Transfer pricing comparables, operating foreign exchange gain, no section 14A disallowance without exempt income, and 35(2AB) relief.

Transfer pricing comparability was tested on a 1:10 turnover filter, which the Tribunal upheld as a valid comparability tool, and Action Construction Equipment Ltd. was directed to be included because it met the filter and no functional dissimilarity was shown. Foreign exchange gain was treated as operating income following the assessee's own case. No disallowance under section 14A read with Rule 8D was sustained because no exempt income was earned, and the Finance Act, 2022 amendment was held not to apply retrospectively. Deduction under section 35(2AB) could not be denied merely for non-issuance of Form 3CL where the R&D facility was approved and the expenditure was otherwise eligible.

---

---

Issues: (i) Whether the turnover filter and comparable-company selection in the transfer pricing analysis were proper, including exclusion of certain comparables and inclusion of Action Construction Equipment Ltd.; (ii) whether foreign exchange gain was to be treated as operating income; (iii) whether disallowance under section 14A could be made in the absence of exempt income; (iv) whether deduction under section 35(2AB) could be denied for want of Form 3CL.

Issue (i): Whether the turnover filter and comparable-company selection in the transfer pricing analysis were proper, including exclusion of certain comparables and inclusion of Action Construction Equipment Ltd.

Analysis: The Tribunal upheld application of the 1:10 turnover filter as a valid means of improving comparability and rejected the challenge to exclusion of the smaller-turnover comparables. The ground against introduction of two comparables was not pressed. As to Action Construction Equipment Ltd., the Tribunal found that it satisfied the turnover filter, no reasons had been given for its exclusion, and no material was shown to establish functional dissimilarity.

Conclusion: The turnover filter was sustained, and Action Construction Equipment Ltd. was directed to be included in the comparable set; the transfer pricing issue was partly decided in favour of the assessee.

Issue (ii): Whether foreign exchange gain was to be treated as operating income.

Analysis: The Tribunal followed the coordinate bench decision in the assessee's own case and treated foreign exchange gain as operating in nature.

Conclusion: The foreign exchange gain was held to be operating income, in favour of the assessee.

Issue (iii): Whether disallowance under section 14A could be made in the absence of exempt income.

Analysis: The Tribunal noted that no exempt income had been earned during the year and held that, in such circumstances, no disallowance under section 14A read with Rule 8D could be sustained. It also held that the amendment brought in by the Finance Act, 2022 did not apply retrospectively to the year under appeal.

Conclusion: The section 14A disallowance was deleted, in favour of the assessee.

Issue (iv): Whether deduction under section 35(2AB) could be denied for want of Form 3CL.

Analysis: The Tribunal held that once the research and development facility stood approved and the expenditure was otherwise eligible, the deduction could not be denied merely because Form 3CL was not issued by the DSIR. Reliance was placed on judicial authority recognising that the assessee should not suffer for the authority's failure to certify the expenditure in time.

Conclusion: The disallowance under section 35(2AB) was deleted, in favour of the assessee.

Final Conclusion: The appeal succeeded on the substantial issues concerning transfer pricing comparables, treatment of foreign exchange gain, section 14A disallowance, and weighted deduction for in-house R&D, resulting in partial relief to the assessee.

Ratio Decidendi: A comparable may be excluded or included in transfer pricing only on a reasoned functional and economic analysis, no disallowance under section 14A is permissible where no exempt income is earned, and deduction under section 35(2AB) cannot be denied merely for non-issuance of Form 3CL when substantive eligibility is otherwise established.

---