TURBO ENERGY PVT. LTD.,CHENNAI vs. DCIT, LARGE TAX PAYER UNIT 1, CHENNAI

आदेश /O R D E R

PER S. R. RAGHUNATHA, AM:

This appeal filed by the assessee is directed against the final assessment order dated 28.10.2024 passed u/s.143(3) r.w.s. 144C (13) r.w.s. 144B of the Income Tax Act, 1961 (hereinafter the ‘Act’) for the Assessment Year (AY) 2021-22 in pursuant to the direction of the Dispute Resolution Panel-2, Bengaluru vide order dated 11.09.2024.

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parts in after sales market. The Company has manufacturing plant in Pulivalam Village, Vellore district, Tamil Nadu with the facility to manufacture a wide range of turbo chargers for engine applications in passenger car and commercial vehicles off-highway vehicles and industrial engines. The Company is also having a fully automated plant at Payyanur near Chennai and an assembly plant at Baroda.

Sr.no. Head of Adjustment Amount (in Rs.) 1 Upward adjustment towards margin earned from Rs.11,72,92,000/- manufacturing segment 2 Upward adjustment towards interest on overdue receivables Rs.39,26,981/- Total Rs.12,12,18,981/-

5.1 For the impugned AY, the assessee had undertaken manufacturing activities, in relation to which the assessee had entered into certain international transactions with its Associated Enterprises (‘AEs’). The Assessee had adopted “TNMM” as the most appropriate method for benchmarking the international transaction and the Assessee had reported a margin of 8.21% vis-a-vis 8 comparable companies’ margin at 3.78%. The TPO has accepted the methodology adopted by the Assessee i.e. TNMM. However, the TPO has

:-3-: ITA. No: /Chny/ tweaked the margins of the Assessee/comparable companies by excluding certain incomes/ expenses and also by including/excluding certain comparable companies. Accordingly, the TPO has determined the margin of the Assessee to be at 6.68% against 8 comparable companies’ margin of 10.19% to 15.37% with a median of 11.93%. Since the Assessee margin did not fall within the range, the TP adjustment was proposed on the difference between the margin of the Assessee (i.e. 6.68%) and the median of comparable companies (i.e. 11.93%). The TPO vide order dated 20.10.2023 determined the quantum of adjustment at Rs.11,72,92,000/-. A draft assessment order dated 22.12.2023 came to be passed by the AO incorporating the TP adjustment. The Assessee filed its objections before the DRP, which issued directions dated 11.09.2024 upholding the action/order of the TPO. Aggrieved by the final assessment order, the Assessee has preferred the above appeal before us.

Ground No.2: Incorrect PLI computation by TPO of assessee and comparables:

5.2 The Ld.AR for the Assessee contended that the TPO did not consider the computation of PLI of the assessee as well as the comparable companies nor did the TPO give reasons or basis for calculation undertaken by him. Further the TPO has merely stated that certain expenses were non-operating, and the Assessee did not provide breakup of these expenses and therefore the TPO considered the same as non-operating expenses. Apart from this the Ld.AR contended that the Assessee has provided a detailed submissions with financials showing the correct percentages as per Rule 10 CA and accordingly the 35th percentile is at 4.81% and 65th percentile is 7.62% and the median is at 7.02% which would warrant no TP adjustment as this transaction would be at arms length. The next contention of the assassee in relation to the PLI is that even with TPS exclusion of miscellaneous expenditures for the comparable and the assessee, the margins of the assessee will be at arms length as the margins of the assessee will be at 12.31% which is higher than the mean value of the

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comparable companies [refer page 8 and Annexure 1 of paper book]. The last contention in relation to the PLI computation is that the TPO erred in treating the export incentive as non-operating. In this regard, the Ld. AR has relied on 3 decisions: 1. The Chennai Tribunal in ZF Rane Automobile India Private Limited v. DCIT in IT(TP)A No.53/Chny/2024 dated 04.08.2025 2. The Chennai Tribunal in M/s.Greenland Exports Private Limited v. DCIT ITA No.514/Mds/2016 dated 21.09.2016 3. The Hon’ble High Court of Bombay in CIT V. Welspun Zucchi Textiles Limited (2017) 292 CTR (Bom) 1

5.3 Per contra, the Ld. DR relied on the orders of the DRP and TPO and prayed that the PLI computation undertaken is reasonable and on the basis of the information available in public domain and therefore the same need be interfered with at this stage.

5.4 We have heard the rival contentions and submissions and considered the material on record and gone through the orders of the authorities. The ld.DRP has held that since the Assessee has not given the breakup of the miscellaneous expenses, the TPO would not be able to analyse and therefore the stand taken by the TPO was upheld in the absence of breakup and insofar as the export incentive is concerned DRP has rejected the contention of the taxpayer without providing any specific reasons. The Ld.AR also prayed that if the correct percentile is computed in accordance with Rule 10CA, exclusion of Miscellaneous expenses for Assessee and comparables after considering export incentive as operating income, the margins of the Assessee would be at arms length.

5.5 We find that the issue of treatment of Miscellaneous Expenses as operating or non-operating expenses and Export incentives as operating or non-operating income has already been dealt with by the jurisdictional Tribunal in the case of ZF Rane Automobile India Private Limited v DCIT IT(TP)A.No. 53/Chny/2024 wherein at Para 5 to 7, the ‘Export Incentive’ has been held to be

:-5-: ITA. No: /Chny/ operating income and at Para 9 ‘Miscellaneous Expenses’ has been held to be operating expenses both for the Assessee as well as for the comparable companies (wherever the data is available). Respectfully following the ratio decidendi, we also hold that ‘Export Incentive’ should be treated as operating income and ‘Miscellaneous Expenses’ to be treated as operating expenses both for the Assessee as well as for the comparable companies. In so far as the contentions of the Ld.AR that the computation of margins of the comparables should be as per Rule 10CA, we are of the view that computation of margins should be as per Rule 10CA, accordingly we direct the TPO to consider the margin working provided by the Assessee at Page 8 of Paper book and Annexure 1 in page 10-13 of paper book. Therefore, in the interest of justice and fair play, we deem it fit that the TPO may redetermine the margins of the comparables in accordance with Rule 10CA of the Rules. Accordingly, this ground of appeal is partly allowed.

6.1 The Ld.AR contended that the Assessee had chosen 8 comparable companies in its TP study. The TPO has excluded 4 companies out of the 8 companies. Based on the objections filed by the Assessee that all 4 companies pass the 25% RPT filter applied by TPO, the ld.DRP called for a remand report from the TPO. In the remand report, the TPO has accepted that 2 comparable companies were passing the RPT filter and the balance 2 comparable companies i.e. Tata Toyo Radiator and Federal Moghal failed the RPT filter. The ld.DRP based on the remand report has excluded 2 comparable companies and included 2 comparable companies of the Assessee. The contention of the Assessee is that the TPO has not provided the basis of computation of 25% of RPT filter. As per the financials available, both ‘Tata Toyo Radiator’ and ‘Federal Moghul’ pass the 25% RPT filter test applied by the TPO. Therefore, the Ld.AR prayed that appropriate directions may be given to the TPO to

:-6-: ITA. No: /Chny/ reverify the RPT filter on the basis of the financials and then come to a conclusion whether these companies should be retained or not.

6.2 The Ld.DR objected to remand since the ld.DRP has already obtained remand report from TPO and as such there is no requirement to once again remit back the matter to the file of the TPO.

6.3 After considering the submissions of both the parties, we feel that the TPO without providing the basis of computation of 25% of RPT cannot arbitrarily reject a particular comparable. Therefore, in the interest of justice and fair play we remit this issue to the file of the TPO and direct the TPO to provide the basis of computation of the 25% of RPT filter for the respective comparable companies and afford opportunity to the Assessee to file its submissions and then decide the issue in accordance with law. Hence, this ground of appeal is partly allowed.

7.1 The Ld. AR contented that the TPO has undertaken a fresh search and included certain comparable companies and among those comparable companies the Assessee had objected to inclusion of 2 new comparable companies i.e. Durovalves India Private Limited (Durovalves) and Agrasen Engineering Industries Private Limited (Agrasen) in the list of comparable. Before the ld.DRP the Assessee contended that ‘Durovalves’ is functionally dissimilar and the margins of the ‘Agrasen’ is computed incorrectly. The DRP held that since the TPO has adopted TNMM the functional similarity is more relevant rather than product similarity and the DRP did not address in respect of incorrect computation of Agrasen.

7.2 Before us the Ld.AR contended that the comparable company ‘Durovalves’ is entirely different and functionally not comparable to the products

:-7-: ITA. No: /Chny/ manufactured by the Assessee. Further the Ld.AR submitted that the actual margins of the ‘Agrasen’ is only 13.74% whereas the TPO has considered 27.35% by excluding miscellaneous expenses. The Ld.AR prayed that appropriate directions may be issued to reconsider the comparable company and correct margins.

7.3 The Ld.DR objected to the remand and prayed that the comparable companies ought to be retained.

7.4 We have heard the rival contentions and are of the view that in so far as the principle that when TNMM is applied it is the functional similarity gains more relevance but it cannot mean that completely different industry can be considered. According to us, even while applying TNMM the industry which is much closer to the functions undertaken by the Assessee ought to be considered. In light of these observations, we direct the TPO to reconsider the comparable ‘Durovalves’. In so far as correct computation of margin is of ‘Agrasen’ is concerned, we have already held herein above at Para 5.5 that ‘Miscellaneous Expenses’ ought to be treated as operating expenses and as such the TPO is directed to recompute the margins of ‘Agrasen’ after considering the ‘Miscellaneous Expenses’ as operating in nature. Accordingly, this ground of appeal of the assessee is partly allowed.

8.1 The TPO proposed an upward adjustment towards notional interest on outstanding receivables to the extent of Rs.39,26,981/-. Against the draft assessment order, the assessee filed its objections before the ld.DRP and the ld.DRP had issued directions confirming the adjustment proposed by TPO. Subsequently, the AO passed the final assessment order against which the assessee has filed this appeal before us.

:-8-: ITA. No: /Chny/ 8.2 The ld.AR submitted that the TPO proposed the upward adjustment towards notional interest on outstanding receivables on the basis that trade receivables due from the foreign AE have been delayed beyond the credit period allowed, for which appropriate compensation has not been received, thus concluding that the receivables have resulted in an interest free loan being provided by the assessee to the foreign AEs. The TPO accordingly, imputed an interest adjustment based on the ageing details provided charging an interest at the rate of 6 months LIBOR plus 350 bps (4.186%) after allowing 30 days credit period.

8.3 The ld.AR submitted that no adjustment in respect of the interest on overdue receivables shall be warranted in case of a debt free company. Further, the ld.AR submitted that the assessee did not pay interest on payables to AE and thus same treatment has to be meted to receivables also. The ld.AR also contended that the assessee did not charge interest on receivables for both AE and Non-AE and therefore by directly applying internal CUP method, there is no requirement to impute interest on AE transactions alone. The Ld.AR stated that, the above principle has been upheld by the Jurisdictional Tribunal in the case of Newgen Digitalworks Pvt.Ltd. (IT(TP)A No.72/Chny/2024 dated 15.05.2025).

8.4 The Ld.DR in this regard, contended that the assessee’s argument against imputing interest towards a debt free company is not tenable on the basis that, even though there is no finance cost incurred, there is an imputed interest cost that is foregone due to outstanding receivables pending collection and that the said argument can only be made in the case of domestic transactions and not in the case of international transactions.

8.5 We have heard the rival contentions perused the material available on record and gone through the orders of the authorities along with the paper book and the decided case laws relied on by the parties. The issue of TP adjustment on account of interest on overdue receivables from AE is covered in favour of

:-9-: ITA. No: /Chny/ the Assessee by the decision of this Tribunal in the case of Newgen Digitalworks Pvt Ltd (IT(TP)A No.72/Chny/2024 dated 15.05.2025). Therefore, respectfully following the same, we also hold that since the assessee is a debt free company and the assessee does not incur any significant interest cost and the Assessee has not charged interest from Non-AE as well, the TP adjustment of notional interest on overdue receivable is not warranted.

8.6 In the present facts and circumstances of the case, and in consonance with the judicial precedents of this Tribunal, we are of the considered view that the transfer pricing adjustment on account of notional interest pertaining to overdue receivables is unwarranted. This ground of appeal raised by the assessee is allowed.

Order pronounced in the open court on 05th January, 2026 at Chennai.

Sd/- Sd/- (मनु कुमार �ग�र) (एस. आर. रघुनाथा) (MANU KUMAR GIRI) (S. R. RAGHUNATHA) �या�यक सद�य/Judicial Member लेखा सद�य/Accountant Member

चे�नई/Chennai, /दनांक/Dated, the 05th January, 2026 SP आदेश क* (�त1ल2प अ3े2षत/Copy to: 1. अपीलाथ'/Appellant 2. ()यथ'/Respondent 3.आयकर आयु4त/CIT– Chennai/Coimbatore/Madurai/Salem 4. 2वभागीय (�त�न�ध/DR 5. गाड% फाईल/GF