Export incentives count as operating revenue in transfer pricing, and CSR-funded donations cannot be denied section 80G relief.

Export incentives under the Merchandise Exports from India Scheme and duty drawback income were treated as operating revenue for transfer pricing because they were directly linked to normal manufacturing and export operations, formed part of operating revenue in the accounts, and their exclusion would distort the profit level indicator; the adjustment was made in favour of the assessee. Working capital adjustment was also directed as necessary on the material already placed before the authorities to ensure a fair arm's length comparison. Deduction under section 80G was allowed because a donation made out of CSR expenditure cannot be denied on any restriction beyond the statutory exclusions expressly provided in the Act.

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Issues: (i) Whether export incentives received under the Merchandise Exports from India Scheme and duty drawback income constituted operating revenue for transfer pricing purposes; (ii) whether working capital adjustment was required while determining the arm's length price; (iii) whether deduction under section 80G could be denied merely because the donation was made out of corporate social responsibility expenditure.

Issue (i): Whether export incentives received under the Merchandise Exports from India Scheme and duty drawback income constituted operating revenue for transfer pricing purposes.

Analysis: The export incentives were directly linked to exports and were received in the course of normal business operations. They were treated as part of operating revenue in the audited accounts, and the receipts were used against customs duty on imports. Since the incentives were intrinsically connected with the manufacturing and export activity, excluding them would distort the operating profit level indicator. The income was also treated as business income under section 28 of the Income-tax Act, 1961, supporting its operational character.

Conclusion: The export incentives and duty drawback income were held to be operating revenue, in favour of the assessee.

Issue (ii): Whether working capital adjustment was required while determining the arm's length price.

Analysis: The working capital computation had been furnished before the lower authorities. On the material available, the adjustment was considered necessary to arrive at a fair comparison under the transfer pricing analysis. The adjustment was directed in line with the factual working already placed on record.

Conclusion: Working capital adjustment was directed to be granted, in favour of the assessee.

Issue (iii): Whether deduction under section 80G could be denied merely because the donation was made out of corporate social responsibility expenditure.

Analysis: Section 80G contains specific exclusions for certain CSR-linked contributions, and no broader prohibition was found that would deny every donation made through CSR channels. Since the statute itself specifies the disallowable CSR-linked donations, no additional restriction could be imposed beyond the text of section 80G. The donation otherwise satisfied the deduction framework under Chapter VI-A.

Conclusion: The deduction under section 80G was allowed, in favour of the assessee.

Final Conclusion: The appeal succeeded on the principal transfer pricing and deduction issues, with the impugned disallowance under section 80G deleted and the transfer pricing computation directed to be recomputed accordingly.

Ratio Decidendi: Export-linked incentives that are intrinsically connected with normal business operations are to be treated as operating revenue for transfer pricing, and deductions under section 80G cannot be denied by importing restrictions beyond those expressly provided in the statute.

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