GEMCORP RECYCLING & TECHNOLOGIES PRIVATE LIMITED,NAVI MUMBAI vs. ITO WARD 15(1)(1), MUMBAI, MUMBAI

This appeal by the assessee is directed against the assessment order dated 27.12.2025 passed under section 143(3) read with sections 144C(13) and 144B of the Income-tax Act, 1961 ('the Act'), pursuant to the directions dated 17.12.2025 of the Dispute Resolution Panel-1, Mumbai ('DRP'), for the assessment year 2022-23.

At the outset, the Ld. Authorised Representative ('AR') submitted that he was pressing only ground No. 1.6 concerning the treatment of income from Extended Producer Responsibility ('EPR') as operating income while computing the assessee's margin under the Transactional Net Margin Method ('TNMM'). He submitted that upon allowing this ground, the other grounds would become academic. Accordingly, we confine our consideration to this issue. Ground No. 1.6, together with its sub-grounds, reads as under:

Briefly stated, the assessee is engaged in the import, export, trading, recycling, manufacturing and processing of waste and scrap materials. It filed its return of income on 07.11.2022 declaring total income of Rs. 5,31,13,560/- . During the relevant year, it purchased scrap amounting to Rs. 97,21,36,116/- from its associated enterprise, Gemini Corporation N.V. A reference was made to the Transfer Pricing Officer ('TPO') for determining the arm's length price of the international transactions. The TPO, by order dated 27.01.2025, determined an upward adjustment of Rs. 5,76,41,719/-. In computing the assessee's entity level operating margin, the TPO excluded EPR service income of Rs. 431.75 lakh and adopted a margin of 0.54% on operating revenue. The draft assessment order dated 11.03.2025 proposed the corresponding addition. The DRP confirmed the adjustment and the AO thereafter assessed the total income at Rs. 11,07,55,279/-.

The Ld. AR submitted that EPR income arose in the ordinary course of the assessee's waste recycling business. He explained that producers, importers and brand owners were required to discharge obligations relating to the collection and recycling of plastic waste. A recycler such as the assessee earned EPR income in connection with the recycling of such waste and the fulfilment of those obligations. The income was thus directly connected with the assessee's business and was earned on a recurring basis. He submitted that the assessee had earned EPR income of Rs. 6.75 lakh and Rs. 162.20 lakh in the assessment years 2020-21 and 2021-22, respectively, followed by Rs. 431.75 lakh in the year under appeal.

The Ld. AR further submitted that the TPO had, in paragraphs 6.5.2 and 6.6.1 of his order, accepted EPR income as operating income, but had excluded the same in the actual computation of the assessee's margin. The assessee brought this inconsistency to the notice of the DRP and filed a rectification application dated 27.06.2025 before the TPO. According to the Ld. AR, the application was rejected on the ground that the matter was pending before the DRP. He also drew our attention to the DRP's observations at page 71 of its directions that EPR was integral to the assessee's business and that Gem Enviro and Attero, which also earned EPR income, were functionally similar. He submitted that exclusion of the assessee's EPR income, while retaining the related expenditure as operating expenditure and adopting entity level profitability, understated its operating margin. He requested that the TPO/AO be directed to recompute the margin by treating EPR income as operating 3 income. He submitted that the corrected margin would fall within the arm's length range and no adjustment would survive.

The Ld. Departmental Representative ('DR'), on the other hand, relied on the orders of the lower authorities. The DRP had held that the international transaction under examination was the purchase of scrap from the associated enterprise, whereas EPR income arose from services rendered to third parties for disposing of waste and constituted a distinct revenue stream. It had further held that, in the absence of reliable segmental accounts, the entity level expenses were required to be considered while determining the margin. On this basis, the DRP sustained the computation made by the TPO.

We have heard the rival submissions and perused the material available on record. The issue before us is whether EPR income of Rs. 431.75 lakh is to be included in operating income for computing the entity level margin adopted by the TPO. The assessee carries on the business of handling, processing and recycling waste and scrap. EPR receipts arise from activities connected with that business. The fact that such receipts are described as service income and are received from third parties does not, by itself, make them non-operating in the computation of the profitability of the business at the entity level.

We find that the DRP itself, while considering the functional comparability of the companies selected by the TPO, recorded the following observation at page 71 of its directions:

Thus, the EPR activity was taken into account as a part of the assessee's functional profile for selecting the comparables. Having accepted that functional profile and proceeded on the basis of entity level profitability, the EPR receipts arising from the same business cannot be excluded merely because they do not represent the resale proceeds of scrap purchased from the associated 4 enterprise. The DRP's reasoning for exclusion also does not address the distortion arising from retaining the corresponding expenditure in operating costs. Where the entire business is considered together, its operating income and operating expenditure have to be considered on a consistent basis. A computation which includes the expenditure of the EPR activity but excludes the corresponding revenue does not reflect the operating profitability of that business.

Rule 10B(1)(e) of the Income-tax Rules, 1962 contemplates computation and comparison of net profit margins under TNMM having regard to the same base. In the present case, EPR services form part of the business profile on which the entity level comparison has been made. We are, therefore, of the considered view that the EPR income of Rs. 431.75 lakh is required to be treated as operating income while computing the assessee's operating margin. Our finding is confined to the entity level computation adopted in the present case.

Accordingly, we set aside the assessment order to the extent of the transfer pricing adjustment under consideration and restore the matter to the file of the TPO/AO with a direction to recompute the assessee's entity level operating margin by including EPR income of Rs. 431.75 lakh as operating income and giving corresponding effect in the computation of operating profit and operating revenue. The related operating expenditure shall be considered consistently. The TPO/AO shall verify the revised computation furnished by the assessee and determine the consequential transfer pricing adjustment, if any, in accordance with law. If the recomputed margin falls within the applicable arm's length range, no adjustment shall be made. The assessee shall be afforded a reasonable opportunity of being heard. The remand is confined to giving effect to the above direction; the operating character of EPR income shall be governed by our finding herein. Ground No. 1.6 is allowed in the above terms.

In view of the submission of the Ld. AR that only ground No. 1.6 was pressed and the remaining grounds would become academic upon acceptance of the said plea, the remaining grounds are not examined. No opinion is expressed on their merits.

In the result, the appeal of the assessee is allowed for statistical purposes.