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2016 (9) TMI 1658 - AT - Income TaxTP Adjustment - computing the operating income under TNMM - excluding the Export incentive received and Foreign Exchange gain - HELD THAT:- As for the case of Goodyear India Ltd [2012 (12) TMI 1166 - ITAT DELHI] relied on by the AO, the issue was whether export incentive and rebate could be reduced from cost of goods. What was held was that such incentives were available to an assessee only after the exports were made and therefore, could not go to reduce the cost of goods. On the other hand, in the cases relied on by the assessee, it has been uniformly held that such incentives were to be considered as part of operational income under TNM method while working out the margin of an assessee for comparability. As for exchange gains, there is no case for the Revenue that it was earned through any hedging or speculative activity. It is not disputed that such gains were on account of transactions related to the exports. Hence, such gains, has to be considered as operational in nature. We set aside the orders of the authorities below on this issue and direct the AO/TPO to rework the results of the assessee after considering the above terms as operational in nature. Needless to say same treatment shall be followed while working out the average PLI of the comparables as well. Comparable selection - M/s Venus Garments Ltd (‘ VGL’) was a manufacturer exporter and not a trader exporter, according to the ld. AR, said company was functionally dissimilar to the assessee. also had related party transactions exceeding 25% - HELD THAT:- Lower authorities had still considered it to be a good comparable on a premise that both were in same line of business and exact product profile similarity was not a cardinal requirement. It is true that in a TNM method matching of exact product profile is not essential. In fact, this is rarely possible. However, the question here is not matching of profile as such. There is a cardinal difference in method of procurement of the garments for sale. Nature of expenditure and business environment of a manufacturer is different from that of a trader. A garment trader cannot be considered as functionally similar to a garment manufacturer. Hence, in our opinion, M/s VGL had to be excluded from the list of comparables. AO/TPO is directed to rework the Arm’s Length Price of the international transactions based on our direction in paras supra.
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