. CIT(A)-56, Mumbai dated 11.04.2025for

A.Y. 2017-18. The revenue has raised following grounds of appeal:

“1. Whether on the fact and circumstances of the case and in law, the Ld. CIT(A) is erred in not appreciating the selection of functionally similar comparables as that of the assessee by the Ld.TPO based on the TNMM Method and considering jewellery division as tested party as the assessee failed to provide actual details of profit margin of Diamond division.

2 Whether on the fact and circumstances of the case and in law, the Ld.CIT(A) is erred by relying on the stand of the transfer pricing officer in assessee's own case in AY 2022-23, without appreciating the fact that each

ITA No. 4329/Mum/2025 & C.O. No. 270/Mum/2025 DNJ Creation LLP

year's transfer pricing proceeding is distinct and based on the facts and circumstances on that year only.

Whether on the fact and circumstances of the case and in law, the Ld.CITT(A) is erred by relying on the stand of the transfer pricing officer in assessee's own case in AY 2022-23, without appreciating the fact that transfer pricing officer had specifically mentioned in his order that findings and discussions made here applicable only for this assessment year being referred, i.e.. for AY 2017-18 and also the fact that documentation, benchmarking and profit margins earned by the assessee during AY 2022-23 differed from preceding years.

The appellant craves, leave to amend or alter any grounds or add a new ground which may be necessary.”

On receipt of memorandum of appeal of Revenue, the assessee has filed

its C.O. raising following grounds:

“1. The Hon'ble CIT(A) erred in not adjudicating on the issue of upward adjustment made in the assessment order u/s 143(3), where the alleged extraordinary profits have been attributed to the entire year, including the period from April 01, 2016 to September 28, 2016, when the Appellant was not in existence. The learned AO/TPO had no jurisdiction, territorial or otherwise, over the predecessor entity, which was a private limited company. Consequently, both the Transfer Pricing order u/s 92CA(3) and the consequential addition in the assessment order u/s 143(3) are untenable and unsustainable in law.

The Hon'ble CIT(A) erred in not adjudicating on the issue where the learned AO/TPO wrongly applied the differential OP/OR margin of 8.76% (11.70% minus 2.94%) on the entire operating revenue of INR 124,23,52,396/- instead of restricting the adjustment only to the specified domestic transactions of INR 26,53,96,346/-

In the facts and circumstances of the case and in law, the Hon'ble CIT(A) erred in not holding that the learned AO/TPO wrongly worked out the adjustment at INR 10,88,13,111/-, whereas on the correct computation it could not have exceeded INR 2.54,07.011/-.

In the facts and circumstances of the case and in law, the Hon'ble CIT(A) erred in not holding that the learned AO/TPO erred in straightaway enhancing the total income of the Appellant by INR 10,88,13,111/- on account of TP adjustment u/s 92CA(3), instead of recomputing the

ITA No. 4329/Mum/2025 & C.O. No. 270/Mum/2025 DNJ Creation LLP

deduction u/s 10AA of INR 7,97,59,044/-legitimately allowable to the LLP for the period September 28, 2016 to March 31, 2017.

In the facts and circumstances of the case and in law, the Hon'ble CIT(A) erred in not appreciating that the learned TPO wrongly determined an upward adjustment u/s 92CA at INR 10,88,13,111/-, which exceeds the 10AA deduction claimed of INR 7,97,59,044/-as addition if any, in any case, should be restricted to the amount of 10AA deduction claimed.

The appellant craves leave to add, amend, alter and/or delete any of the grounds of cross objection before or during the course of appeal.”

Perusal of record shows that there is delay of about 50 days in filing cross-

objection by assessee. For seeking condonation of delay in filing C.O., the

assessee has filed affidavit of Rajnikant Jhaveri. In the affidavit, it is stated

that he is instructing counsel of assessee. The learned Authorised

Representative (ld. AR) of the assessee submits that notice of Revenue’s

appeal was received to assessee on 15.07.2025 and the present C.O. was

filed only on 03.10.2025, thus, there is delay of 50 days. The delay in filing

C.O. is neither intentional nor deliberate but due to the reasons that

instructing counsel was facing heart related ailment. In the month of

September, the said person was hospitalised. In the meantime, his sister,

Jyotsna Kothari was also hospitalised. Further, in last week of September,

his sister in law was died. Thus, due to such circumstances, he could not

take necessary step for preparation and filing the cross-objection. The ld.

AR of the assessee prayed for condoning the delay in filing his CO.

On the other hand, the learned Senior Departmental Representative (ld. Sr.

DR) for the Revenue after going through the contents of affidavit and

various medical prescriptions attached thereto, would submit that bench

may take appropriate decision on the plea of assessee.

ITA No. 4329/Mum/2025 & C.O. No. 270/Mum/2025 DNJ Creation LLP

Considering the submissions of both the parties and material placed before

us, we find that delay in filing C.O. is not intentional or deliberate. Thus,

delay in filing such C.O. is condoned. Now, adverting to merits of the case

in accordance with various grounds of appeal raised by respective parties.

Now adverting to the merits of the case.

We have heard the submissions of both the parties on merits and have

gone through the orders of lower authorities carefully. With the consent of

parties, the ld AR of the assessee begins with his submissions. The learned

AR of the assessee while explaining brief background of the case submit

that assessee is LLP engaged in the business of trading in cut and polished

diamonds as well as manufacturing of diamond jewellery. The assessee

has been converted from Private Limited Company to LLP with effect from

28th September 2016. Thus, during the relevant previous year that is from

1stApril 2016 to 27thSeptember 2016 business was carried out by the

Private Limited Company and from 28thSeptember to 31stMarch 2016 the

business was carried out by the assessee i.e. DNJ Creation LLP. The

assessee has a manufacturing unit in special economic Zone (SEZ) being

SEEPZ, Mumbai, wherefrom it carries out activities of manufacturing of

diamond jewellery, which is exported out of India. This unit, being situated

in SEZ is eligible for deduction under section 10AA of the Act the said

jewellery manufacturing unit has entered into transaction of purchase of

cut and polished diamond from its own diamond division i.e. its own

associated enterprises (AE) and secondly from others which are non-

associated enterprises. As the assessee is claiming deduction under section

ITA No. 4329/Mum/2025 & C.O. No. 270/Mum/2025 DNJ Creation LLP

10AA of the Act, its transaction of purchase of cut and polished diamond

from its diamond division qualifies for Specified Domestic Transaction

(SDT) and accordingly transfer pricing regulations are applicable to the

transaction. The assessee has benchmarked its transaction of purchase

and cut polished diamonds by manufacturing unit from Leima dividend for

the purpose of transfer pricing evaluation under the act. The assessee

adopted transaction that margin method. However there is difference of

opinion in respect of such evaluation leading to transfer pricing adjustment

of ₹ 10.38 crore, which is the subject matter of dispute in the present

appeal. The dispute basically arising on account of three issues; No. 1

selection of tested party, which is subject matter of ground No. 1 to 3

revenue’s appeal and No. 2 considering transaction of the DNJ creation

Private Limited while benchmarking transaction of assessee, which is

ground No. 1 of assessees cross objection and thoroughly calculation of TP

adjustment, which is subject matter of ground No. 2 to 5 of assessee’s

cross objection.

Against the ground No. 1 to 3 of reminder grounds of appeal, the assessee

submitted that jewellery manufacturing unit situated in special economic

zone, which is eligible unit, has purchased cut and polished diamond from

the diamond division of assessee. Dispute in respect of specified domestic

transaction of purchase of cut and polished diamonds by you jewellery

manufacturing division from diamond division. The Department seeks to

treat the jewellery manufacturing division as a tested party is whereas

assessee maintained that diamond division is the appropriate tested party.

ITA No. 4329/Mum/2025 & C.O. No. 270/Mum/2025 DNJ Creation LLP

The ld. A.R. of the assessee fairly submits that if assessee succeeded on

this ground that is if domestic diamond trading unit is accepted as a tested

party, there would not be any transfer pricing adjustment and all other

grounds of appeal and the Department grounds of appeal would become

academic. The working of arm’s length price considering diamond division

as a tested party is provided as per the detailed working on factual paper

book at page No. 137-139, which shows that sales made by diamond

division to jewellery manufacturing division is at arm’s length price.

Optionally, in TPS, the assessee has taken jewellery division as a tested

party. Subsequently, during the course of TransferPricing proceedings, the

assessee has rectified its error and considered the diamond division as the

tested party because the same is the least complex in the transaction

chain. The assessee also submits that margin of the diamond division with

comparable the company is engaged in diamond business. The profit level

indicator being OP/OC of the diamond division are above the profit level

indicator of the range of comparable companies establishing that no profit

had been transferred to the jewellery unit on the specified domestic

transaction. The assessee made a prior to TPO to consider the diamond

division as the tested party and allowing to specified domestic transaction

which was indeed purely the purchase of cut and polish diamonds. The

TPO rejected the plea and proceeded by comparing the jewellery division

margin with the jewellery manufacturing companies for benchmarking

diamond purchases. The ld. A.R. of the assessee retreated that taking of

diamond division as a tested party, which is released complex entity for the

ITA No. 4329/Mum/2025 & C.O. No. 270/Mum/2025 DNJ Creation LLP

regions that under transfer pricing jurisprudence a functional as analyses

of the primary determinant for identifying the least complex entity. The

tested party must be the participant whose asset, risk and functions are

most easily identifiable and standard. The diamond division (DTA Unit)

operates as a straightforward procurement and sorting hub. Its activities

are simply buying, assortment and sales. It has a very modest asset base

consisting of his small tools it has a modest workforce performing routine

sorting and sales function. Thus the diamond division represents the least

complex party in the inter-unit transaction. While explaining functional

profile of jewellery manufacturing division (SEZ/eligible unit), is an eligible

unit is an intricate manufacturing segment. It contains a narrow and

complexity, driven by multi-disciplinary operations and high-technology

assets. Unlike the trading unit, the manufacturing process is labour-inte, it

involves creative and technical planning utilising both manual artistry and

advanced software. This is followed by creation of manual design

concepts. This design is converted into precise 3D digital model using auto

CAD software. Thereafter, a resin piece is generated from the digital

design. Finally, a master model usually in silver or copper is created from

the design. After the design is created, complex process of mould making

follows. Thereafter a complicated jewellery manufacturing process follows

in the SEEPZ manufacturing unit of the assessee. The jewellery division

utilises Auto CAD software, 3D resin printers (CAM) and metallurgical

casting equipment. It also uses heavy machinery like Ledger machines

casting machine and XRF testers and specialised labour. At the end the

ITA No. 4329/Mum/2025 & C.O. No. 270/Mum/2025 DNJ Creation LLP

jewellery is checked for quality and thereafter exported after packing.The

whole process require experienced and technical persons. This division’s

profit is driven by intangible heavy design and precision metallurgy,

making it inherently more complex and difficult to benchmark reliably. So

far as legal justification for least complex entity rule is concerned, transfer

pricing principal mandate that tested party be the entity with the simplest

functional profile. Comparison between the two divisions is stock: the

diamond division is a procurement and sorting hub whereas value is a

standard, whereas the jewellery division is a precision manufacturer where

value is driven by creative design and complex metallurgy. Further

benchmarking the SEZ Unit of what requires identifying comparable with

identical design capabilities and manufacturing technology, and exercise

prone to extreme volatility and error. Conversely, the diamond division

profit driven are easily verified against external market that. On the basis

of aforesaid submission, the ld. A.R. of the some assessee submits that

diamond division is a least complex which is suitable tested party. Most

importantly assessment year 2022- 23, the assessee in its TP study report

itself considered the diamond division as the tested party and compare the

same with similar diamond business companies to benchmark the diamond

purchases made by the jewellery division, such reporters available at page

No. 155 of paper book. This was accepted by TPO while passing transfer

pricing order for assessment year 2022- 23. The facts and the business

model in both the year that is in the year under consideration and in

subsequent year are identical with no change whatsoever in function

ITA No. 4329/Mum/2025 & C.O. No. 270/Mum/2025 DNJ Creation LLP

assets employed or risk assumed. The TPO has erred in completely

ignoring the benchmarking done by the assessee taking diamond division

as a tested party. TPO refuse to consider the analyses given by the

assessee on the ground that assessee himself has taken the jewellery

manufacturing unit as tested party, in para 5.6 of his order the TPO noted

that assessee itself conducted a transfer pricing study and selected

comparable based on functional similarity. The ld. A.R. of the assessee

submits that ld. CIT(A) rightly observed in para 6.1 of his order that

assessee has considered the least complex or simple entity which is

diamond trading unit as tested party. The ld. A.R. of the assessee while

supporting the order of ld. CIT(A) is would submit that selection of

diamond division as the tested party may be upheld and Transfer Pricing

addition may be declared to be uncalled for.

In support of his C.O., the ld. A.R. of the assessee submits that assessee is

LLP and has been converted from a private limited company with effect

from 28thSeptember 2016. Thus during the relevant previous year, from

1stApril 2016 to 27th September 2016 business was carried out by the DNJ

Creation Private Limited that his predecessor. During the year under

consideration, the predecessor prepared its own separate financial, and

filed return of income for the period from 1stApril 2016 to 27th September

2016 and its own PAN declaring income of ₹53,14,440/-. In similar

manner, assessee prepared separate financials and filed return of income

for the period 28thSeptember 2016 to 31stMarch 2017 under its own PAN

declaring income at ₹ 1,59,21,340/-. Both the entities filed their own

ITA No. 4329/Mum/2025 & C.O. No. 270/Mum/2025 DNJ Creation LLP

separate TP report and forms 3CEB. The respective assessing officer

selected the cases for scrutiny by issuing notice under section 143(2) and

subsequently also made their separate TP references. Thereafter, TPO also

passed separate TP orders, copy both the TP orders is placed on record.

However, the TPO of the assessee considered the transaction of private

limited company also filed the computing TP adjustment in the hands of

assessee. Thereafter, a separate assessment order under section 143(3) of

the Act was passed for Private Limited Company on 31stMarch 2021

accepting the return income with Nil addition, assessment order is placed

on record. Separate assessment order was passed for the assessee LLP on

14.06.2021 making addition on account of TP adjustment suggested by

TPO. The TPO effectively merged references originated from two different

circles/ wards by passing single order under section 92 CA(3) under PAN

LLP, the TPO exercised jurisdiction over the predecessor (private limited

company) without the authority to blend its financial into the successors

assessment order. Such exercise is unknown to the law and needs to be

quashed. The TPO received two distinct references from two separate

assessing officers belonging to different circles, yet choose to ignore these

statutory boundaries to pass a single order. The TPO/AO has assessed the

income/margin of predecessor company (DNJ creation private limited) in

the hands of successor (DNJ Creation LLP) for the period prior to the

existence of the LLP. The TPO/AO has legally erred by aggregating the

transaction of two distinct assessable entities to determine the arm’s

length price and tax liability in a single assessment order. The TPO

ITA No. 4329/Mum/2025 & C.O. No. 270/Mum/2025 DNJ Creation LLP

committed a fundamental error by confusing the succession provision of

section 170 of the act with clubbing provision of chapter V (section 60 to

65). Chapter V provides for clubbing of income of one assessee with

another (transfer of income without transfer office asset), which is not

applicable in the present case. Further, Chapter-XV (section 159-170)

provides the mechanism for assessment in case of succession. Section

170(1)(a) of the Act mandates that predecessor shall be assessed in

respect of income up to the date of succession, in the name of successor

in a representative capacity, it dictates that the predecessor is liable up to

the date of succession and the successor thereafter. It does not permit a

‘rolling assessment’ where distinct income is blended to determined profit

margins. The TPO has not only clubbed income but also considered the

transaction of Private Limited Company to determine the profit margin and

TP adjustment amount of LLP which is legally impermissible. The

predecessor entity was separately assessed and the assessee was not in

existence for the period from 1sr April 2016 to 27th September 2016, the

addition related to the private limited company in the hands of assessee -

LLP is viod ab initio. To support his submission, the ld A.R. of the assessee

relied upon the following decisions;  Motor Sales versus CIT (230 ITR 44) (All),  City Gold Education Research Ltd Vs DCIT (ITA No. 1699/Mum/2023),  Manish Tyagi Vs ITO,( ITA No. 5548/Del/2015),  Kalptaru Project International Limited Vs DCIT (ITA No. 5961/Mum/2025.

ITA No. 4329/Mum/2025 & C.O. No. 270/Mum/2025 DNJ Creation LLP

In support of ground No. 2 to 5 of CO, the landed A.R. of the assessee

submits that in case the assessee succeeds on the issue of domestic

diamond trading unit to be taken as tested party, there would not be any

transfer pricing adjustment and all other grounds of assessee’s including

other submission would become academic. The ld A.R. of the assessee

further submitted that TPO/AO erred in applying the differential margin of

8.76% (difference between assessee is 11.70% and TPOs 2.94%) on the

entire operating revenue of jewellery division. The transfer pricing

provisions under Chapter X apply only to specified domestic transaction.

The TPO has no jurisdiction to proposed as adjustment on transactions

with unrelated third party. To support such submission, the ld A.R. of the

assessee relied upon the following decisions;  CIT versus Alston Project India Ltd (394 ITR 141 ),  CIT versus Bhansali & CO. (94 taxmann.com552) (Bombay),  DCIT versus Spicer India Ltd (458 ITR 40)(Bombay) 10. The ld AR of the assessee further submits that SDT value (purchase of

Diamond from DTA unit by the manufacturing unit of LLP) it only of ₹

26.53 crore, not Rs. 124.23 crore. TPO calculation of 8.76% on Rs. 124.23

crore amounting to ₹ 10.88 crore is erroneous. The correct calculation,

even if TPO’s margin is applied should be limited to the variation in the

purchase price of SDT. The landed A.R. of the assessee further submitted

that AO is straightaway added the TP adjustment of ₹ 10.88 crore to the

total income and full to recompute the eligible deduction under section

10AA of the act. It is well established that any adjustment to the

consideration of a specified domestic transaction must lead to a

ITA No. 4329/Mum/2025 & C.O. No. 270/Mum/2025 DNJ Creation LLP

corresponding re-computation of profit linked deduction. The landed A.R.

of the assessee after reading Section 10AA and section 80-IA(8) and

80IA(10) would submit that the plain reading of the provisions clearly

suggests that where inter-unit or related party transactions resulted in

inflated profit of an eligible undertaking, the statue mandates a fresh

computation of profit solely for the purpose of deduction. The adjustment

mechanism operates only for the purpose of eligible profit and,

consequently to the quantum of deduction under section 10AA. It does not

authorise and independent addition to the taxable income. An upward TP

adjustment in purchase implies that the ‘profit of the business’ for the

eligible SEZ unit have decreased. Consequently, the statutory deduction

under section 10AA of the act must be calculated on this decreased profit

base. The deduction of ₹ 7.97 crore claimed for the period from 28

September 2016 to 31 March 2017 must be recalculated based on these

enhanced market value purchases. On rectifying the aforesaid errors, the

correct transfer pricing adjustment and consequential correct adjustment

to purchase from AE for recalculating deduction under section 10 AA would

be left to Rs.2.54 crore.

11.

On the other hand, the ld Sr -DR for the revenue supported the order of

TPO/AO. In support of various grounds of appeal raised by revenue the ld

Sr-DR for revenue submit that CIT(A) failed to appreciate that the

assessee in its TPSR itself considered jewellery division as tested party.

The assessee failed to provide actual details of profit margin of Diamond

division. Further, the CIT(A) erred in relying on the stand of TPO in

ITA No. 4329/Mum/2025 & C.O. No. 270/Mum/2025 DNJ Creation LLP

assesses own case for AY 2022-23, without appreciating the fact each year

transfer pricing proceeding is distinct and based on the facts and

circumstances of that year only. On various grounds of appeal raised by

assessee in its CO, the ld Sr-DR for the revenue supported the order of

TPO /AO. The ld CIT-DR for the revenue also relied on the decision of

Mumbai Tribunal in DCIT Vs Dharmanandan Diamonds Pvt Ltd ( in ITA No.

4232/Mum/2019 dated 19.05.2022.

12.

We have considered the rival submissions of the parties and have gone

through the order of lower authorities. We find that before us, the landed

A.R. of the assessee, though vehemently argued various points on

different issues, however he fairly submits that in case Diamond division

that is DTA unit is considered/ accepted as a tested party,all other issues

will become academic. We find that in subsequent assessment year, the

TPO himself accepted the DTA unit as tested party in his order dated

27.01.2025, copy of which is already placed on record at page no. 229-230

of paper book. Otherwise, such facts are not in dispute. We further find

that, during TP proceedings, the assessee rectified its error and made a

prayer to treat Diamond division as tested party as the same is least

complex in the transaction chain. We also find merit in the submission of ld

A.R. of the assessee that it is a settled position in transfer pricing

regulations that a functional analysis is the primary determination for

identifying the least complex entity. The tested party must be participant

whose assets employed, risk assumed and the functions performed are the

most easily identifiable and standard.

ITA No. 4329/Mum/2025 & C.O. No. 270/Mum/2025 DNJ Creation LLP

13.

We find that Hon’ble Calcutta High Court in PCIT Vs Almatis Alumina (P)

Ltd (2022) 137 taxmann.com 202( Cal) held that Indian transfer pricing

guidelines issued by the Institute of Chartered Accountant of India wide

guidance note on report under section 92E by ICAI and transfer pricing

guidelines issued by OECD do not prohibited foreign AE to be a tested

party, therefore, where assessee company was a more complex entity

when compared to its foreign AE, said foreign AE could be selected as a

tested party. The Mumbai Tribunal in DCIT versus Inventors Knowledge

Solution (P) limited (2022) 145 taxmann.com 514(Mumbai-Trib) also held

that companies whose functions are less complex in nature, does not own

any intangible generally and whose results can be verified by using reliable

database should be taken as a tested party. Further, Mumbai Tribunal in

ISS Facility Services India(P) Ltd (2022) 141 taxmann.com 185(Mumbai

tribunal) also held that there is no bar in treating foreign AE as a tested

party, only condition is that tested party should be least complex entity.

Now coming to the case in hand. We find that the diamond division unit of

assessee is least complex entity as its activities are mainly buying,

assortment and sales, it has a very modest assessed base consisting of

modest workforce and performing routine sorting and sales functions. Such

party has been accepted by TPO himself in subsequent assessment year

for AY 2022-23.

14.

We find that the ld CIT(A) while allowing relief to the assessee clearly held

that DTA unit is accepted by TPO as tested party in AY 2022-23, thus, we

have no hesitation to confirm the order of CIT(A).The decision relied by ld

ITA No. 4329/Mum/2025 & C.O. No. 270/Mum/2025 DNJ Creation LLP

Sr DR for the revenue in The ld Sr -DR for the revenue also relied on the

decision of Mumbai Tribunal in DCIT Vs Dharmanandan Diamonds Pvt Ltd

(supra) has no application on the facts of present case. In the said case

the issued was related to deleting the penalty levied under section 271G.

In the result, grounds of appeal raised by revenue are dismissed.

15.

Considering the fact that we have dismissed all the grounds of appeal

raised by revenue thus the various grounds of appeal raised by assessee in

its CO has become academic and are dismissed as such.

16.

In the result, appeal of revenue is dismissed and cross-objection of

assessee is also dismissed as infructuous.

Order was pronounced in the open Court on 13/02/2026.

Sd/- Sd/-

GIRISH AGRAWAL PAWAN SINGH ACCOUNTANT MEMBER JUDICIAL MEMBER

MUMBAI, Dated: 13/02/2026 Dragon/Biswajit

Copy of the order forwarded to: (1) The Assessee; (2) The Revenue; (3) The PCIT / CIT (Judicial); (4) The DR, ITAT, Mumbai; and (5) Guard file. By Order

Assistant Registrar ITAT, Mumbai

ACIT, MUMBAI vs. DNJ CREATION LLP, MUMBAI