ITAT Holds EPR Income Must Be Treated as Operating Income While Computing Transfer Pricing Margin:

The assessee is Gemcorp Recycling & Technologies Private Limited who is engaged in the business of importing, exporting, trading, recycling, manufacturing and processing waste and scrap materials. For Assessment Year 2022-23, it filed its return of income declaring total income of Rs. 5,31,13,560. During the relevant assessment year, the assessee purchased scrap worth Rs. 97,21,36,116 from its Associated Enterprise (AE), Gemini Corporation N.V. The international transactions were referred to the TPO for determining their Arm's Length Price (ALP).

The TPO, through an order dated 27 January 2025, proposed an upward transfer pricing adjustment of Rs. 5,76,41,719. While computing the assessee's entity-level operating margin under the Transactional Net Margin Method (TNMM), the TPO excluded Extended Producer Responsibility (EPR) service income of Rs. 431.75 lakh and calculated the operating margin at 0.54% on operating costs.

The DRP upheld the adjustment, following which the AO passed the final assessment order under Section 143(3) read with Sections 144C(13) and 144B of the Income Tax Act, 1961, determining the total income at Rs. 11,07,55,279.

The Tribunal observed that once EPR activities were recognised as part of the assessee's functional profile for selecting comparable companies, the corresponding receipts could not be excluded merely because they were not generated from the resale of scrap purchased from the associated enterprise. The Tribunal further held that the fact that EPR receipts were described as service income and received from third parties did not, by itself, make them non-operating income for computing the profitability of the assessee's business at the entity level.

The Tribunal referred to Rule 10B(1)(e) of the Income Tax Rules, 1962, which provides for the computation and comparison of net profit margins under the Transactional Net Margin Method (TNMM) by having regard to the same base. It observed that where the entire business is considered together for determining entity-level profitability, operating income and operating expenditure must be treated consistently. The Tribunal, therefore, concluded that EPR income of Rs. 431.75 lakh was required to be included as operating income while computing the assessee's operating margin under TNMM. It clarified that its finding was confined to the entity-level computation adopted in the present case.

The Tribunal set aside the assessment order to the extent of the transfer pricing adjustment under consideration and restored the matter to the file of the TPO. The authorities were directed 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.