PRINCIPAL COMMISSIONER OF INCOME TAX-5 vs M/S REITZEL INDIA PVT.LTD.

Court
Karnataka High Court

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HC-KAR
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ITA No. 143 of 2021


CNR: KAHC010162522020




IN THE HIGH COURT OF KARNATAKA AT BENGALURU

TH
DATED THIS THE 8 DAY OF OCTOBER, 2026

PRESENT

THE HON'BLE MR. JUSTICE S.G.PANDIT


AND

THE HON'BLE DR. JUSTICE CHILLAKUR SUMALATHA

INCOME TAX APPEAL NO. 143 OF 2021

BETWEEN:

1. PRINCIPAL COMMISSIONER
OF INCOME TAX-5
BMTC COMPLEX
KORAMANGALA
BENGALURU.

2. DEPUTY COMMISSIONER
OF INCOME TAX
CIRCLE -5(1)(1)
BANGALORE.
…APPELLANTS
(BY SRI. SANMATHI E. I., ADV.)


AND:

M/S. REITZEL INDIA PVT.LTD.
PLOT NO.98-99
KIADB, INDUSTRIAL AREA
KUNIGAL, TUMKUR-572101
PAN.AACRP4566P
…RESPONDENT
(BY SRI. NARENDRA KUMAR J. JAIN, ADV.)

THIS APPEAL IS FILED UNDER SEC.260-A OF INCOME TAX ACT
1961, ARISING OUT OF ORDER DATED 08/11/2019 PASSED IN
IT(TP)A NO.3329/BANG/2018, FOR THE ASSESSMENT YEAR 2014-
2015, PRAYING TO A) DECIDE THE FOREGOING QUESTION OF LAW
AND / OR SUCH OTHER QUESTIONS OF LAW AS MAY BE
FORMULATED BY THE COURT AS DEEMED FIT AND (B) SET ASIDE









Digitally signed by
NANJUNDACHARI
Location: High
Court of
Karnataka

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ITA No. 143 of 2021


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THE APPELLATE ORDER DATED 08/11/2019 PASSED BY THE INCOME
TAX APPELLATE TRIBUNAL, 'C' BENCH, BENGALURU, IN APPEAL
PROCEEDINGS NO. IT(TP)A NO.3329/BANG/2018 (ANNEXURE-A)
FOR THE ASSESSMENT YEAR 2014-2015 AS SOUGHT FOR IN THIS
APPEAL, AND TO GRANT SUCH OTHER RELIEF AS DEEMED FIT, IN
THE INTEREST OF JUSTICE.

THIS APPEAL, COMING ON FOR ADMISSION, THIS DAY,
JUDGMENT WAS DELIVERED THEREIN AS UNDER:

CORAM: HON'BLE MR. JUSTICE S.G.PANDIT
AND
HON'BLE DR. JUSTICE CHILLAKUR SUMALATHA

ORAL JUDGMENT

(PER: HON'BLE MR. JUSTICE S.G.PANDIT)

This appeal is filed by the Revenue under section 260A
of the Income Tax Act,1961 assailing the order dated
08.11.2019 in IT(TP)A No.3329/Bang/2018 passed by the
Income Tax Appellate Tribunal ‘C’ Bench, Bangalore for the
assessment year ‘2014-15’, wherein the appeal filed by
the assessee was allowed.

2. Heard Sri.E.I.Sanmathi, learned counsel for the
Revenue and learned counsel Sri.Narendra Kumar Jain for
respondent-assessee. Perused the entire appeal papers.

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3. The appeal was admitted on 16.02.2022 to
examine the following substantial questions of law:
“(i) Whether on the facts and circumstances of
the case and in law, the tribunal is right in law
directing the assessing authority to treat export
incentive to be part of operating income even though
the export incentives like DEPB are incentives provided
by Government as a matter of policy and as such they
do not form part of eligible business whereas the same
belong to the category of ancillary profits of such
undertakings?

(ii) Whether on the facts and circumstances of
the case and in law, the tribunal remanding the matter
with regard comparable's and on interest on delayed
trade receivable's without analyzing the reasoning for
such remand merely on the ground that the main
issue was restored to file of assessing officer /
Transfer Pricing Officer?

4. A Coordinate bench of this Court in ITA
No.10/2011 and connected appeals in SAP Labs India
(P) Ltd. V. Income Tax Officer, vide judgment dated
28.08.2026, in an identical fact situation has, on a detailed
discussion recorded its conclusion as follows:

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“E. CONCLUSION
(i) The Court concludes that Chapter X of the
Income-tax Act, 1961 constitutes a self-contained
code governing transfer pricing, providing a complete
statutory framework for determination of the Arm's
Length Price (ALP), maintenance of documentation,
and assessment of international transactions.

(ii) The initial burden of determining the ALP
and maintaining the prescribed documentation rests
upon the taxpayer, while the Transfer Pricing Officer
can interfere with the taxpayer's determination only
upon satisfaction of the conditions stipulated under
Section 92C(3) of the Act.

(iii) The selection or exclusion of comparables is
essentially a factual and data-driven exercise, and
the TPO cannot reject the taxpayer's comparables
merely to substitute them with a standard
departmental set. Such determination must strictly
conform to the requirements of Rule 10B of the
Rules.

(iv) The Tribunal's adoption of an upper turnover
filter of Rs.200 crores is rational and legally
sustainable, as turnover, brand value, economies of
scale, bargaining power and ownership of intangibles
materially influence comparability and profitability.

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(v) An RPT filter of 15% is ordinarily preferable,
though a higher threshold of 20% or 25% may be
adopted only upon recording a specific finding that
sufficient comparable companies satisfying the lower
threshold are unavailable.

(vi) Foreign exchange gain or loss can be
treated as an operating item only when it has a
direct nexus with the international transaction.
Where such nexus is absent, it cannot form part of
the operating revenue or operating cost.

(vii) The burden of proof varies according to the
nature of the dispute. While the taxpayer bears the
initial burden of substantiating the ALP, once the TPO
rejects the taxpayer's determination and substitutes
comparables, the burden shifts to the TPO to justify
such inclusion or exclusion.

(viii) There is no legal prohibition against inclusion
or exclusion of comparables at the appellate stage,
provided the subsequently relied upon data is reliable
and the proposed comparables satisfy the
requirements of the Act and the Rules.

(ix) The tolerance of ±5% prescribed under
Section 92C of the Act is merely a permissible
variation and not a standard deduction, and transfer

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pricing adjustment becomes necessary whenever the
variation exceeds the prescribed statutory limit.

(x) Working Capital Adjustment is a
comparability adjustment and not a selection filter,
and its grant depends entirely upon the facts of each
case. Findings on such adjustment, like the selection
of comparables, ordinarily remain findings of fact and
do not warrant interference unless shown to be
contrary to the Act or vitiated by perversity.”

Re: Substantial Question of Law No.1
nd
5. The 2 Substantial question of law pertains to
whether the export incentives provided to the assessee
form part of the operating income or whether they are to
be treated as ancillary profits. It is necessary to point out
that the assessee would be eligible for export incentives
only if the assessee is indulged in exporting its products.
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,

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as they have a direct nexus with its export activity. In the
present case, the export incentives arise from the
assessee’s business of exporting gherkins. Having regard
to the nature of the assessee’s business and the principle
laid down by the Bombay High Court in COMMISSIONER
OF INCOME-TAX V. WELSPUN ZUCCHI TEXTILES
LTD., (2017) 391 ITR 211 (BOM) as relied upon by the
Tribunal, the export incentives cannot be excluded from its
operating income merely on the ground that they are
granted by the Government. The Tribunal was, therefore,
justified in directing the TPO to treat the export incentives
as part of the operating income for the purpose of
determining the ALP. Accordingly, the substantial question
of law No.1 is answered in favour of the assessee and
against the Revenue.

Re: Substantial Question of Law No.2
6. The Coordinate bench of this Court in SAP Labs
India (P) Ltd. (supra) has held that the selection or
exclusion of comparables is essentially a factual and data-

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driven exercise, and the TPO cannot reject the taxpayer's
comparables merely to substitute them with a standard
departmental set. Such determination must strictly
conform to the requirements of Rule 10B of the Rules.The
said finding would be aptly applicable to the facts of the
present case. The issue in the present case pertains to the
exclusion of the rejection of the comparables selected by
the TPO. A perusal at the records would indicate that the
assessee is engaged in the business of growing,
processing and exporting of a vegetable called gherkins to
its Associated Enterprise. The Tribunal has rejected the
comparables selected by the TPO and has merely
remanded the matter back to the TPO for fresh
consideration of some of the comparables as chosen by
the assessee in its TP study. We do not find any merit in
the contentions of the Revenue in this regard, inasmuch
as, the comparables selected by the assessee in its TP
Study and as well as some new comparables are also
involved in the business of growing, processing and

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exporting of gherkins, whereas, the comparables opted by
the TPO were in the business of food processing, which
cannot be said to be functionally similar to the assessee.
The learned counsel for the Revenue has not been able to
point out the perversity in the aforesaid finding. Hence,
substantial question of law No.2 is answered against the
Revenue and in favour of the assessee

7. Thus, the appeal stands dismissed .



Sd/-
(S.G.PANDIT)
JUDGE



Sd/-
(DR.CHILLAKUR SUMALATHA)
JUDGE



NC
CT:bms
List No.: 1 Sl No.: 14