TECH CLARITIES PRIVATE LIMITED,CHENNAI vs. ITO CORPORATE WARD 3(3), CHENNAI

The brief facts of the case are that the assessee, Tech Clarities Private Limited, formerly known as To Cheunglee Stationery Manufacturing Company Private Limited, is a private limited company engaged in the assembly and export of loose-leaf metal ring binder mechanisms, with its assembling facility at Tiruvallur, Tamil Nadu. For the year under consideration, the assessee filed its return of income declaring total income of Rs.1.45 crores. The case was selected for scrutiny and, since the assessee had entered into international transactions with its associated enterprises, the matter was referred to the Transfer Pricing Officer for determination of the arm's length price.

The Transfer Pricing Officer passed an order under section 92CA (3) of the Act dated 04 January 2025 proposing an upward transfer pricing adjustment of Rs.0.79 crores. Consequent thereto, the Assessing Officer passed a draft assessment order dated 21 January 2025 under section 144C (1) of the Act. The objections filed by the assessee before the Dispute Resolution Panel were disposed of by directions dated 28 October 2025, upholding the transfer pricing variation. The Assessing Officer thereafter passed the final assessment order dated 03 November 2025. Aggrieved, the assessee is in appeal before us.

At the outset, the Ld. Authorised Representative submitted that grounds of appeal Nos. 3 and 4, challenging the validity of the assessment proceedings as being barred by limitation, are not pressed. Accordingly, grounds of appeal Nos. 3 and 4 are dismissed as not pressed.

The remaining effective dispute in grounds of appeal Nos. 5 to 7 relates to the transfer pricing margin adjustment made in the manufacturing segment. The controversy is twofold: first, whether export incentives, stated to be in the nature of MEIS/government export incentives, are to be treated as operating income while computing the assessee's PLI and secondly, whether Welspun Steel Limited and Ganesh Foundry & Castings Limited are to be excluded from the list of comparables merely on the ground that they incurred losses in 2 out of 3 years selected for computing the weighted average margins.

The assessee for the relevant year had benchmarked its international transactions under the Transactional Net Margin Method by selecting itself as the tested party and by adopting operating profit to total cost as the profit level indicator. The assessee selected nine companies as comparables and arrived at an arm's length range of minus 0.53% to 2.09%. Since the assessee's margin was 1.35%, the transactions were considered to be at arm's length by the assessee.

The Transfer Pricing Officer rejected two comparables selected by the assessee, namely Welspun Steel Limited and Ganesh Foundry & Castings Limited, on the ground that they were loss-making, and recomputed the assessee's margin at 0.81% by treating export incentives as non-operating income. On this basis, the Transfer Pricing Officer adopted a set of seven comparables and arrived at an arm's length range of 1.28% to 1.95%, resulting in the impugned adjustment of Rs. 0.79 crores. The Dispute Resolution Panel upheld the Transfer Pricing Officer's action.

The Ld. Authorised Representative submitted that export incentives arise directly from export activity, support export pricing, and are ordinarily factored into commercial pricing by exporters. It was submitted that the incentives are intrinsically linked to the assessee's operating activity and therefore cannot be excluded while computing the PLI. Reliance was placed on the decisions of this Jurisdictional Bench in ZF Commercial Vehicles Control Systems India Ltd. (IT (TP) A Nos. 80 & 132/CHNY/2014). Greenland Exports Pvt. Ltd. (ITA No. 514/MDS/2016), and SAME Deutz Fahr-India Pvt. Ltd. (119) taxmann.com 401), wherein it was held that MEIS/export incentives cannot be excluded merely because some comparables may not have such incentives or may operate mainly in domestic markets.

The Ld. Authorised Representative further placed reliance on the decision of the Hon'ble Bombay High Court in CIT v. Welspun Zucchi Textiles Ltd., held that export incentives are to be included as operating income while computing operating margins. The Ld. Authorised Representative consequently submitted that the assessee's margin ought to be recomputed by treating export incentives as operating income. The Ld. Authorised Representative also submitted that once, the export incentives are treated as operating income and the PLI of the assessee is recomputed, the other grounds shall be academic.

The Ld. Departmental Representative, on the other hand, supported the orders of the lower authorities and submitted that the Transfer Pricing Officer and the Dispute Resolution Panel were justified in excluding export incentives from operating income.

We have heard the rival submissions and perused the material available on record. The first question for our consideration is whether export incentives are to be treated as operating income while computing the assessee's PLI. This Tribunal has considered an identical issue in the context of inclusion of DEPB/export incentives while computing operating margins in the following cases:

In the present case, the assessee has stated that the export incentive is in the nature of MEIS/government export incentive arising from the export activity of the assessee. The Transfer Pricing Officer has excluded the same from operating income on the ground that the selected comparables do not include such incentives. In our considered view, this reason by itself cannot justify exclusion of export incentives from operating income where the incentive is linked to the export activity and forms part of the operating results of the tested transaction. The comparability exercise under TNMM requires a commercial and operating comparison of margins. If export incentive is directly connected with the operating activity of the assessee, exclusion thereof would distort the operating margin of the tested party. Further, it may also be noted that the incentives received by comparable companies have been treated as operating income while computing the margins of comparable companies.

We therefore hold that the export incentives received by the assessee are to be treated as operating income for the purpose of computing the assessee's PLI. The Assessing Officer/Transfer Pricing Officer is directed to recompute the assessee's operating margin after inclusion of export incentives.

Accordingly, grounds of appeal Nos. 4 and 5 are allowed for statistical purposes with the above directions. The Assessing Officer/Transfer Pricing Officer shall recompute the arm's length margin by treating export incentives as operating income.

Ground No. 6 is rendered academic in view of our findings above. Since we have accepted the assessee's contention regarding inclusion of export incentives as operating income and directed re-computation of PLI of tested party, we do not consider it necessary to deal with the said ground separately and the same is left open.

In the result, the appeal of the assessee is partly allowed.

पवभागीय प्रयतयनधि/DR 5. गार्ड फाईल/GF Digitally signed K BABU by K BABU Date: 2026.08.13 13:06:44 +05'30'