ITAT Holds Scrap Sales Taxable as Operating Income: ₹26.18 Lakh Treated from Packing Material [Read Order]
The sole reason for treating sale of scrap as non-operating was that the assessee had classified the receipts as ‘other income’.
ITAT - Scrap Sales - Income - Packing Material - taxscan
ITAT - Scrap Sales - Income - Packing Material - taxscan
The Chennai Bench of the Income Tax Appellate Tribunal (ITAT) has held that receipts from scrap sales, when linked to regular manufacturing activity, are to be treated as operating income for transfer pricing purposes. The Tribunal upheld the order of the Commissioner of Income Tax (Appeals) (CIT(A)), treating ₹26,18,539 earned from the sale of packing material as income from an operating nature.
The assessee, ZF Wind Power Coimbatore Pvt. Ltd., a private limited company engaged in manufacturing gearboxes for wind turbine generators, filed its revised return of income for the Assessing Year (AY) 2012–13, declaring a loss of ₹22,25,56,267 and was selected for scrutiny, the Assessing Officer(AO) referred the matter to the Transfer Pricing Officer (TPO) to benchmark its international transactions.
During the transfer pricing assessment, the TPO excluded scrap sale receipts of ₹26,18,539 from the operating income of the assessee because they were not derived from the main business activity, scrap sale receipts were excluded as they were not operational. This exclusion had the effect of altering the computation of the Profit Level Indicator (PLI).
On appeal, the CIT(A) examined the nature of the scrap receipts and noted that they represented sale proceeds of packing material generated during the regular manufacturing process. The CIT(A) held that such receipts are directly linked to the business activity and form part of operating income.
The Bench comprising George George K (Vice President) and S.R. Raghunatha (Accountant Member) observed that scrap sales arising from the course of manufacturing are part of operational activity and cannot be excluded for computing margins under transfer pricing. The Tribunal found that the CIT(A) was justified in treating the scrap sale receipts as operating income.
Accordingly, the ITAT dismissed the Revenue’s appeal on this ground.
The assessee was represented by Ashik Shah along with Soundariya, while the Revenue was represented by P.K. Senthil Kumar.
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