TMI Blog2017 (11) TMI 515X X X X Extracts X X X X X X X X Extracts X X X X ..... vided according to our direction following the decision of coordinate bench. Not to exclude duty drawback and the DEPB from operational income of the assessee as well as of the comparable because they are operational income of the assessee for the reason given by us. Not to exclude exchange fluctuation on account of forward contract in case of eastern medicate private limited as it is pertaining to the raw material purchases and on account of risk mitigation of the operation of the comparable. To not to allow the risk adjustment to the assessee in the computation of margin. - ITA No. 895/Del/2014 - - - Dated:- 7-11-2017 - SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER For The Assessee : Shri Rohit Tiwari, Adv. For The Revenue : Shri Amrender Kumar, CIT DR ORDER PER PRASHANT MAHARISHI, A. M. 1. This is an appeal filed by the assessee against the order of the Assistant Commissioner of Income Tax, Circle 1 (1), Gurgaon [hereinafter referred to as ld AO] dated 23.12.2013 for the Assessment Year 2009-10 under section 143 (3) read with section 144C of the income tax act, 1961 (in short The Act) passed in purs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ances of the case by rejecting our objection to proposed comparable. DRP has misconstrued the functional proximity of the products and was not able to appreciate the facts that Medical disposable cannot be compared with electronic products i.e. laparoscope and component. Also medical disposable cannot be compared with medical implants i.e. Copper T. 5. The learned TPO and the learned AO have erred, in law and on facts and circumstances of the case by committing apparent mistake in his revised calculation by adding non-operational income in operational income like incentive in the form of DEPB /duty drawback and removing / ignoring operational expenses out of total operational expense like exchange fluctuation on forward Contract by exporters in normal business, thereby increasing margins of each comparable in his revised calculations (increasing average margin by almost 2.5%). The revised calculation of margin done by learned TPO in individual comparable is not correct. The Learned TPO has not given any cogent or logically convincing ground for such additional to income and rejection of operational expenses. In fact Learned TPO has not acted judiciously in doing above an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ational transactions, the case was referred to the Ld. Transfer Pricing Officer under section 92CA (1) of the Income Tax Act. The Ld. Transfer Pricing Officer passed an order under section 92CA (3) on 29/01/2013 proposing an adjustment to the International Transaction of the assessee of ₹ 1762 9070/ . Consequent to that draft assessment order under section 144C of the Income Tax Act was passed on 28/2/2013 wherein the only adjustment was made to the returned loss of ₹ 17377228/ of transfer pricing adjustment to the returned income of the assessee of loss of ₹ 17629070/-and computed total income of the assessee at ₹ 251842/ . The assessee preferred objections before the Ld. Dispute Resolution Panel who gave its direction on 03/10/2013. After considering the direction of the Ld. Dispute Resolution Panel, Ld. Transfer Pricing Officer passed an order under section 144C (10) read with section 92CA(3) proposing adjustments of ₹ 15336400/- on the arm s length price of the international transaction entered into by the assessee. Consequent to this, the Ld. Assessing Officer passed final assessment order under section 143 (3) of the Income Tax Act read with sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Ld. Transfer Pricing Officer of Hindustan Syrengies and medical devices Ltd, which has the PLI of 16.91% and Pregna international Ltd, which is a PLI of 11.57%. Further, the assessee has also disputed the margin of the comparable companies wherein the duty drawback and duty entitlement pass book, foreign exchange fluctuation and other income is required to be adjusted. The assessee has also asked for the working capital adjustment, risk adjustment and abnormal items adjustment. 11. Ground No 3 4 are against the inclusion of two comparables. Now we 1st take up the issue on inclusion of the 2 comparables i.e. Hindustan Syringes and medical devices Ltd and Pregnant international Ltd. 12. Regarding Hindustan Syringes Limited Ld. Transfer Pricing Officer has selected this comparable as the assessee has rejected this comparable in its accept reject matrix on the ground that sufficient financial data are not available. The Ld. Transfer pricing officer stated that the annual report of the company is available, has been perused and it is a medical disposable manufacturer. He further stated that the comparable financial data is also available in the Prowess database because it p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the arm s length pricing. 14. Regarding Pregna International Limited the Ld. transfer pricing officer also looked into the accept reject metrics of the assessee wherein this company did not figure. Therefore he included this comparable stating that it is Manufacturer of medical disposable and data for the same is available in the databases. He further held that it passes all filters also therefore this is a suitable comparable. On objection before the Ld. Dispute Resolution Panel assessee contested the functional difference in dissimilarity of the above comparable. However, the Ld. Dispute Resolution Panel held that this company is engaged in the manufacturing and sale of medical products. According to the Ld. Dispute Resolution Panel items manufactured by the assessee are production of semi finished medical products and therefore it was observed that this comparable is functionally quite close to the assessee company. Further, the detailed reason given for 1st comparable of Hindustan syringes medical devices Ltd regarding relatively low degree of proximity acceptable in transaction net margin method were also applied for this and objection of the assessee was rejected. 15. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in 1991, I.V Cannulas in 1992, Auto Disable Syringes in 2001, Vacuum Blood Collection Tubes in 2007 and Blood Collection Needles in 2008 to it s product range. It is the first company in the world to launch a comprehensive range of sizes of Auto Disposable Syringes for curative segment, in the world. To cater effectively to its commitment of providing Safe Injections, few years back it came up with a 22.73 million $ worth State of the Art manufacturing facility, specifically for manufacturing K1 Design Auto Disable Syringes, for which it technologically collaborated with M/s. Star Syringe UK. It has collaboration with M/s. Ester Technology, Israel and launched Vaku-8 brand of Evacuated Blood Collection Tubes and Blood Collection Needles, which are fast getting acceptance support of the medical fraternity. Thus the comparable company is largest manufacturer of disposable syringes and needles. During the year it has also executed agreement with UK Company to manufacture and sell specific syringes. The company is also carrying on research and development in several areas including quality improvement, capacity optimization, waste reduction, substitute of import inputs consumable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that further effort be taken to find a comparable entity rendering services of similar characteristics as the tested entity. The Dispute Resolution Panel held that the transactional net margin method allows flexibility and tolerance in selection of comparables, as functional dissimilarities are subsumed at net margin levels, as compared to resale price method or comparable uncontrolled price method and, therefore, the functional dissimilarities pointed out by the assessee did not warrant rejection of eClerx and Vishal as comparables. 43. In our view, the aforesaid approach would not be apposite. In so far as identifying comparable transactions/entities is concerned, the same would not differ irrespective of the transfer pricing method adopted. In other words, the comparable transactions/entities must be selected on the basis of similarity with the controlled transaction/entity. Comparability of controlled and uncontrolled transactions has to be judged, inter alia, with reference to comparability factors as indicated under rule 10B(2) of the Income-tax Rules, 1962. Comparability analysis by the transactional net margin method may be less sensitive to certain dissimilarities bet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stry classification of the rubber and rubber products. However, the Ld. Transfer Pricing Officer stated that as the assessee is manufacturing, balloon catheters being manufactured by the assessee. But is comparable with the company which is manufacturing rubber and rubber products. The same argument was also given by the Ld. Transfer Pricing Officer in this case that the transaction net margin method is the most appropriate method and product comparability should not be same mandatory rather functions performed should be similar. The Ld. Dispute Resolution Panel also gave the same reasons for confirming the inclusion of the above company and also relied upon the reasons given above for confirming the inclusion of Hindustan syringes and medical devices private limited. We failed to understand the logic given by the Ld. Transfer Pricing Officer that though industrial classification of both the companies is different still they are similar. Furthermore, the Ld. Transfer pricing officer has further failed to appreciate that the comparable companies engaged in the sale of components where one unit was sold for ₹ 69,000. This shows that the assessee company as well as the comparabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d while working out the PLI or it should be excluded in the case of the assessee. With respect to the foreign exchange fluctuation, which is on account of the forward contract with respect to the purchase of material? We fully agree with the contention of the Ld. authorized representative that these are the foreign exchange fluctuations on revenue account and the hedging is also a risk mitigating exercise to reduce the cost of imports and only. Therefore, it should be considered as part of the operating profits and losses of the companies. 24. With respect to the insurance claim he submitted that in insurance claim cannot be part of the income from manufacturing operating profit and it always pertains to the loss incurred in earlier years. Therefore, the quantitative impact of the above loss is required to be excluded in case of the comparability analysis. We do not find any reason to agree with the contentions of the assessee as insurance claim is on account of the assets employed by the company and may also relate to the working capital, expenditure for restating the assets have already been debited to the profit and loss account hence, such is part of operating results of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e entity. Before us no risk adjustment working was given by the Ld. authorized representative despite asking for, therefore, we do not entertain this ground of objection of the assessee. Hence, any adjustment on account of risk unless quantified cannot be given. Ground no 7 of the appeal is allowed. 27. In view of this we direct the Ld. Transfer pricing officer as well as the Ld. assessing officer to i. exclude the 2 comparables namely, Hindustan syringe Ltd were and Pregna international Ltd. ii. to grant assessee that adjustment on account of the working capital if appropriate details are provided according to our direction following the decision of coordinate bench. iii. not to exclude duty drawback and the DEPB from operational income of the assessee as well as of the comparable because they are operational income of the assessee for the reason given by us. iv. not to exclude exchange fluctuation on account of forward contract in case of eastern medicate private limited as it is pertaining to the raw material purchases and on account of risk mitigation of the operation of the comparable. v. To not to allow the risk adjustment to the assessee in the com ..... X X X X Extracts X X X X X X X X Extracts X X X X
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