2023 (7) TMI 746 - AT - Income Tax

TP adjustment - comparable selection - parameters of FAR analysis ie. Assets employed - HELD THAT - In the instant case the Assets employed by the assessee company in the form of Plant Machinery whereas the comparable viz. BVPL selected the Ld. TPO has employed Assets in the form of Plant Machinery. We are therefore of the considered view that based on one of the parameters of FAR analysis ie. Assets employed we hold that the comparable BVPL could not be a good comparable with that of the assessee company. Hence the TPO / Ld. AO is directed to exclude the entity BVPL from the final set of comparables while reworking the international transactions. DTE Exports Pvt Ltd. and Premier Tobacco Packers Private Limited - We find that the exports constitute only 3.74% of the total turnover and therefore the Ld. TPO / Ld. DRP considered the insignificant exports of DTE Exports Pvt Ltd. and rejected it as a comparable. DRP has considered the inclusion of Premier Tobacco Packers Private Limited which does not have any export turnover. TPO has not applied filter of minimum of 50% should be from exports turnover in the case of Premier Tobacco Packers Private Limited. While observing the inconsistency in the comparables selected by the Ld. TPO wherein Ld. DRP also affirmed the selection of Premier Tobacco Packers Private Limited we find that the same is not in accordance with Rule 10B(2)(d) of the Income Tax Rules 1962. Therefore we direct the TPO / Ld. AO to exclude Premier Tobacco Packers Private Limited as a comparable in determining the ALP of the assessee company. We noticed that the Ld. DRP has already excluded DTE Exports Pvt Ltd. based on the insignificant turnover and following the principle of consistency we confirm the same. Export incentives - treated as operating or non-operating income for the purpose of PLI computation - HELD THAT - Since the assessee has adopted TNM Method which was not disputed by the Revenue Net Profit is used as a bench mark for ALP computation. Rule 10B(1)(e)(ii) provides for computation of net profit margin in the uncontrolled comparable transactions whereas a net margin realized by the enterprise namely the tested party as well as the comparables the total income and expenditure of the business should be considered. It is also a general principle that all the subsidies / export incentives are factored by all the exporters while determining their sales price in the international market. We direct the Ld. TPO / Ld. AO to consider the export incentives as operating income while computing the PLI of the assessee. It is ordered accordingly.

Summary

Issues Involved:

1. Selection of Comparable Companies
2. Consideration of Export Incentives as Non-operating Income

Summary:

1. Selection of Comparable Companies:

The primary issue raised by the assessee concerns the inclusion of Bommidala Ventures Pvt Ltd (BVPL) and the exclusion of DTE Exports Pvt Ltd as comparables. The assessee argued that BVPL is functionally dissimilar as it is engaged in trading/export without employing significant assets, unlike the assessee who engages in manufacturing activities like threshing and redrying of unmanufactured tobacco. The Tribunal agreed with the assessee's argument, noting that BVPL's assets in the form of Plant & Machinery are significantly lower compared to the assessee. Therefore, the Tribunal directed the exclusion of BVPL from the final set of comparables.

Regarding DTE Exports Pvt Ltd, the Tribunal observed that the exports constitute only 3.74% of the total turnover, which led the TPO and DRP to reject it as a comparable. However, the Tribunal noted the inconsistency in the DRP's approach, as it included Premier Tobacco Packers Private Limited despite its NIL export turnover. Therefore, the Tribunal directed the exclusion of Premier Tobacco Packers Private Limited as a comparable while confirming the exclusion of DTE Exports Pvt Ltd based on its insignificant export turnover.

2. Consideration of Export Incentives as Non-operating Income:

The second issue pertained to whether export incentives should be treated as operating or non-operating income for the purpose of Profit Level Indicator (PLI) computation. The Tribunal found that Rule 10B of the Income Tax Rules, 1962, which provides the methodology for computation of Arm's Length Price (ALP), supports the inclusion of export incentives as operating income. The Tribunal cited various court decisions, including the Bombay High Court's ruling in CIT-2 vs. Welspun Zucchi Textiles Limited, which held that DEPB benefits are operating revenue. The Tribunal concluded that export incentives should be considered as operating income while computing the PLI of the assessee.

Conclusion:

The appeal of the assessee was partly allowed, with the Tribunal directing the exclusion of BVPL and Premier Tobacco Packers Private Limited from the final set of comparables and the inclusion of export incentives as operating income for PLI computation.