TaxTMI 
TaxTMI 
2026 (4) TMI 1294
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....rounds are consequential and would become academic if the principal issues are decided in favour of the assessee. 4. The Assessee has raised the following Grounds of Appeal. 1. Rejection of Transfer Pricing (TP) documentation of the Appellant on account of application of filters for selection of comparable companies by the Appellant. 2. The TPO rejected the transfer pricing documentation maintained by the Appellant and undertook fresh search to identify new comparable companies and erred in confirming the order of TPO in selecting Talbros Engineering Limited and Adroit Industries Limited without appreciating the fact that the said companies are functionally dissimilar. 3. The AO/DRP erred in law and facts by confirming the order of TPO in considering the export incentive and duty drawback income - Merchandise Exports from India Scheme (MEIS) scrip income as non-operating income while computing the margins of the Appellant. 4. Rejection of depreciation cost claimed by the Assessee pertaining to assets installed in 5th phase expansion project as extra ordinary expense. 5. The AO/ DRP having admitted the additional grounds on working cap....
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....76%) and the median of comparable companies (i.e. 5.66%). The TPO vide order dated 22.02.2023 determined the quantum of adjustment at Rs. 8,17,27,919/-. A draft assessment order dated 25.09.2023 was passed by the Assessing Officer incorporating the TP adjustment. The Assessee filed its objections before the DRP, along with additional ground on working capital adjustment. The DRP issued directions dated 20.06.2024 upholding the action/order of the TPO rejecting the additional ground. Aggrieved by the final assessment order, the Assessee has preferred the above appeal before us. 8. The Ld. AR placed on record ground-wise chart and advanced arguments by referring to the findings of lower authorities. Our attention has been drawn to various documents as placed in paper book, case law compendium and the extract of annual report of comparable companies. The Ld. CIT-DR also advanced arguments and supported the findings of TPO / DRP. Having heard rival submissions and upon perusal of case records, our adjudication is as under. The core issues which fall for our primary consideration are: a) Treatment of export incentives as operating income while computing the margin of Assesse....
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.... lower authorities. He submitted that, the MEIS incentive was not directly linked with the operations of the assessee but only the exports and therefore it was rightly excluded from computation of operating margin. He pointed out that several comparables had not earned any such export incentive and therefore inclusion of the same in assessee's PLI would give skewed results. The Ld AR also countered this by taking us through the paper book submitted with details of export revenue and export incentive received by those comparable companies. 13. We have heard both the parties and perused the material on record. It is seen that, the assessee was in receipt of MEIS scrip income of INR 6.24 crores and duty drawback income of INR 4.16 crores under the Scheme of Government of India which was reported as part of the operating revenues in the audited financial statements of the assessee. The assessee is noted to have considered this government incentive as an operating item of income for arriving at its PLI i.e. OP/OC. Though MEIS scrip income and duty draw back income are provided by the Government of India emanates from two separate Act i.e. from the Foreign Trade Policy and the Cus....
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....mited v. DCIT (supra) rendered on similar facts and circumstances, wherein the incentives received in relation to exports were held to be item of operating nature. The relevant portion of the judgment is as under :- " .... whether an income is operating or non-operating would be heavily dependent upon the character of such income and its proximity to the normal business operation. Viewed from this angle, we feel that both the export incentives are intertwined with the core operation of manufacturing and export as the entitlement of such incentive is wholly on manufacturing and export. In fact, Section 28 of the Act, specifically states that these export incentives will chargeable to tax as "profits and gains of business or profession", accordingly taking a cue from the corporate tax provisions, it could be safely inferred that export incentives are operating in nature. Further, the Act does not provide any specific definition of the specific term "operating income". Therefore we refer to other related Enactments/Rules to decipher the meaning of the aforesaid term. In this regard, the Safe Harbour Rules 10TA(1)(i) defines "operating revenue" in an inclusive manner to mean "....
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....ther export incentive and rebate could be reduced from cost of goods. What was held was that such incentives were available to an Assessee only after the exports were made and therefore, could not go to reduce the cost of goods. In the cases relied by the Assessee, it has been uniformly held that such incentives were to be considered as a part of operational income under TNM method while working out the margin of an Assessee for comparability. hence we set aside the orders of the authorities below on this issue and direct the Assessing officer/TPO to rework the results of the Assessee after considering the above terms as operational in nature." Similarly, the co-ordinate Bench of this Tribunal in the case of ZF Commercial Vehicle Control Systems India Ltd. (supra), has also held that export incentive ought to be treated as "operating revenue" while computing the margins of the tested party (i.e. Assessee therein). The relevant extract of paragraph 44 of the order of this Tribunal is reproduced below: "44. We have heard the rival contentions, and we find that the issue of considering the incentives / grants as part of the operating income for computing the margin e....
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.... and referred to the working capital adjustment PLR of 12.26% with the comparables current assets being sundry creditors, sundry debtors and inventories at Page 42 and supported working capital adjustment of comparables company based on the financial statements. The Ld. DR relied on the order of TPO and prayed for no adjustment is required. Considering the facts and material on record the financial statements and the paper book, there is necessity for working capital adjustment and accordingly we remit the issue to the file of AO to consider the material for fresh consideration. 5.3 By giving effect to the order of the ITAT, vide order dated 28.10.2018, the TPO had examined and allowed the benefit of working capital adjustment. Thus, respectfully following the above decision of the Coordinate Benches of the Tribunal, for the assessment year under consideration also, we direct the Assessing Officer to give suitable adjustment against the working capital component while determining the ALP." 17. Per contra, the Ld DR also placed reliance on a decision of Chennai ITAT in the case of Mobis India Ltd. v. Dy. CIT [2013] 38 taxmann.com 231/[2014] where the decision was based o....
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.... the attendant conditions. 21. The Assessee placed reliance on the following decisions to support its arguments: M/s. FNF India Private Ltd v. The ACIT, Circle 3(1)(1), Bengaluru in ITA No. 1565/Bang/2019 and Allegis Services (India) Pvt. Ltd. v. ACIT in ITA No. 1693/Bang/2019 22. The Ld AR further contended that there is no specific exclusion for expenditure on CSR activities under section 80G of the Act. As per section 80G of the Act, restriction is placed only for specific donations such as Swachh Bharat Kosh [Sec 80G(2)(iiihk)] and Clean Ganga Fund [Sec 80G(2)(iiihl)], provided if it has been spent in pursuance to CSR activities. Hence, only those contributions made in pursuance to CSR activities to the above-mentioned funds would not qualify for deduction u/s 80G of the Act. This is not the case with any donations made to funds or institutions covered under section 80G(2)(iv) and hence, all donations made to such institutions or funds are allowable whether spent through CSR or otherwise. The Ld AR has placed its reliance on the following decisions: i.) M/s. Source Hov India Private Limited v. The DCIT, Corporate Circle- 6(2) Chennai in ITA No.2454/Chny/....