TaxTMI 
TaxTMI 
2026 (9) TMI 38
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....nder section 143(3) r.w.s. 144C(13) of the Act by learned Assessing officer (AO) is illegal and liable to be quashed as the same is passed beyond the statutory time limit prescribed under section 153 of the Act and hence barred by limitation. 3. On the facts and circumstances of the case, the learned AO/DRP has erred, both on facts and in law, in rejecting the contention of the assessee that he reference to the Transfer Pricing Officer (TPO) has been made without complying to the mandate of CBDT Instruction No. 3/2016 dated 10.03.2016 and provisions of section 92CA(1) of the Act 4. On the facts and circumstances of the case, the learned AO has erred, both on facts and in law in making the assessment at the income of the assessee at Rs. 19,09,20,975/- as against returned income of Rs. 8,68,44,307 1- declared by the assessee. 5. (i) On the facts and circumstances of the case, the learned AO/TPO has erred both on facts and in law in making the addition of Rs. 10,40,76,668/- on account of adjustment proposed by the TPO in respect of international transaction relating to 'Sale of Rice' made to the AE. (ii) That the abovesaid addition has been ....
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....rmining the arm's length price." 2. Grounds No.1 to 3 are general and not pressed at the time of hearing. Hence not adjudicated. 3. With regard to Grounds No.4 to 9, ld. AR of the assessee submitted the relevant facts and his submissions are as under. He submitted that the final assessment order dated 08.01.2026 passed by the Assessing Officer in pursuance of the directions issued by the Ld. DRP upholding the Transfer Pricing adjustment of Rs. 10,40,76,668/- proposed by the TPO, while rejecting the comparables selected by the assessee and introduced six fresh comparables for the purpose of benchmarking the international transaction entered into by the assessee with its Associated Enterprise during the year under consideration. 4. He submitted that the Ld. TPO erred in excluding Export Incentive and Cash Discount from operating revenue while determining the Arm's Length Margin Under TNMM and wrong selection of new comparables without conducting proper FAR Analysis (Functions performed, Asset employed and Risk assumed and wrong rejection of one of the comparables selected by the assessee namely 'Kothari Products Ltd' 5. In this regard, he submitted that the assessee ....
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....er Book Pages 3 to 46, Tax Audit Report also placed atPB Pages 47-75 and Transfer Pricing report in the Form 3CEB placed at Paper Book Pages 76-80. 9. He submitted that during the year under consideration, the assessee has entered into international transaction with its Associated Enterprise (AE) i.e., Saleh Abdulaziz Babaker Sons & Co. in the nature of sale of rice amounting to Rs. 276,84,54,517/-. He submitted that the assessee sells rice to its AE only, not to any outside party, and no 'cost of materials consumed' is incurred. He further submitted that the price of the sales made to the AE is determined on a case-to-case basis, taking the market conditions into consideration such as demand and supply functions. 10. He submitted that subsequently, the case of the assessee was selected for scrutiny under CASS and a statutory notice under Section143(2) of the Act was duly issued to assessee on 02.06.2023.Simultaneously, a reference was made by the AO to the Transfer Pricing Officer ('Ld. TPO') for the purpose of determination of arm length price u/s 92CA(3) in respect of international transactions undertaken by the assessee during the year under consideration and accordingly,....
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....t producing any contradictory material on record, the Ld. TPO straightaway issued show cause notice dated 27.12.2024 (placed at Pg 1148-1153 of PB), whereby he proposed to reject the PLI (OP/OC) of 2.25% adopted by the assessee. In response to this show cause notice, assessee filed reply dated 08.01.2025 (Pg 1154- 1194 of PB), submitting that TNMM with OP/OC as PLI was the most appropriate method and since the assessee's margin of 2.25% exceeded the comparables margin of 0.80%, thus, the transactions were at arm's length. 13. He submitted that however, ignoring the detailed submissions, the Ld. TPO concluded the TP proceedings vide order dated 24.01.2025, computing margin of assessee at 1.14%, placed at page 3 of TPO, that too was incorrectly computed by excluding export incentives of Rs. 88,81,830/- and cash discounts of Rs. 2,89,45,460/- from operating income. He submitted that the TPO, at page 3 of the order, stated that the assessee's margin is to be computed in accordance with Rule 10TA under the Safe Harbour provisions as per CBDT Notification No. S.O. 2810(E) dated 19.09.2013. Thereafter, at page 19 of the order, the Ld. TPO determined the OP/OC margin at 4.88% ba....
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....passed the final assessment order under section 143(3) read with section 144C(13) of the Act following the directions of the DRP and confirming the TP adjustment of Rs. 10,40,76,668/-.Now, aggrieved by the final assessment order passed by the AO dated 08.01.2026, assessee has raised the aforesaid grounds in the present appeal. 18. On the other hand, ld. DR of the Revenue brought to our notice page 3 of the TPO and detailed findings of TPO and DRP. Accordingly, he relied on the orders of lower authorities. 19. Considered the rival submissions and material placed on record. We observed that the assessee is purchasing basmati rice in the India to export the same based on the indent raised by the AE. Basically, the assessee is involved only in procuring the rice in India and exports the same to its AE. The assessee has risk of only transaction otherwise it is called trading risk. Since it is dealing with its wholly owned holding company, there is no financial risk also. Therefore, the TPO should have selected the comparables based on the above FAR. It is brought to our attention that the TPO had selected some of the comparables who are dealing in manufacturing activities whereas ....
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.....2025. placed at PB Pages 1154-1194, submittedthat the company is functionally dissimilar as it owns and operates world-class rice processing units and derives not only trading margins but also substantial milling/manufacturing margins. He submitted that the financial statements of the company reflect significant cost of materials consumed, comprising paddy, unprocessed rice and packing materials, which clearly establishes that the company is engaged in manufacturing/processing activities. He submitted that facts can be verified from Audited Accounts placed at PB pages2646-3056. (Relevant Pages 2707, 2749, 2803, 2809 and 2810) 24. Further, ld. AR submitted that the Ld. TPO rejected the assessee's contention at pages 16-17 of its order by observing that, as per the company's website, it is one of India's largest exporters of Basmati rice. The DRP also upheld the action of the Ld. TPO without appreciating that the company's status as a leading exporter does not alter the fact that it is predominantly engaged in manufacturing and processing activities. TANNA AGRO IMPEX PVT. LTD. 25. Ld. AR submitted that the Ld. TPO(at Pg 18 of its order) and ld. DRP(at Pg 14 ....
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.... He submitted that facts can be verified from Audited Accounts placed at PB pages 2223-2425. (Relevant Pages 2227, 2260, 2277, 2280, 2283, 2284, 2289). 29. He submitted thatfurther, the company has developed substantial brand value through its branded products, including rice, spices and atta, marketed under its own brands and sold through organized retail channels such as Walmart. In contrast, the assessee is a routine trader exporting rice to its AE based on purchase orders obtained from third-party vendors and does not own any brand or marketing intangibles. The presence of significant brand value and manufacturing operations materially distinguishes the company from the assessee and renders it unsuitable as a comparable. CHAMAN LAL SETIA EXPORTS LTD. 30. Ld. AR submitted that the Ld. TPO erred in retaining the aforesaid company as a comparable despite the specific objections raised by the assessee vide reply dated 08.01.2025 (Placed at PB Pages 1154-1194). He submitted that the company owns paddy milling and processing facilities, has substantial brand value and earns super-normal profits, thereby rendering it functionally incomparable to the assessee. The Ld. TPO reje....
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....essing activities. 35. He further submitted that the financial statements of the company reflect significant cost of materials consumed, while it owns paddy milling and processing units, thereby earning milling/processing margins in addition to trading margins. The company also enjoys substantial brand value and exceptional revenue growth, which materially distinguish its FAR profile from that of the assessee. He submitted that facts can be verified from Audited Accounts placed at PB pages 1262-1982 (Relevant Pages 1291, 1293, 1299, 1362, 1437, 1500, 1642, 1718, 1893, 1794, 1798, 1873 and 1874.)Accordingly, the inclusion of the aforesaid company in the final set of comparables is unjustified and deserves to be rejected. 36. With regard to ground no.8 regarding wrong rejection of comparables of assessee, namely, Kothari Products Limited, ld. AR submitted that TPO rejected this comparable of assessee on page 12 of TPO Order stating that 'since the company is involved into diversified business, it is not functionally similar to the assessee' and the same is also rejected by DRP on pages 22-23 stating the functional dissimilarity. 37. In this regard, he submitted that the Ld. ....
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....ludes the margins of above activities also. Whereas the assessee had declared the margins involved in trading activities only. We also observed that it has declared substantial amounts in cost of material consumed, it clearly indicate that it is involved in processing/manufacturing activities. Hence, it cannot be a comparable company to the assessee. c. With regard to Tanna Agro Impex P. Ltd, we observed that this company is involved in manufacturing of food products, similarly, it has claimed substantial cost of consumption of raw materials, hence, it also cannot be compared with the assessee for the reasons of risk profile like assets employed on manufacturing activities, business risks, financial risks, finally it showed up in the abnormal profit declared by them. d. With regard to GRM Overseas Ltd, we observed that this company also engaged in processing and milling of rice, declared substantial amount in raw material consumptions, hence, it is also different from the FAR employed by the assessee. This also cannot be a comparable company. e. With regard to Chaman Lal Setia Exports Ltd, we observed that this company also employs different FAR as simila....
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.... The Panel notes that the contentions of the assessee regarding inclusion of export incentive and other income in operating revenue and the consequent computation of OP/OC margin are not found tenable. The TPO has examined the computation of operating margins of both the assessee and the comparable companies. It is observed that the operating margins have been computed strictly in accordance with the CBDT Notification No. SO 2810(E) dated 19.09.2013 issued under the Safe Harbour provisions of the Income-tax Rules. As per the said notification, only those incomes which pertain to the normal operations of the business are to be considered as operating revenue. Certain categories of income which are non-operating in nature and have no direct nexus with the operational activities are required to be excluded. Accordingly, incomes such as interest, dividend, gains on sale of assets or investments, income from investments, revaluation gains, provisions written back and other incomes not pertaining to operations are excluded from operating revenue." 43. At the outset, he brought to our attention to the relevant portion of Rule 10TA CBDT Notification No. SO 2810(E) d....
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....TA by the DRP was incorrect and further observed that even under the definition contained in Rule 10TA,export incentives and cash discounts, being derived from normal business operations, constitute operating revenue: Export Incentives "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 "the revenue earned by the assessee in the previous year in relation to the international transaction during the course of its normal operations but not including the following, namely (vii) other incomes not relating to normal operations of the assessee". From this definition it is clear that an income to form part of operating income it should be derived from normal operations. Undoubtedly in the instant case, the export incentive is derived during the course of normal operations." Cash Discount "We agree in principal that cash discount ought to be treated as operating revenue and observation of the DRP by placing reliance on Rule 10TA of Safe Harbour Rules is not correct. In fact, even as per the definiti....
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.... / discount income, incentives and insurance claim as operating income for the purpose of computing operating margin. * ITAT Vishakhapatnam in the case of Alliance One Industries India Pvt. Ltd. vs DCIT, Circle-1(1), Guntur 2023 (7) TMI 746 * ITAT CHENNAI in the case of M/s. Hyundai Wia India Pvt. Ltd Versus The DCIT, Corporate Circle-1 (1), Chennai. 2026 (4) TMI 1294, Dated:- December 30, 2025 * M/s. AB INBEV GCC Services India Pvt. Ltd., (earlier known as GCC Services India Pvt. Ltd.) Versus The Deputy Commissioner of Income Tax, Circle 3 (1) (1), Bangalore., 2023 (2) TMI 1160 - ITAT BANGALORE, Dated:- February 2, 2023 48. He submitted that moreover, Audited Financial Statement of assessee placed at PB page 3-46, relevant page 33 and 41 showing other income of Rs. 506.59 lakhs comprising interest income of Rs. 164.74 lakhs, cash discount of Rs. 289.46 lakhs, export incentive/sale of license of Rs. 88.82 lakhs and foreign exchange fluctuation loss of Rs. 36.42 lakhs. Significantly, while computing its operating margin, the assessee itself excluded interest income of Rs. 164.74 lakhs,(clearly evident from computation placed at PB Page 139)being admitte....