Karnataka High Court Upholds Reitzel India Relief, Says Export Incentives Count As Operating Income

The Karnataka High Court on 8 October dismissed the Income Tax Department's appeal against an Income Tax Appellate Tribunal (ITAT) order directing it to include export incentives received by Reitzel India Pvt. Ltd. in its operating income while determining the arm's length price (ALP) of international transactions.

A Division Bench comprising Justices S.G. Pandit and Chillakur Sumalatha held that export incentives directly linked to a taxpayer's export business must be included in operating income for determining the arm's length price, while comparable companies can be rejected only by applying the functional comparability criteria under Rule 10B of the Income Tax Rules. The judges held:

“The assessee is indulged in the business of growing, processing and export of gherkins to its AE. The export incentives are available to the assessee on account of its export activity. Therefore, the incentives cannot be viewed in isolation from the business carried on by the assessee, as they have a direct nexus with its export activity.”

Reitzel India grows, processes and exports gherkins to its associated enterprise. The Revenue challenged the ITAT's order dated 8 November 2019, for assessment year 2014–15, disputing the treatment of export incentives and the Tribunal's decision to remand certain transfer pricing issues for fresh consideration.

The Court held that the export incentives arose directly from Reitzel India's export activity and could not be excluded from operating income merely because they were granted by the government. Relying on the Bombay High Court's decision in Commissioner of Income-Tax v. Welspun Zucchi Textiles Ltd., it upheld the ITAT's direction to the Transfer Pricing Officer (TPO) to include the incentives while determining the ALP.

Further, the Revenue had also challenged the ITAT's directions on selecting comparable companies. The judges noted that Reitzel India was engaged in growing, processing and exporting gherkins, while the companies selected by the TPO were engaged in food processing. It held that the companies could not be considered functionally comparable merely because they operated in the food-processing sector.

Referring to its decision in SAP Labs India Pvt. Ltd. v. Income Tax Officer, the Bench reiterated that selecting or rejecting comparable companies is a factual exercise governed by Rule 10B of the Income Tax Rules. The TPO cannot reject a taxpayer's chosen comparables simply to replace them with a standard set of companies selected by the department.

It found no merit in the Revenue's challenge to the ITAT's decision to remand the comparable-selection issue for fresh consideration, noting that the Revenue had failed to establish any perversity in the Tribunal's findings.

Accordingly, the High Court dismissed the Revenue's appeal and answered the substantial questions of law in favour of Reitzel India.

For Revenue: Advocate Sanmathi E.I.

For Reitzel India: Advocate Narendra Kumar J. Jain