Tribunal decision: Foreign exchange gains included, risk adjustment dismissed, working capital issue remanded

The Tribunal ruled in favor of the assessee regarding the treatment of foreign exchange gains as part of operating profits, and directed the exclusion of a specific company from the list of comparables for transfer pricing. However, the Tribunal dismissed the claims for risk adjustment but remanded the issue of working capital adjustments for further computation by the AO. The appeal was partially allowed, with the decision pronounced on 27th June, 2018.

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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.

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