Tribunal rules on exclusion of companies and treatment of export incentives for Profit Level Indicator

The Tribunal partially allowed the assessee's appeal by directing the exclusion of Bommidala Ventures Pvt Ltd and Premier Tobacco Packers Private Limited from the comparable companies. Additionally, the Tribunal ruled that export incentives should be considered as operating income for Profit Level Indicator computation, in line with Rule 10B of the Income Tax Rules and relevant court decisions.

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Issues Involved:

1. Selection of Comparable Companies
2. Consideration of Export Incentives as Non-operating Income

Summary:

1. Selection of Comparable Companies:

The primary issue raised by the assessee concerns the inclusion of Bommidala Ventures Pvt Ltd (BVPL) and the exclusion of DTE Exports Pvt Ltd as comparables. The assessee argued that BVPL is functionally dissimilar as it is engaged in trading/export without employing significant assets, unlike the assessee who engages in manufacturing activities like threshing and redrying of unmanufactured tobacco. The Tribunal agreed with the assessee's argument, noting that BVPL's assets in the form of Plant & Machinery are significantly lower compared to the assessee. Therefore, the Tribunal directed the exclusion of BVPL from the final set of comparables.

Regarding DTE Exports Pvt Ltd, the Tribunal observed that the exports constitute only 3.74% of the total turnover, which led the TPO and DRP to reject it as a comparable. However, the Tribunal noted the inconsistency in the DRP's approach, as it included Premier Tobacco Packers Private Limited despite its NIL export turnover. Therefore, the Tribunal directed the exclusion of Premier Tobacco Packers Private Limited as a comparable while confirming the exclusion of DTE Exports Pvt Ltd based on its insignificant export turnover.

2. Consideration of Export Incentives as Non-operating Income:

The second issue pertained to whether export incentives should be treated as operating or non-operating income for the purpose of Profit Level Indicator (PLI) computation. The Tribunal found that Rule 10B of the Income Tax Rules, 1962, which provides the methodology for computation of Arm's Length Price (ALP), supports the inclusion of export incentives as operating income. The Tribunal cited various court decisions, including the Bombay High Court's ruling in CIT-2 vs. Welspun Zucchi Textiles Limited, which held that DEPB benefits are operating revenue. The Tribunal concluded that export incentives should be considered as operating income while computing the PLI of the assessee.

Conclusion:

The appeal of the assessee was partly allowed, with the Tribunal directing the exclusion of BVPL and Premier Tobacco Packers Private Limited from the final set of comparables and the inclusion of export incentives as operating income for PLI computation.

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