TaxTMI 
TaxTMI 
2025 (11) TMI 1983
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....ination of Arms Length Price (ALP) with reference to the transaction reported by the assessee. 3. The assessee in its TP study had aggregated the international transactions and benchmarked them at entity level by applying Transactional Net Margin Method (in short 'TNMM'). The assessee is noted to have computed its margin at 5.17% and the seven (7) comparables identified had margin in the range of 5.12% to 11.98%. The TPO vide his order dated 05.07.2023 accepted the selection of TNMM method as the most appropriate method and also acceded to the PLI adopted by the assessee. The TPO however was not agreeable to the manner of computation of 'operating profits'. According to the TPO, the 'Export Incentives' were non-operating in nature and therefore excluded the same from the computation of PLI. Accordingly, the TPO reworked the margin of the assessee at 3.06%. The TPO also rejected the search conducted as per TP study report and performed a fresh search and included 4 additional comparable companies while retaining 6 comparable companies of Assessee, totaling to ten (10) comparable companies and arrived at the markup range of 8.41% to 12.57% with a median of 10.23%. While computing ....
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....er Margin adjustment Rs. 53,07,28,841/- Rs. 37,48,27,690/- Interest on outstanding receivables Rs. 18,52,12,670/- Rs. 21,70,47,093/- Total Rs. 71,59,41,511/- Rs. 59,18,74,783/- 6. Thereafter, the AO passed the final assessment order u/s. 143(3) r.w.s. 144C(13) r.w.s. 144B of the Act on 02.07.2024 making total TP adjustment to the tune of Rs. 59,18,74,783/-. Aggrieved by the aforesaid action of the AO, the assessee is in appeal before us. 7. We first take up the issue relating to primary transfer pricing adjustment of Rs. 37,48,27,690/- At the outset, the Ld.AR of the assessee submitted that, if Ground Nos. 2.6 & 2.7 are decided in assessee's favour, then the transfer pricing margin adjustment of Rs. 37,48,27,690/- shall stand vacated as the margin(s) would be within the arm's length range. Hence, with the consent of both the parties, we take up these grounds first. In order to adjudicate the same, we, first of all, reproduce Ground No.2.6 which reads as under: 2.6 The AO/DRP erred in law and facts by considering the export incentive as non-operating while computing the margins of the Appellant and the comparable companies. 8. Assailing t....
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....o him, though it is not possible to provide a direct correlation of such incentives with the actual pricing of the goods sold to its customers, but it is implied principle that, the quantum of incentives would eventually be reflected in the pricing of the transaction or cost of the transactions and thereby, the overall profitability. The Ld. AR relied on the following case laws wherein export incentives were treated to be operating item. 1. ZF Rane Automotive India Private Limited v. DCIT [2025] 177 taxmann.com 442 (Chennai - Trib.) 2. ZF Commercial Vehicle Control Systems India Ltd., v. DCIT IT(TP)A Nos.: 50 & 132/Chny/2024 3. Greenland Exports Pvt Ltd v. DCIT [2017] 88 taxmann.com 988 (Chennai - Trib.) 4. CIT v. Welspun Zucchi Textiles Ltd., [2017] 77 taxmann.com 137 (Bombay)/ [2017] 245 Taxman 132 (Bombay) 5. AB INBEV GCC Services India Pvt. Ltd v, DCIT [2023] 149 taxmann.com 452 (Bangalore - Trib.) 10. Per contra, the Ld. DR for the Revenue supported the order of the 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....
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....features of operating revenue. Only because some of the comparables operated only in domestic markets or had minimal exports cannot justify the TPO's action of excluding the MEIS receipts from the operating revenues of the assessee. Rather, considering the terms of the scheme and having regard to the fact that this incentive is directly linked with all exports, irrespective whether made to AEs or non-AEs, there is merit in the assessee's plea that, this incentive would impliedly be inter alia reflected while pricing the transaction or ascertaining the cost of exports and thereby the overall profitability from exports. Hence, we are of the view that the exclusion of such export incentive from operating revenues would distort the operating profits of the assessee company. In our considered view therefore, the lower authorities were unjustified in treating the export incentives earned by the assessee under the MEIS Scheme to be non-operating in nature. Our view is ably supported by the decision of the coordinate Bench in the case of ZF Rane Automotive India Private Limited v. DCIT (supra) rendered on similar facts and circumstances, wherein the incentives received in relation to expor....
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....idered by DRP and also emphasised by Ld DR in the case of Goodyear India Ltd (supra), the issue was whether export incentive and rebate should 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. Apparently, the issue for consideration in the aforesaid case is different from the issue under consideration. Therefore, the decision of Goodyear is distinguishable on facts. Our view is also supported by the jurisdictional Tribunal decision in the case of Greenland Exports (P.) Ltd. (supra) wherein it was held that export incentives and duty drawback are considered to be operating in nature. Relevant extract of the ruling is provided below: "We have perused the orders and heard the rival contentions insofar as duty drawback and export incentives are concerned, the cases relied on by the ld. AR do support Assessee's case. As for the case of Goodyear India Ltd (supra) relied on by the Assessing Officer, the issue was whether export incentive and rebate could be reduced from cost of goods. What was held was that such incentives were available ....
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....panies selected by the Assessee in its TP documentation, the Assessee has computed the margins after considering the miscellaneous expense as operating in nature. The TPO however treated the Miscellaneous Expenses as a Non-Operating item, but excluded the same only while computing the margins of comparable companies and not the PLI of the assessee. Though the DRP in principle upheld the TPO's action of treating Miscellaneous Expenses as a Non-Operating item, but as a matter of parity, directed that miscellaneous expenses ought to be excluded from the computation of the PLI of the assessee as well. Now the issue before us is whether the miscellaneous expenses is operating or non-operating in nature. 17. Assailing the action of the TPO/DRP, the Ld.AR submitted that miscellaneous expenses are typically incurred during regular business operations by every company. He explained that, several regular business expenses with small value which are below the materiality threshold are grouped together and reported by way of miscellaneous expenses. Since they support day-to-day functioning of the assessee, the Ld. AR claimed that it aligns with the definition of operating expenses. Accordin....
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....ompanies. Relevant para of the order is produced below: "47. Ground no. 6: The main contention of department is that ld. CIT(A) had concluded that misc. income and misc. expenses were operating profits without verifying their nature. We find that ld. CIT(A) has observed in regard to misc. income that the same pertained to income from other sources and the misc. income was included as part of operating profit in the case of comparable company. Therefore, there could not be any prejudice to revenue on this count. As regards misc. expenses, ld. CIT(A) has observed that the same included a multitude of expenses that were too small in value. But since they pertained to the operations of the company, they were treated as operating expenses for both the tested party as well as the comparable companies. The TP analysis, as we have earlier observed, is not an exact science and we have to arrive at reasonable conclusions which would not materially affect the profit margins. Therefore, we do not find any reason to interfere with the finding of ld. CIT(A) on this count. In the result ground no. 6 is dismissed". 9.4. In view of our above discussions/observation and the judicia....
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....s for both the tested party as well as the comparable companies. The TP analysis, as we have earlier observed, is not an exact science and we have to arrive at reasonable conclusions which would not materially affect the profit margins. Therefore, we do not find any reason to interfere with the finding of Id. CIT(A) on this count. In the result ground no. 6 is dismissed". 14.0 We have noted the facts of the present case are akin to those available in judicial precedence discussed herein above and no distinguishment could be made. Accordingly, in respectful compliance to the same, we are of the considered view that miscellaneous expense ought to be considered as part of "operating expense" of comparable companies. The impugned allowance is also permissible in view of its treatment in earlier years in conformity with principles of consistency. Accordingly, we remit the matter to the Ld. TPO with the direction to redetermine the margin of the comparable companies after including the same. Accordingly, the grounds of appeal Nos. 2.16 to 2.17 are allowed for statistical purposes." 21. Following the above decisions (supra), we hold that miscellaneous expense ought to be consi....
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....t by way of interest on overdue receivables at Rs. 18,52,12,670/- by adopting LIBOR + 350 bps @ 5.818% after giving a credit period of '30' days. The DRP is noted to have rejected the objections raised by the assessee and in principle concurred with the TPO's findings. Having regard to the foreign currency risk borne by the assessee, the DRP directed further markup of 100 bps and thereby, the interest on outstanding receivables stood increased to Rs. 21,70,47,093/-. 25. Aggrieved, the assessee is before us. 26. At the time of hearing, the Ld. AR submitted that, if the primary transaction of manufacturing and export/sales is at arm's length under TNMM, then there is no necessity to separately benchmark the underlying transaction of outstanding receivables as the underlying transaction gets automatically subsumed and forms an inseparable part of primary transaction. For this, he relied on the decision of this Tribunal in the case of Gimpex (P.) Ltd. vs. ACIT [2021] 124 taxmann.com 618 (Chennai - Trib.). The Ld. AR additionally also brought to our notice that, the Assessee has not charged interest on outstanding receivables from Non-AE's wherein the weighted average credit perio....
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....ties, perused the material available on record and gone through the orders of the authorities below. There is no dispute with regard to the fact that receivables is included under the definition of international transactions by amending section 92B by the Finance Act, 2012 w.e.f. 01.04.2002. Therefore, we are of the considered view that there is no merit in the arguments advanced by the assessee that receivables is not international transactions. As regards benchmarking international transactions, once the assessee has adopted TNMM as most appropriate method, whether separate adjustment is required to be made in respect of receivables or not has been the subject matter of deliberations by the co-ordinate Bench of the Tribunal in assessee's own case for the assessment year 2014-15 in IT(TP)No. 57/Chny/2018, where the Tribunal after considering relevant facts has held that once TNMM method is considered as the most appropriate method, the net margin worked out thereunder could take care of all such notional interest cost, wherever it could be imputed and there could be no arm's length price adjustment for any overdue receivables. The Bench has also observed that once there is complet....