Tribunal's decision to reject non-comparable companies for transfer pricing remand validated; Revenue's appeal dismissed
In a significant ruling dated October 8, 2026, the Karnataka High Court (Division Bench) dismissed the appeal filed by the Principal Commissioner of Income Tax-5 against M/s. Reitzel India Pvt. Ltd., in the matter of transfer pricing adjustments for the assessment year 2014-15. The judgment clarifies the treatment of export incentives in computing operating income and sets important precedents regarding the selection of comparables in transfer pricing analysis under the Income Tax Act, 1961.
The case arose from an order passed by the Income Tax Appellate Tribunal (ITAT), Bangalore, which favored the assessee, M/s. Reitzel India Pvt. Ltd., engaged in the growing, processing, and export of gherkins to its Associated Enterprise (AE). The Revenue contested two substantial legal questions: whether export incentives granted by the Government should be treated as part of the operating income for determining the Arm's Length Price (ALP), and whether the Tribunal erred in remanding the issue of comparables selected by the Transfer Pricing Officer (TPO).
The Court relied heavily on precedent from a Coordinate Bench decision in SAP Labs India (P) Ltd. v. Income Tax Officer (2026), which elaborated on the statutory framework governing transfer pricing under Chapter X of the Income Tax Act, emphasizing that selection or exclusion of comparables is a factual and data-driven exercise. The TPO cannot arbitrarily substitute the taxpayer's chosen comparables with departmental sets without proper justification and compliance with Rule 10B of the Income Tax Rules.
Regarding export incentives, the Court held that these incentives have a direct nexus with the assessee's export business and cannot be excluded from operating income merely because they are government grants. Drawing on the Bombay High Court's decision in Commissioner of Income-Tax v. Welspun Zucchi Textiles Ltd. (2017), the Court affirmed that export incentives form an integral part of ancillary profits arising from the export activity. Consequently, the Tribunal was justified in directing the TPO to include export incentives while determining the ALP.
On the issue of comparables, the Court noted that the TPO-selected comparables were companies engaged in generic food processing, which were not functionally comparable to the assessee's specialized business of gherkins cultivation, processing, and export. The Tribunal's rejection of such comparables and its remand for fresh consideration of the assessee's comparables - which were functionally similar companies - was found to be a sound factual finding not vitiated by perversity. The Court found no legal basis to interfere with the Tribunal's decision.
The dismissal of the Revenue's appeal reinforces the principle that transfer pricing adjustments must be grounded in a thorough factual analysis, respecting the taxpayer's chosen comparables and recognizing the commercial realities of the taxpayer's business operations, including government incentives.
This judgment provides clarity to taxpayers and tax authorities alike on the inclusion of export incentives in operating income for transfer pricing and underscores the need for careful selection of comparables that reflect functional similarity.
Bottom Line:
Income Tax - Transfer Pricing - Export incentives having direct nexus with assessee's export business form part of operating income for determination of ALP - Selection and exclusion of comparables is a factual exercise - Tribunal justified in remanding matter to TPO where TPO-selected comparables were not functionally similar to assessee's business of growing, processing and exporting gherkins.
Statutory provision(s): Income Tax Act, 1961 Sections 92C, 260A; Income Tax Rules Rule 10B
