2018 (6) TMI 1454 - AT - Income Tax

TPA - comparable selection - Held that - Relying in assessee s own case, we are of the considered opinion that there are no reasons brought to our notice to take a different view. We accordingly held that Hindustan Syringes & Medical Devices Pvt. Ltd. is not a suitable comparable. We, therefore, direct the learned TPO to exclude this company from the final list of the comparables. Risk adjustment - Held that - Unless the adjustment on account of risk is quantified and working is given, it is not possible to direct the authorities below to allow the risk adjustment as pleaded by the assessee. It is not possible for us either to consider at the Tribunal level or to direct the AO to consider this aspect. Working adjustment - Held that - Remand this ground to the file of the AO for computing the working capital adjustment only on the opening and closing balance of the working capital employed at the beginning and end of the year.

Summary

Issues Involved:
1. Treatment of foreign exchange gains as non-operating.
2. Selection of comparable companies for transfer pricing.
3. Non-allowance of risk adjustment.
4. Non-allowance of working capital adjustments.

Issue-wise Detailed Analysis:

1. Treatment of Foreign Exchange Gains as Non-Operating:
The assessee contested the treatment of foreign exchange gains as non-operating by the TPO and DRP, who based their decision on Safe Harbour Rules. The assessee argued that these rules apply only from AY 2014-15 and not retrospectively. The Tribunal, referencing previous decisions including the assessee's own case (ITA No.895/Del/2014) and PCIT vs B C Management Pvt Ltd. (2018), held that foreign exchange fluctuations related to revenue accounts and hedging should be considered part of operating profits and losses. Consequently, this ground was decided in favor of the assessee.

2. Selection of Comparable Companies for Transfer Pricing:
The assessee challenged the inclusion of Hindustan Syringes & Medical Devices Pvt. Ltd. as a comparable for benchmarking international transactions, citing significant differences in turnover and product types. The Tribunal noted that in the assessee's own case for AY 2009-10 (ITA No.895/Del/2014), this company was rejected as a comparable. The Tribunal found no reason to deviate from this position and directed the TPO to exclude Hindustan Syringes & Medical Devices Pvt. Ltd. from the final list of comparables, thereby deciding this ground in favor of the assessee.

3. Non-Allowance of Risk Adjustment:
The assessee argued for risk adjustment, stating that exact comparables are not possible and adjustments should be made to account for differences. However, the Tribunal noted that without quantifiable working and evidence of how the comparables undertook similar risks, it was not feasible to allow risk adjustments. This position was consistent with the Tribunal's earlier decision in the assessee's case for AY 2009-10. Therefore, this ground was dismissed.

4. Non-Allowance of Working Capital Adjustments:
The assessee contended that its working capital policy, involving negative working capital investment, justified adjustments. The Tribunal referred to its earlier decision in the assessee's case for AY 2009-10, which directed the AO to compute working capital adjustments based on the opening and closing balances of the working capital employed. Following this precedent, the Tribunal remanded the issue to the AO for recomputation, thus deciding this ground in favor of the assessee.

Conclusion:
The appeal was partly allowed for statistical purposes, with the Tribunal ruling in favor of the assessee on the treatment of foreign exchange gains and the selection of comparable companies, while dismissing the ground on risk adjustment and remanding the issue of working capital adjustments to the AO for further computation. The order was pronounced in the Open Court on 27th June, 2018.