2017 (11) TMI 515 - AT - Income Tax

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 assessee. Assessee imports different sub assemble parts i.e. semi finished balloon catheters which includes the purging of holes in the silicon tubing and fixing with wall, rings and the balloon. The final products are being sold only to one customer i.e. the AE of the assessee. Thus comparables functionally dissimilar with that of assessee need to be deselected from final list of comparable, thus exclude the 2 comparables namely, Hindustan syringe Ltd were and Pregna international Ltd. 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. 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.

Issues Involved:
1. Inclusion of Hindustan Syringes & Medical Devices Pvt. Ltd. as a comparable.
2. Inclusion of Pregna International Ltd. as a comparable.
3. Computation of margins of the comparable companies.
4. Risk adjustment.
5. Working capital adjustment.

Issue-wise Detailed Analysis:

1. Inclusion of Hindustan Syringes & Medical Devices Pvt. Ltd. as a Comparable:
The assessee contended that Hindustan Syringes & Medical Devices Pvt. Ltd. is not a suitable comparable due to significant differences in turnover, product range, and use of raw materials. The Transfer Pricing Officer (TPO) included it as a comparable, stating that it is a medical disposable manufacturer with available financial data. The Dispute Resolution Panel (DRP) upheld this inclusion, noting that TNMM allows some flexibility in comparability. However, the Tribunal found that Hindustan Syringes is a full-fledged manufacturer with significant R&D activities, use of intangibles, and trading activities, which are not comparable to the assessee, who is merely an assembler. The Tribunal directed the TPO to exclude Hindustan Syringes from the comparability analysis.

2. Inclusion of Pregna International Ltd. as a Comparable:
The assessee argued that Pregna International Ltd. is not a suitable comparable as it manufactures medical implants and electronic components, which are different from the assessee's medical disposables. The TPO included Pregna, stating it is a manufacturer of medical disposables. The DRP upheld this inclusion, applying the same reasoning as for Hindustan Syringes. The Tribunal noted that Pregna's product range includes electronic items and implants, making it functionally different from the assessee. The Tribunal directed the TPO to exclude Pregna from the comparability analysis.

3. Computation of Margins of the Comparable Companies:
The assessee disputed the inclusion of duty drawback and DEPB as operational income and the exclusion of foreign exchange fluctuations as non-operational items. The Tribunal held that duty drawback and DEPB are part of operational income as they reduce the cost of raw materials. Foreign exchange fluctuations related to revenue transactions and hedging were considered operational. The Tribunal directed the TPO to include these items in the computation of margins.

4. Risk Adjustment:
The assessee sought risk adjustment, arguing that it bears fewer business risks compared to the comparables. However, the Tribunal noted that no quantifiable risk adjustment data was provided by the assessee. Therefore, the Tribunal did not entertain the ground for risk adjustment.

5. Working Capital Adjustment:
The assessee argued for working capital adjustment, stating that it has negative working capital due to advance payments from its associated enterprise, while the comparables have positive working capital. The Tribunal directed the TPO to grant working capital adjustment based on the opening and closing balances of working capital, provided the assessee submits the relevant details.

Conclusion:
The Tribunal directed the TPO to:
1. Exclude Hindustan Syringes & Medical Devices Pvt. Ltd. and Pregna International Ltd. from the comparability analysis.
2. Grant working capital adjustment based on the provided details.
3. Include duty drawback and DEPB as operational income.
4. Include foreign exchange fluctuations related to revenue transactions as operational items.
5. Not allow risk adjustment due to lack of quantifiable data.

Result:
The appeal of the assessee was partly allowed.

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