VERMEIREN INDIA REHAB PRIVATE LIMITED,TIRUPATI vs. DCIT., CIRCLE-1(1), TIRUPATI

3 ITA.No.1315 /Hyd./2024 maintained by the Appellant cannot be rejected merely on account of difference of opinion. 3.2 In law and facts and circumstances of the case, the Ld. DRP and Ld. TPO/AO have erred in conducting a fresh search for identifying comparable companies following an arbitrary approach towards selection/rejection of the companies. Ground No.4: Transfer Pricing: Erroneous Quantitative filters 4.1. In law and facts and circumstances of the case, the Ld. DRP and Ld. TPO/AO have erred in conducting the fresh search process on the following grounds . 4.1.1. Have erred in applying the filter Income from manufacturing activity greater than 75 percent to sales. 4.1.2. Have erred in computation of RPT filter by taking only RPT Income/Total Income or RPT Expenditure/Total Expenditure instead of taking the total value of RPT transactions (RPT income + RPT Expenditure) in the numerator and sales in the denominator. 4.1.3. Have erred in selecting the companies only if the data pertaining to FY 2020-21 is available in the public databases. 4.1.4. Have erred in rejecting companies having different FY ending or whose data does not fall within the 12-month period of 1. April 2020 to 31. March 2021, leading to having a limited set of comparable companies and would have bearing on the comparability analysis. 4.1.5. Have erred in rejecting companies having losses for two out of three years. 4.2. In law and the facts and circumstances of the case, the Ld. DRP and Ld. TPO/ΑΟ have erred in rejecting the filters applied by the Appellant on the following grounds. 4.2.1. Have erred in not applying the upper limit for the sales turnover filter, considering the underlying factor that the companies having high turnover has the benefit of economies of scale. 4.2.2. Have erred in not applying the forex filter while the business of the Appellant is majorly on account of export. Ground No.5: Transfer Pricing: Inappropriate PLI Computation 5.1. In law and facts and circumstances of the case, the Ld. DRP and Ld. TPO/AO have erred in treatment of certain items in the computation of PLI of the Appellant on the following grounds.

4 ITA.No.1315 /Hyd./2024 5.1.1 Have erred in considering forex loss as operating in nature. 5.1.2 Have erred in considering discount provided as negative income and did not add the same to the cost base while computing the PLI of the Appellant. Ground No.6: Transfer Pricing: Erroneous Qualitative Analysis 6.1. In law and facts and circumstances of the case, the Ld. DRP and Ld. TPO/AO have erred in selecting the functionally different comparable companies as mentioned below: 6.1.1. Anitha Texcot (India) Private Limited, the company is engaged in the business of manufacture of n-95 masks, head and face protection which is functionally different from manufacture of wheelchairs and rehabilitation equipment. 6.1.2. Biorad Medisys Private Limited, which is engaged in the extensive research and development activity for innovation of new technologies for medical devices. 6.1.3. Dental Cermists India Private Limited which is engaged in the activity of manufacturing of Dentures and medical lab equipment which is functionally different from manufacture of Wheelchairs. 6.1.4. Roots Industries Limited that is into manufacturing of horns for automobiles. 6.1.5. B L Lifesciences Private Limited which is engaged in manufacture of blood bags and component manufacturing for OEM. 6.1.6. Sahajanand Medical Technologies Limited, which is engaged in significant Research and Development activities and engaged in manufacture of heart stent and valves. 6.1.7. Paramount Surgimed Limited, which is engaged in the manufacture of medical disposable products. 6.1.8. Bhat Biotech India Private Limited which is engaged in significant research and development activities. Ground No.7: Transfer Pricing: Trade Receivables treated as Advance 7.1. In law and facts and circumstances of the case, the Ld. DRP and Ld. TΡΟ/ΑΟ have erred in considering receivables outstanding from AE as an international transaction and have erred in not accepting the contention of the Appellant that it does not fall within the purview of capital financing as stated under Section 928 of Income-tax Act, 1961 ('the Act').

5 ITA.No.1315 /Hyd./2024 7.2. in law and facts and circumstances of the case, the Ld. DRP and Ld. TPO/AO have erred in making a transfer pricing adjustment with respect to certain receivables by the Appellant, not considering the fact that the Assessee has received advance for most of the sales undertaken during the year and have erred in not considering weighted average outstanding receivables for determining period of receivables outstanding. 7.3. The Ld. DRP and Ld. TPO/AO have erred in considering receivables outstanding from AE as "debt receivable (loan)" advanced to the AEs for the period of delay, and thereby erred in imputing an interest on the same during the year. 7.4. The Ld. DRP and Ld. TPO/AO have erred in computation of interest based on SBI Short Term Deposit Rate and not appreciating Appellant's contention that, since the invoices are raised in foreign currency, LIBOR based rate should be considered for computing interest on receivable.

8. The Appellant prays that directions be given to grant all such relief arising from the grounds of appeal

mentioned supra as also all consequential relief thereto.

9. In law and facts and circumstances of the case, the Appellant in the interest of justice, may be allowed to adduce additional evidence as may be necessary in support of the grounds raised hereinabove after following due procedures laid down in the Income-tax (Appellate Tribunals) Rules, 1963.

10. The Appellant craves leave to add to or alter, by deletion, substitution or otherwise, any or all of the above grounds of appeal, at any time before or during the hearing of the appeal.”

6 ITA.No.1315 /Hyd./2024 vide SEZ approval dated 19.09.2014 from the Ministry of Commerce & Industry. The assessee company had filed it’s return of income on 15.03.2022 for the impugned assessment year 2021-2022 declaring returned gross loss of Rs.4,22,627/-. The case of the assessee company was selected for complete scrutiny on account of international transactions in respect of lending or borrowing of money [T.P. Risk Parameter] and notice u/sec.143(2) of the Act was issued and served on the assessee on 28.06.2022 through ITBA Portal as well as registered email. During the course of assessment proceedings, the Assessing Officer has issued various notices u/sec.143(2), 142(1) of Act on 7 occasions in total and a final show cause notice dated 05.12.2023 was also issued calling upon the assessee to comply with the said notice by 12.12.2023. Further, the Assessing Officer referred the matter to Transfer Pricing Officer [in short “TPO”] for determination of Arm’s Length Price [in short “ALP”] in respect of international transactions u/sec. 92CA(1) of the Income Tax Act, 1961. The TPO had issued u/sec.92CA of the Act dated 07.11.2022 calling the 7 ITA.No.1315 /Hyd./2024 assessee for documentation maintained as prescribed u/sec.92D(3) of the Act. In response, the assessee company had submitted the relevant documents as called for by the TPO from time to time. The TPO after considering the submissions of the assessee company, computed the TP adjustment on international transactions of the assessee company at Rs.1,95,55,466/- u/sec.92CA of the Act by making adjustments on account of purchase of raw material and assembling parts and sale of goods amounting to Rs.1,94,89,259/- and also addition on account of interest on trade receivables amounting to Rs.66,207/- vide order dated 22.11.2022 passed u/sec.92CA(3) of the Income Tax Act, 1961. Thereafter, the Assessing Officer passed Draft Assessment Order by determining the total income of the assessee at Rs.5,49,30,047/- by making addition of TP adjustment computed by the TPO amounting to Rs.1,95,55,466/- and disallowance on account of depreciation amounting to Rs.3,57,97,208/- as against the returned income of the assessee at Rs.4,22,627/- vide Order

8 ITA.No.1315 /Hyd./2024 dated 27.12.2023 passed u/sec.144C(1) of the Income Tax Act, 1961.

9 ITA.No.1315 /Hyd./2024

8.1. With respect to the wrong application of 75% manufacturing income filter noted by the TPO, the Learned Counsel for the Assessee submitted that, not all companies disclose manufacturing income, making the filter's application unreliable. The Learned Counsel for the Assessee drew the attention of the Bench pointing-out certain errors where, non-"Anitha Texcot (India) Pvt. Ltd." was accepted, despite earning 77.88% revenue from distribution and further, absence of manufacturing income data for two comparables was overlooked.

8.2. The Learned Counsel for the Assessee on incorrect computation of RPT filter by not aggregating income and expenditure by the TPO submitted that, an RPT filter is essential under TNMM to exclude companies, whose profitability is influenced by related-party transactions. The Learned Counsel for the Assessee demonstrated that, the 13 ITA.No.1315 /Hyd./2024 TPO's approach could allow inclusion of companies with significant RPTs. In support of these submissions, the Learned Counsel for the Assessee relied upon the decisions of ITAT, Bangalore in the cases of (i) Philips Software Pvt. Ltd. vs. ACIT (ITA.No.216/Bang/2008); (ii) M/s.Toyota Kirloskar Motors Private Limited (ITA.No.2016/Bang/2018 for Asst. Year 2013-2014) and (iii) M/s. AMD India Private Limited (ITA No. 775/Bangalore/ for Assessment Year 2018- 19.

8.3. Learned Counsel for the Assessee further submitted that, the TPO has restricted the selection only to companies with financial year 2020-2021 data. In this regard, he submitted that, mere non-availability of current year data cannot justify exclusion, if the company engaged in comparable transactions in the prior year. He submitted that, Rule-10B(5)(ii) permits use of preceding year data for comparability. Thus, the TPO was erred in restricting the selection of companies only with financial year 2020-2021. The Learned Counsel for the Assessee also pointed out the observation of the TPO that, the TPO has rejected the 14 ITA.No.1315 /Hyd./2024 companies with non-March financial year ends and reduced the comparables unfairly. Learned Counsel for the Assessee argued that, the companies with non-March year-ends should not be automatically rejected. As per Rule-10B(4) of the Act, which requires contemporaneous data and not strict financial year end matching and, therefore, data overlapping the financial year, should be considered. Further, he submitted that, the TPO has wrongly rejected the companies with two out of three years of losses. In support of his contentions, Learned Counsel for the Assessee submitted that, persistent loss should mean consistent losses over 3+ years, but, not a single-year loss. In support of his contentions, he relied upon the decisions of (i) KBACE Technologies Pvt. Ltd., vs The Deputy Commissioner of Income Tax, Circle-4(1)(1) ITA.No. 3189/ Bang/2018; (ii) Sumitomo Chemical India Private Limited vs The DCIT Range-3(3), ITA.No.3077/Mum/2012 and ITA.No. 7461/Mum/2013 (iii) Nihilent Technologies Private Limited vs., Income Tax Officer-Ward 3(2), ITA.No.2428/Pun/2012; (iv) M/s. Bobst India Private Limited vs Deputy 15 ITA.No.1315 /Hyd./2024 Commissioner of Income Tax, Circle-1(1), ITA.No. 1380/ PN/2010 and (v) M/s. Sabic Innovative Plastics India Private Limited vs DCIT-2(1)(1) in ITA.No.2730/Ahd/2017.

8.4. Learned Counsel for the Assessee drew the attention of the Bench that, the TPO was erred in rejecting the filters applied by the appellant on the ground that, they are not appropriate filter and eliminated the companies with sales smaller than Rs.1 crore by observing that, sales smaller than Rs.1 crore are the correct filters. Learned Counsel for the Assessee argued that, no upper sales turnover limit applied, ignoring economics of scale. He further submitted that, a zero lower limit was chosen to broaden the search and ensure a larger comparable pool for qualitative analysis and hence, it should not be seen as inappropriate. The Learned Counsel for the Assessee further argued that, size impacts profitability-larger companies benefit from economies of scale, while smaller ones face inefficiencies. Therefore, an upper turnover cap ensures meaningful comparability. Learned Counsel for the Assessee drew the attention of the Bench on Reference made to Para 16 ITA.No.1315 /Hyd./2024 5.33 of ICAJ TP Guidelines emphasizing that, transactions of vastly different-sized enterprises are not comparable. In support of these submissions, the Learned Counsel for the Assessee relied upon the following decisions (i) Deputy Commissioner of Income Tax, Circle-11(1), Bangalore vs., ABB Global Industries & Services (P.) Ltd, Bangalore Tribunal (IT (T.P) A.No.620/BANG/2013 and (ii) Frost & Sullivan (India) Private Limited ITA.No.2073/Mum/2010 dated 24.02.2012.

8.5. With respect to the issue of Forex filter not applied despite major export business, he submitted that, the TPO has observed that, this is not an appropriate filter. Learned Counsel for the Assessee on this issue highlighted that, the assessee earns -95% revenue from exports, and companies catering mainly to the domestic market have materially different functional profiles and business models. Thus, companies with a predominantly domestic focus are not comparable.

17 ITA.No.1315 /Hyd./2024 8.6. Learned Counsel for the Assessee on the issues of wrong treatment of certain items in PLI computation, forex loss incorrectly treated as operating expense by the TPO submitted that, the learned TPO has considered the forex loss as operating in nature and has rejected the contention of the Assessee that, the negative discount should be included in the cost base by stating that, the similar treatment should be done for comparable companies as well. Learned Counsel for the Assessee argued that, the assessee referred to Safe Harbour Rules and Rule 10TA(j), which exclude forex loss from operating expenses. In support of this contention, the Learned Counsel for the Assessee relied on the decision of Radisys India Ltd [2023] 154 taxmann.com 459 (Bangalore-Trib). 8.7. The Learned Counsel for the Assessee further pointed out on the issue of wrongly treating the discount as negative income without adjusting cost base by the TPO, pointed out that, discounts were disclosed under "Other Income" in the financials, but, were treated as negative income by the TPO. The assessee pleaded that, these 18 ITA.No.1315 /Hyd./2024 discounts be classified as operating expenses instead, and be included in the cost base while computing the PLI.

8.8. Learned Counsel for the Assessee further submitted that, the TPO was erred in selection of functionally incomparable companies viz., Anitha Texcot (India) Pvt. Ltd., which is engaged in the different line business of i.e., masks and head protection by rejecting the contention of the taxpayer's contention with respect to functionally dissimilarity of the company is not acceptable as from the financial statement of the company it is seen that the principal business activity i.e., 77.88% to total turnover of the company is Wholesale of pharmaceutical and medical good. The Learned Counsel for the Assessee submitted that, the TPO acknowledged Anitha Texcot (India) Pvt. Ltd., which earns 77.88% of revenue from trading, but, not manufacturing. Yet, the learned TPΟ applied a smaller than 75% manufacturing revenue filter, making the selection and fresh benchmarking is arbitrary and non- transparent. Therefore, the Learned Counsel for the 19 ITA.No.1315 /Hyd./2024 Assessee pleaded for rejection of not just the company, but, the entire benchmarking study.

8.9. Further, in respect of selection of comparable companies, the learned TPO relied on Biorad Medisys Pvt. Ltd., which R & D activities are intensive, continuously launching new products via innovation and lab collaboration, unlike the assessee which performs no R & D. Learned Counsel for the Assessee, therefore, submitted that, this functional disparity makes Biorad Medisys Pvt. Ltd., unsuitable as a comparable and submitted that, the same may be deleted from the list of comparables. Similarly, the Learned Counsel for the Assessee submitted that, the TPO has taken Dental Cermists India Pvt. Ltd., as a comparable company which is engaged in the business of denture and lab equipment maker, whereas, the assessee company is engaged in manufacturing comprising assembling of wheelchairs, which is entire distinct functions and end-uses too. He, therefore, submitted that, Dental Cermists India Pvt. Ltd., cannot be compared with that of the assessee company and, therefore, submitted that, the said company 20 ITA.No.1315 /Hyd./2024 be deleted from the list of comparables. Further, the TPO has taken Roots Industries Ltd., which is engaged in automobile horn manufacture is also selected by the TPO as one of the comparable with the assessee company. Learned Counsel for the Assessee submitted that, since the line of business is totally distinct, Roots Industries Ltd., be deleted from the list of comparables. Further, on similar lines, the TPO has selected comparables viz., B L Lifesciences Pvt Ltd., engaged in the business of blood bags and OEM components, Sahajanand Medical Technologies Ltd., engaged in R & D intensive heart devices; Paramount Surgimed Ltd., engaged in manufacturing business of disposable medical products and Bhat Biotech India Pvt. Ltd., engaged in significant R & D Operations. He submitted that, all the above 4 companies are engaged in different and distinct line of business when compared to the manufacturing/assembling of assessee company and, therefore, he submitted that, the TPO was erred in selecting these 4 companies as comparable companies with that of 21 ITA.No.1315 /Hyd./2024 assessee company. He submitted that, all the above 4 companies also be deleted from the list of comparables.

8.10. The Learned Counsel for the Assessee on the issue of trade receivables submitted that, the TPO has treated the receivables as international transactions [capital financing]. Learned Counsel for the Assessee submitted that, the TPO has incorrectly ignored the weighted average collection period, which showed that, the Assessee realized payments from AEs faster than from non-AEs [Weighted Average : AEs-5 days, non-AEs = 57 at days]. He submitted that, during the year, only 3 out of 236 invoices were realized after due dates, yet the learned TPO cherry-picked these instances to propose an adjustment. He submitted that, the credit terms granted to AEs were shorter than to non-AEs and no interest was charged even for delayed payments from non-AEs. Therefore, the Learned Counsel for the Assessee submitted that, the Assessee was operating at Arm's Length. Learned Counsel for the Assessee further submitted that, outstanding receivables are not an international transaction under Section 92B of the Act and 22 ITA.No.1315 /Hyd./2024 no separate adjustment is warranted even for delayed payments from non-AEs. Hence, the Assessee was operating at arm's length. Without prejudice the above contentions, the Learned Counsel for the Assessee submitted that, the outstanding receivables are not an international transaction under Section 92B of the Act, and no separate adjustment is warranted once the primary transaction is tested. Further, continuing debit balances cannot be treated as international transactions and based on the concept of real income, no notional interest should be imputed. He, therefore, submitted that, the observations of the TPO on outstanding trade receivables are devoid of merits and cannot be accepted. In support of these contentions, the cl relied upon the following decisions : 1. Kusum Healthcare Pvt. Ltd. [TS-412-HC-2017(DEL)- TP); 2. Sunquest Information Systems (India) Pvt. Ltd (IT(TΡΙΑ No.552/Bang/2015] 3. Pegasystems Worldwide India Pvt. Ltd. (ITA No. 1758 & 1936/Hyd/2014).

23 ITA.No.1315 /Hyd./2024 4. Bombay Steam Navigation Co (1953) P Ltd v CIT 56 ITR 52 (SC) Assistant Commissioner of Income Tax vs. Millipore India Limited [IT (TP) A No. 327/Bang/2015] 5. Mastek Ltd. vs. ACIT [ITA No. 3120/Ahd/2010] M/s 6. Avnet India Pvt. Ltd vs Deputy Commissioner of Income-tax (IT(TP)A No.757(Bang.)/2011) 7. GSS Infotech Ltd. Vis ACIT (ITA No 497 (HYD) of 2015) 8. Ingersoll Rand (India) Ltd Vis DCIT (I.T. (TP) A No. 228/Bano/2015)

8.11. Learned Counsel for the Assessee on the issue of wrong application of SBI rate instead of LIBOR for interest computation submitted that, the TPO initially suggested applying the SBI Short Term Deposit Rate and the DRP updated this recommendation to use the SBI PLR (State Bank of India Prime Lending Rate) instead. Further, the DRP reasoned that, the SBI PLR is more appropriate for imputing interest on delayed receivables between Indian taxpayers and their AEs, as it reflects the true opportunity cost of funds in India. The DRP emphasized that, interest rates in India are generally higher than international rates, 24 ITA.No.1315 /Hyd./2024 such as LIBOR, and using LIBOR would not align with the economic realities of the Indian market. As a result, the DRP directed that, the interest on outstanding receivables be recomputed using SBI PLR. The Learned Counsel for the Assessee submitted that, the authorities below are erred in applying SBI rate instead of LIBOR which is settled law. He, therefore, submitted that, the interest computation shall be made by applying LIBOR instead of SBI PLR. In support of this contention, he relied upon the following decisions.

1. Mastek Lid, vs. ACT ITA.No.3120/Ahd/2010.

3. GSS Infotech Ltd. vs., ACIT (ITA No 497/Hyd./2015) 4. Ingersoll Rand (India) Ltd vs., DCIT (IT.(TP).A No.228/Bang/2015). 5. CIT vs., Bokaro Steel Ltd. 236 ITR 315. 6. Nimbus Communications Ltd. (ITA No. 6579/Mum/09).

38 ITA.No.1315 /Hyd./2024

Order pronounced in the open Court on 19.11.2025.