ITAT Allows Excise Duty Incentive as Capital Receipt; TP Issues Remanded for Fresh Adjudication

The assessee, a partnership firm manufacturing UPS, inverters and stabilizers, filed its return for AY 2017-18 declaring income of Rs. 26.09 crore after claiming a deduction under section 80-IC. The case was selected for scrutiny and referred to the TPO for specified domestic transactions. Applying TNMM at the entity level, the TPO proposed a TP adjustment of over Rs. 21 crore on the ground that profits were inflated due to transactions covered under sections 80-IA(8)/(10). The final assessment order was passed pursuant to DRP directions.

Before the Tribunal, the assessee challenged the TP methodology, inclusion of location-based incentives in operating margins, entity-level benchmarking, selection of comparables, and also raised an additional ground that excise duty exemption availed by its Himachal Pradesh unit was a capital receipt not chargeable to tax.

Issue Raised: Whether location-based excise duty/CST incentives should be excluded from TP margins, whether excise duty exemption is a capital receipt, and whether TP issues on comparability, segmentation, and sections 80-IA(8)/(10) require fresh examination.

ITAT’s Decision: The Tribunal held that excise duty and CST incentives enjoyed due to the unit’s location in a backward area are location-specific benefits and must be excluded while computing operating margins for TP benchmarking. Therefore, it directed recomputation of margins after excluding such incentives.

The Tribunal held that excise duty exemption under Notifications 49–50/2003-CE was intended to promote industrialization in backward areas and, applying the “purpose test”, constituted a capital receipt not chargeable to tax under normal provisions or AMT.

TP issues were restored to the Assessing Officer for fresh adjudication. The appeal was partly allowed for statistical purposes.

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