The principle/conditions for using the Berry Ratio as a PLI are as follows:
1. Rule 10B(1)(e) does not disregard use of Berry Ratio as a Profit Level Indicator (“PLI”) , since as per the rule, the net profit released by an enterprise is computed in relation to cost incurred or sales affected or assets employed or to be employed or any having regard to any other relevant base. Therefore, if operating cost is considered as an appropriate base, there would be no difficulty in using Berry Ratio as the PLI in terms of the said rule;
2. Berry Ratio can be useful in situations where the value of goods have no role to play in the profits earned by an enterprise and that the profits so earned are directly linked with the operating expenditure incurred by the assessee.
3. Berry Ratio is most suitable in case of stripped down distributors , wherein the distributors have no financial exposure and risk in respect of the goods distributed by them;
4. Further, for Berry Ratio to be an effective PLI, the product mix of the assessee shall be similar to the product mix of the comparables.
5. Berry Ratio would not be appropriate in case where the assessee uses intangibles as a part of its business. In these cases the value of such intangibles would not be captured under the operating expenses of the assessee;
6. Berry Ratio would also not be appropriate to apply in cases where the assessee has made substantial investments in fixed assets since value added by such fixed assets does not get captured under operating expenses.