Capital subsidy under Maharashtra PSI held non-taxable; TP adjustment limited to manufacturing segment international transactions under TNMM

ITAT Pune held that subsidy of Rs. 89.73 crore received under the Maharashtra PSI scheme was a capital receipt, linked to setting up industrial units in less developed areas, and therefore not chargeable to tax for AY 2014-15. As a corollary, the subsidy was excluded from operating revenue for determining ALP under TNMM for the Manufacturing segment. The Tribunal further upheld the DRP's view that customs duty differences could not justify reducing comparables' margins absent evidence of different duty rates. In transfer pricing, Bharat Earth Movers Ltd. was excluded from the comparables following earlier precedent, while JCB India Ltd. was retained. The AO/TPO was directed to restrict TP adjustment only to international transactions in the Manufacturing segment.

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Issues Involved:
1. Transfer pricing adjustment in the Manufacturing segment.
2. Treatment of subsidy received as a revenue receipt.
3. Impact of excess Custom Duty on operating margin.
4. Inclusion of Bharat Earth Movers Limited and JCB India Limited in the list of comparables.
5. Transfer pricing adjustment on an entity level vs. proportionate adjustment.

Detailed Analysis:

Transfer Pricing Adjustment in the Manufacturing Segment:
The primary issue revolves around the transfer pricing adjustment of Rs. 37,42,31,420/- in the Manufacturing segment. The assessee, a wholly-owned subsidiary of Hyundai Korea, engaged in manufacturing and trading of excavators, reported various international transactions. The Transfer Pricing Officer (TPO) excluded a subsidy of Rs. 89.73 crore from operating revenue, considering it an extraordinary item, which led to the adjustment. The Dispute Resolution Panel (DRP) upheld this exclusion and treated the subsidy as a revenue receipt. The Tribunal, however, determined the subsidy to be a capital receipt, not chargeable to tax, and thus, should not be included in the operating revenue for determining the Arm's Length Price (ALP).

Treatment of Subsidy Received as a Revenue Receipt:
The subsidy under the Package Scheme of Incentives (PSI) from the Government of Maharashtra was treated by the assessee as part of operating revenue and offered for taxation. The Tribunal analyzed the nature of the subsidy, considering it as a capital grant aimed at industrial growth in less developed areas. The Tribunal concluded that the subsidy was a capital receipt, not chargeable to tax, and thus, should not form part of the operating revenue for ALP determination.

Impact of Excess Custom Duty on Operating Margin:
The assessee argued for considering the impact of excess Custom Duty on imports while computing the operating margin from Manufacturing operations. The Tribunal noted a similar issue had been decided against the assessee in a previous assessment year, holding that profit margins of comparables cannot be reduced by differences in Custom Duty rates, as there was no evidence of such differences. Thus, this ground was dismissed.

Inclusion of Bharat Earth Movers Limited and JCB India Limited in the List of Comparables:
The TPO included Bharat Earth Movers Limited and JCB India Limited in the list of comparables. The Tribunal, following its previous decision, directed the exclusion of Bharat Earth Movers Limited from the list of comparables. However, it upheld the inclusion of JCB India Limited, consistent with the prior year's decision, dismissing the assessee's objection.

Transfer Pricing Adjustment on Entity Level vs. Proportionate Adjustment:
The assessee contested the transfer pricing adjustment on an entity level, advocating for a proportionate adjustment. The Tribunal, aligning with its earlier decision, directed the AO/TPO to restrict the transfer pricing adjustment to the extent of international transactions under the Manufacturing segment.

Conclusion:
The appeal was partly allowed, with the Tribunal ruling that the subsidy should be treated as a capital receipt, not chargeable to tax, and excluded from operating revenue for ALP determination. The Tribunal upheld the exclusion of Bharat Earth Movers Limited from comparables but retained JCB India Limited. The transfer pricing adjustment was directed to be restricted to international transactions under the Manufacturing segment. Other grounds were deemed either consequential or premature.

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