Export incentives directly linked to export activity form part of operating income for transfer-pricing purposes.

The assessee, which grew, processed and exported gherkins to its Associated Enterprise, challenged the transfer-pricing determination for assessment year 2014–15.

The Income Tax Appellate Tribunal allowed the assessee’s appeal, directed that export incentives be treated as operating income for determining the arm’s-length price (ALP), and remanded issues concerning comparables and delayed trade receivables.

The Revenue appealed under Section 260A of the Income-tax Act, 1961.

Section 260A of the Income-tax Act, 1961 provides for appeals to the High Court on substantial questions of law.

The Court applied the transfer-pricing principles in Chapter X of the Act and Rule 10B of the Income-tax Rules, including the requirement that comparables be assessed by reference to functional comparability.

It relied on Commissioner of Income-tax v. Welspun Zucchi Textiles Ltd., (2017) 391 ITR 211 (Bom), for the proposition that export incentives connected with an assessee’s export activity may form part of operating income.

It also applied the principles stated in SAP Labs India (P) Ltd. v. Income Tax Officer, ITA No. 10/2011 and connected appeals (Karnataka High Court, 28 August 2026), including that comparable selection is a factual, data-driven exercise governed by Rule 10B.

The Court found that the export incentives arose because the assessee exported gherkins and therefore had a direct nexus with its business activity; the fact that the incentives were granted by the Government did not make them non-operating income.

The Tribunal was consequently justified in directing their inclusion in operating income for ALP determination.

As to comparables, the assessee and its proposed comparables were engaged in growing, processing and exporting gherkins, whereas the TPO’s selected comparables were engaged in food processing.

The Court found no demonstrated perversity in the Tribunal’s rejection of the TPO’s comparables and remand for fresh consideration.

It likewise rejected the Revenue’s challenge to the Tribunal’s treatment of the comparables and remand.

The Revenue’s appeal was dismissed.