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Degania Medical Devices Pvt. Ltd. Versus ACIT, Circle-1 (1) , Gurgaon

2017 (11) TMI 515 - ITAT DELHI

TPA - comparable selection criteria - Held that:- Assessee is a private limited company, which is engaged in the business of import of assembly of component and re-export of assembled medical disposable balloon catheters as 100 % export oriented unit (EOU). It is providing a captive production to its parent company and its parent company has helped in setting up and expansion of manufacturing facilities by providing technology, training, and finance administrative and marketing support to the as .....

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t assessee that adjustment on account of the working capital if appropriate details are provided 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 pertainin .....

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rder 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 pursuance of direction of the Ld Dispute Resolution Panel - 1, New Delhi (hereinafter referred to as the Ld. DRP) dated 03/10/2013 against objections on draft assessment order passed by the Ld. Assessing Officer on 28/2/2013 wherein the tra .....

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ction in pre conceived and mechanical manner without giving any justifiable, logical or cogent reasoning. 2. That on the facts and circumstances of the case and in law, the Assessing Officer ( AO ) / Transfer Pricing Officer (TPO) / Dispute Resolution Panel ( DRP ) has erred in making an addition of ₹ 1533640/- to the total income of the appellant on account of various transfer pricing adjustments and accordingly, brought down returned loss of ₹ 17377228/- to ₹ 2040830/-. 3. Th .....

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4. The learned TPO and Learned AO has erred in law, facts and circumstances of the case by proposing and selecting Pregna International Ltd. ( Pregna ) as a comparable to the assessee to benchmark the impugned transaction. Pregna is not a suitable comparable. This proposed comparable ( Pregna ) is producing or dealing in entirely different products like medical implants and electronic Components, which are not comparable with medical disposables (produced by assesse) by any stretch of imaginati .....

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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 .....

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account for differences in the risk borne by the assessee for various risk / functional difference like Marketing, technology, inventory risk, Head office infrastructure support, credit and product liability risk. There is no cogent and logical reasoning for the same. 7. The learned TPO, and Learned AO have erred, in law and on facts and circumstances of the case by failing to make appropriate adjustments to account for differences in working capital employed by the assessee vis-a-vis comparabl .....

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ound no 5 is against the computation of margins of the comparable as well as the assessee company. Ground no 6 and 7 respectively are for risk adjustment and Working capital adjustments. These grounds are contested. 5. Brief facts of the case are that assessee is a private limited company, which is engaged in the business of import of assembly of component and re-export of assembled medical disposable balloon catheters as 100 % export oriented unit ( EOU). It is providing a captive production to .....

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ear 2009 - 10, it filed its return of income on 25/09/2008 declaring loss of ₹ 17377228/-. As assessee has entered into international 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 144 .....

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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 section 144 C of the Act on 23/12/2013 assessing the total income of the assessee at ₹ 2040228/-. Assessee is in appeal before us against that order. 7. The assessee .....

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ose of benchmarking of purchase of raw material and sale of finished goods. For benchmarking the arm s length price of the transaction of the purchase of plant and machinery and interest assessee in its transfer pricing documentation adopted CUP method as the most appropriate method. While endorsing TNMM method, assessee was adopted as the tested party and the profit level indicator used was operating profit/sales . The assessee used the data for FY 2008 - 09 and average PLI of the 5 comparable .....

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stment under section 92CA of ₹ 17629070/- was proposed. Before the Ld. Dispute Resolution Panel assessee objected for the exclusion of South India surgical company. The Ld. Dispute Resolution Panel directed TPO as per Ground No. 6.3 directed the Ld. transfer pricing officer to include it for the comparability analysis. However all other contentions of the assessee were rejected. Vide order dated 05/12/2013, Ld. transfer pricing officer included the above comparable making the total compara .....

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nt 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 .....

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Resolution Panel also observed that this company is engaged in manufacturing and sale of medical products such as syringes etc. The items manufactured by the assessee is production of the semi finished medical products into final products of disposable and therefore this comparable is functionally quite close to the assessee company. It was further held by the Ld. Dispute Resolution Panel that TNMM method allows some degree of flexibility and tolerance in the matter of selection of the comparabl .....

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mpany as comparable. Hence, the objection of the assessee was rejected. 13. The Ld. authorized representative placed before us balance sheet of the comparable and submitted that the turnover of this companies ₹ 374.26 crores while the turnover of the assessee is only ₹ 18.53 crores and therefore this is not suitable comparable. He relied upon the decision of the coordinate bench in case of DHL express India private limited versus Assistant Commissioner of Income Tax (ITA 7360/MUM/201 .....

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n net margin method (TNMM) the functional dissimilarity have been ignored. He therefore relied on the decision of the Hon ble Delhi High Court in case of Rampgreen solutions private limited wherein it is stated that the comparability factors cannot be different in different methods of the determination of 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 fig .....

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ucts. 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. .....

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main in the human body. Hence, this comparable company is functionally different. He further submitted that there is a wide difference between the margin of the medical implants as well as the disposable. For this he referred to the newspaper article. 16. The Ld. Departmental Representative vehemently relied upon the order of the Ld. Transfer Pricing Officer which was confirmed by the Ld. Dispute Resolution Panel with respect to both the above comparables and stated that when the comparables are .....

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wer authorities and assessee has also relied upon the same. After comparing the functions of the assessee, we discuss both the above comparables which are contested before us. 18. Coming to the 1st comparable of Hindustan syringes and medical devices Ltd, the assessee has placed before us copy of the Balance sheet of the comparable company for the year ended on 31st of March 2009 as well as profile of the company. We found that it was created to serve the medical profession with affordable, worl .....

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od 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 .....

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y improvement, capacity optimization, waste reduction, substitute of import inputs consumable etc. On perusal of the balance sheet of the company, It is apparent that assessee is a full-fledged manufacturer and not merely an assembler of the product. The turnover of the company for the year was ₹ 374 crores and for which the raw material consumption and operating expenses are incurred of ₹ 213 crores. The assessee is also engaged in the trading of the goods which have been mentioned .....

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here in it has few collaborations also, where as the assessee company does not have any R & D as well as does not use any intangible. On looking at the business segment of the company it stated that it produces only medical and surgical instruments and appliances and accordingly the entire business has been considered as one single segment. Looking at the page No. 4 of the order of the Ld. Dispute Resolution Panel wherein in para No. 6.2 This comparable is considered. The comment of the Ld. .....

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method allows same degree of flexibility intolerance in the manner of selection of the comparable because under this method net margins are compared. Hon ble Delhi High Court in Rampgreen solutions Ltd versus CIT 377 ITR 533 (Delhi) has held that:- 42. Before concluding, there is yet another aspect of the matter that needs consideration. The Tribunal proceeded on the basis that while applying the transactional net margin method, broad functionality is sufficient and it is not necessary that furt .....

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erx 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 comparabilit .....

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as possible, the comparables must be selected keeping in view the comparability factors as specified. Wide deviations in profit level indicator must trigger further investigations/analysis. [ extracted from ITR online and undelrlined by us 19. Therefore, we reject the contention of the Ld. Dispute Resolution Panel because despite admitting the functional dissimilarity of the comparable company with the assessee company above comparable was directed to be included for the comparability analysis .....

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e direct the Ld. Transfer Pricing officer to exclude Hindustan syringes and medical devices private limited as a comparable company. 20. Coming to the 2nd comparable, as claimed and submitted this company is it is a leading Contraceptive Solutions Organization. It is spread across the globe in 140 countries partnering with social marketing organizations as well as private distributors in the area of Intra- uterine devices. It is the largest IUD manufacturer in the world and so far 100 million wo .....

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es and the classification of that particular company is under the head of industry 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 approp .....

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erent 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 comparable companies selected by the Ld. Transfer pricing officer was engaged in different kind of business. It is further to be noted that even if in the transactional net margin method the functional similarity is required to be .....

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d that duty drawback has been considered by the Ld. Transfer pricing officer as operational income while comparing the margins of the comparable. He submitted that in case of liberty India Ltd (317 ITR 208) Hon ble Supreme Court has held that it is not operational income as it is not and inextricably linked with the business of the assessee. We have carefully considered the contention of the Ld. and failed to understand that how the duty entitlement pass book scheme entity to duty drawback are n .....

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exchange fluctuations He submitted that these have been considered as nonoperational items. However, the assessee has considered the foreign exchange loss of ₹ 1953939/- as operational as the issue is those foreign exchanges fluctuations have arisen and because of the adjustment on account of sale or realization of the debts. He further submitted that if the same is excluded from the PLI working of the assessee and considered it as a nonoperational then the margin of the company also incr .....

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luctuations 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 exclud .....

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dvance payment from the buyer for goods sold to them and the working capital of the assessee is always negative, while the working capital of comparable is always positive. He submitted that assessee has given a detailed calculation and has a very strong case but rejected by the Ld. Transfer pricing officer without assigning any reason. He submitted that merely for the reason that the working capital should be computed on the basis of daily average of working capital deployed by the tested party .....

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not be accepted as it is the average working capital deployment which is to be considered and which can be computed with reference to opening and closing balance of working capital deployed. Therefore, respectfully following the decision of the coordinate bench we also direct the Ld. assessing officer/transfer pricing officer to grant working capital adjustment to the assessee provided the assessee submits the relevant detail of working capital adjustment computation. In view of the coordinate b .....

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