DCIT 5(1)(1), MUMBAI vs. GLENMARK EXPORTS LTD, MUMBAI

3 & 2446/Mum/2017 M/s. Glenmark Exports Ltd., 5. The assessee made its submission which was considered by the TPO however, the TPO observed that during the year, assessee had exported pharmaceutical products, on behalf of GPL, to an associate concern M/s. Glenmark Impex LLC Russia (GIR) amounting to INR 35.03 Crores. It was found that the assessee has entered into an agreement with GPL and also has entered into agreement with GIR relating to the international transaction, Further as per the agreement the risk of quality, packing, marketing, quality of goods, insurance of the goods rested with the seller i.e. the assessee. It was accordingly arrived at by the TPO that the assessee has therefore owned up all the risks vide this contract dt. 26.01.2007. He further observed that in the contract it is nowhere mentioned that the risk of the normal exporter would not lie with the vendor but it will lie with any third party or GPL. The TPO further observed that the assessee has entered into an agreement with GPL but the said agreement is without any consideration which is not valid in the eyes of law and he further mentioned that there are plethora of decisions holding that the contract is not valid if it is without consideration. Accordingly, the TPO arrived at conclusion that the assessee should have recovered the export consideration with mark up and he proceeded on to bench mark the transaction of the assessee based on the three comparables which the assessee has adopted considering GPL and GEL as a combined entity to bench mark this transaction and accordingly, the TPO applied 5.99% as the mark up on the cost of the assessee's 4 & 2446/Mum/2017 M/s. Glenmark Exports Ltd., international transaction with the AE and accordingly arrived at an adjustment of INR 2,09,85,476/- to the value of international transaction to arrive at the ALP of the international transaction of sale / export of goods to the AE. The AO passed his order in conformity with the ALP determination by the TPO and made adjustment of Rs.2,09,85,476/- on account of Arm’s Length Pricing of the International transaction.

5 & 2446/Mum/2017 M/s. Glenmark Exports Ltd., Vide agreement dated 01.04.2000, GPL and GEL have agreed as under : a. GEL has agreed to assist GPL to supply pharmaceutical products (manufactured by GPL) in Russia to GIR. b. GPL will supply to GEL its pharmaceutical products at the same rate as the export price to GIR. c. GEL shall arrange to ship the pharmaceutical products to Russia. d. GPL shall reimburse GEL the expenses incurred by it in respect of the aforesaid transactions. In terms of the aforesaid agreement, GPL supplied its pharmaceutical products to GEL at the same rate as the final export price to GIR and also reimbursed all cost incurred by GEL in course of exports to GIR. It is a fact that there was an agreement between the appellant and the GPL dt. 01.04.2000 whereby GEL had agreed to assist GPL to supply pharmaceutical products (manufactured by GPL) to GIR in Russia. Further such exports were to be at the same rate as the rate GPL would sell it to the appellant and GEL will arrange for the shipping of the product and GPL shall reimburse all expenses incurred by the appellant in respect of the aforesaid transactions. It is seen from the facts of the case that such agreement between GPL and GEL was without any consideration. Further, the appellant entered into an agreement with GIR Russia dated 26.01.2007 for exporting the pharmaceutical products to it. Furthermore, it is noted that GEL in its final accounts are showing the purchase of pharmaceutical products to the extent of Rs. 35.03 crores from GPL and such purchased pharmaceutical products from GPL have been exported to GIR Russia. Accordingly, the appellant has functioned as a trader. However in such trading activity, it has not earned any margin on the product sold and for such sale of products, the expenses incurred have been reimbursed to it by GPL. It is mentioned in the submissions of the appellant that GEL did have permission to export and sell pharmaceutical products to Russia. Accordingly, without the transaction being routed through GEL, the pharmaceutical products which were manufactured by GPL could not have been exported to GIR in Russia. It is further seen from the details that the appellant incurred expenditure under following heads: Item of expense Amount in Rs. Advertisement 5,594,158 Bank Charges 688,616 6 & 2446/Mum/2017 M/s. Glenmark Exports Ltd., Depreciation 127,552 Exchange Rate Loss 40,177,870 Fees 279,211 Freight Charges 49,194,826 Insurance Premium 180,000 Membership Exp A/c 6,000 Professional Charges 8,915 Loss on sale of asset 303,554 Subscription 17,740 Sales Promotion 24,396,884 Expenses Total 120,975,326 It can be seen from the aforesaid table that the appellant has incurred substantial expenses on various activities that it has undertaken. It has undertaken activity of advertisement, shipment for which the concerned charges has been paid, it has undertaken the insurance activities. It has rented out office and has incurred office expenses and further it has undertaken tours and sales promotion functions for which it has incurred tour expenses as well as sales promotion expenses. It can therefore be seen that these expenses have been incurred by the GEL i.e. the appellant, which are indicative of the undertaking of functions and risks pertaining to the export activity of GEL. It is different matter altogether that these expenses have been reimbursed by the .GPL to the appellant but there is no denial to the facts that these functions were undertaken by the appellant. It is further pointed out that the reimbursement of expenses done by the GPL to GEL, which is on account of various functions that the appellant has performed, is without any mark up. It can be seen from the above facts that GEL who holds the permission and right to export the pharmaceutical goods to Russia did possess assets in the shape of such permission and right for the export and further it has assets in the shape of office which it is maintaining and the person who are working in the company. Hence, it cannot be said that the appellant did not employ any assets for such export activity 7 & 2446/Mum/2017 M/s. Glenmark Exports Ltd., undertaken by it. Further, the appellant has undertaken functions like advertisement, shipment, sales promotion and has undertaken tours in connection with such export activity, therefore it cannot be said that it has not undertaken any function for the purpose of such export activity, under question. It is seen from the order of the TPO that vide agreement dt. 26.01.2007 between the appellant and the GIR, the risk of quality packing, marketing, insurance etc. were with the seller i.e. the appellant. In view of the above it can be seen that the appellant company did undertake crucial function, possessed crucial assets needed for undertaking export activity and has also undertaken commensurate risk to export the product manufactured by the GPL. Accordingly, the contention that the appellant is a channel entity or a pass through entity is not the fact of the case, had such been the position, GPL should have been in the ordinary course able to export its product to Russia which it has not been able to do. It is only with the use of crucial assets in the shape of permission and the existence of functioning legal entity in the shape of GEL and having personnel to undertake functions and risks that the concerned export transaction had been feasible. Accordingly the contention that it is only a pass through entity or a channel entity is away from the facts and accordingly not acceptable. In view of these set of facts the ruling quoted in the case Development Consultants Pvt .Ltd. V/s DOT (Supra) is found to be distinguishable on facts. Whereas on one side it is the fact of the case that the appellant is not a channel or a conduit or a pass through entity, on the other side it is the fact of the case that it is not the company which is into manufacturing of pharmaceutical product and further is into export of the same. The appellant in its benchmarking has considered GPL and GEL as combined entity and had searched for such comparable which are into the manufacturing and export of pharmaceutical products. The TPO in its analysis and benchmarking had considered the arithmetic mean of operating margin of such three comparable is accordingly not found to be correct as the three comparable are into manufacturing and sales and export of pharmaceutical product and they are not into non- manufacturing export activity as is the case of the appellant. In the benchmarking done by the appellant it had considered GPL & GEL as a combined entity and comparables were searched which are into manufacturing and sale of pharmaceutical products. Further it is the submission of the appellant the such comparables searched where comparable to GPL. The appellant's such benchmarking is also not found to be acceptable for the reasons given by the TPO in his order and for the reasons that GPL-GEL is combined entity cannot be taken 8 & 2446/Mum/2017 M/s. Glenmark Exports Ltd., only as GPL, which would in turn render the GEL as non-existent and a shell company without any functions, assets and risks, which as discussed above, is not correct. Further the appellant has only considered margin of GPL from its solitary export transaction through GEL to GIR and here as for the comparable, their margins have been considered at entity level. This vitiates the basics of Transfer Pricing, where what is required to be taken for benchmarking is Comparable Uncontrolled Transactions i.e. the transaction! should be "Comparable" as well as "Uncontrolled", In the analysis undertaken by the appellant, in the facts of the case the transactions are though uncontrolled but not comparable. Accordingly the benchmarking done by the appellant is also not found to be acceptable. During the course of the proceedings, the appellant had submitted a set of six comparables which are non-manufacturing entities. This was submitted on without prejudice basis and as additional evidence under Rule 46A. The same was forwarded to the TPO to give his remand report. It is seen from the remand report that TPO has raised 3 grounds for non-acceptance of new six comparable submitted by the appellant as an additional evidence. The same are discussed hereunder:

1. 1. During the course of TP proceeding, sufficient opportunity was given to the appellant hence additional evidence should not be accepted as the case does not fit under Rule 46A of the Income tax Rule.

2. The following comparable are not appearing in the search process carried out by the assessee but selected in the comparable list: a) Megafine Pharma Pvt Ltd b) Lyka Exports Ltd 3. All 6 comparable including the above 2 is not comparable at all as they do not qualify for export criteria as the assessee being 100% export. In the submission, the appellant has mentioned that while doing the benchmarking, the TPO should have given show cause notice along-with the proposition of comparable entities proposed to be adopted if had not accepted the proposition of the bench marking done by the appellant. Further if the opportunity was given, the appellant could have submitted such non-manufacturing export entities as comparable on without prejudice basis. Under the facts and circumstances of the case and as per the provisions of Sec 92C(3), the TPO was required to bench mark the international transaction on the basis of information/detail/material available with him and in accordance with the provisions of Sec 92C(1) and 92C(2). Where the appellant's function is that of a non-manufacturing exporter, its international transaction cannot be benchmarked by considering the companies which are into manufacturing of pharmaceutical products and sales / exports thereof. Accordingly the benchmarking analysis done by the TPO 9 & 2446/Mum/2017 M/s. Glenmark Exports Ltd., is not found to be proper. Further, the TPO's contention that such additional evidence should not be admitted at the appellate stage is also not found to be acceptable as the same are considered as such details submitted during the course of appellate proceedings which is necessary to be considered keeping in view of the functional profile of the appellant. Accordingly, such additional evidence submitted, which has been taken from the public domain by the appellant, are being considered on their merits in this case for decision purposes. Further, during the TP proceedings the TPO had included Megafine and Lyka into the final comparable list though the same were not appearing in the search process conducted by the appellant. The appellant in this regard/ has submitted its rebuttal. I find that these 2 comparable have been taken by the appellant in A. Y 2007-08 which have been accepted by CIT(A) as well as ITAT. Further in A.Y 2009- 10/ the appellant has separately added Lyka Labs which did not appear in the search process/ which has been accepted by the TPO. Accordingly, these 2 comparable are accepted. Regarding, 3rd issue/ the appellant had submitted its rebuttal. I find that if export filter is applied then there will be no comparable which will be left for benchmarking/ hence some or the other filter need to be removed to find sufficient number of comparables. I find that even in A.Y 2009-10, the appellant had not applied Export filter due to unavailability of any comparable/ which is accepted by the TPO. Accordingly/ all the 6 comparable are taken for final benchmarking. The appellant in its submission has further stated that GPL has earned operating profit margin of 52.46-% and that in respect of the agreement between GPL and GEL, there would be some kind of profit sharing though not accepted by them, between these two entities out of 52.46% and the same would be issue pertaining to domestic taxation. In this regard it is stated by the appellant that is has purchased pharmaceutical products worth Rs. 35.03 crores from the GPL. Further, though it is having an agreement with GPL, but such agreement is without any consideration and hence the same cannot be considered as valid. It is also the fact that such goods purchased by the appellant has been exported to AE. Accordingly there is no doubt that such transaction between the appellant and the GIR is an international transaction u/s 92B of the Act and accordingly all the provisions of Chapter X are applicable to the case of the appellant. It is further not been disputed by the appellant that the provisions of Chapter X of the IT. Act is not applicable to it. When the appellant has undertaken international transaction and further when the appellant has undertaken functions for undertaking such international 10 & 2446/Mum/2017 M/s. Glenmark Exports Ltd., transaction/ employed its assets in the shape of permission, office/ personnel and has further undertaken risk pertaining to quality/ packing/ marketing, insurance etc., there cannot be any reason as to why it should not earn profit out of the international transaction. Further in view of the fact that the agreement between the appellant. and the GPL, is not a valid agreement and not enforceable by the law as it is without consideration, the consequent agreement between GPL and GIR may not be of any consequence to GEL. Also in a third party scenario, no company which would be utilizing its assets and would be undertaking crucial functions and assuming certain degree of risk relating to export activity, would not earn at all from such export activity. Accordingly the contention of the appellant that it is more to do with the domestic bifurcation of profits is not found to be acceptable. In the facts of the case, the appellant has undertaken international transaction and therefore is subject to the provisions under Chapter X of the I.T. Act and is accordingly required to prove its international transaction to be at arm's length. In view of the facts of the case as above, discussion herein above, for the purpose of bench marking the international transaction of the appellant a set of Six comparables are considered to be the set of external comparables for application of TNMM as the most appropriate method and with arithmetic mean of their operating margins as the margin to arrive at the ALP of the international transaction. The TPO/AO are accordingly directed to work out the quantum of adjustment to arrive of ALP of the international transaction in question. The appellant has raised the contention for allowing working capital adjustment and risk adjustment. The appellant relied on order of Hon'ble Mumbai ITAT in appellant own case for A.Y 2007-08 for working capital adjustment. I find that ITAT while allowing the adjustment on account of working capital adjustment, held as under: Now, the question arises as to whether assessee is entitled for adjustment of the operative profit margin on account of difference in the working capital and other difference between itself and the comparable companies. We observe that the Id. CIT(A) while restoring the matter to the AO to determine ALP, has not stated about the appropriate adjustments to be given on account of working capital and other risks profile while computing ALP. It is well settled that the TPO while arriving at the profit level indicator of the comparable entities with the appropriate level margin of the assessee, to arrive at ALP of the international transaction with the Associated Enterprises, has to give due adjustments on account of working capital as provided in Rule 11 & 2446/Mum/2017 M/s. Glenmark Exports Ltd., 10B(2) of the Rules r.w. section 92C(2) of the Act. A similar issue has also been considered in various decisions of the various Benches c: the Income Tax Appellate Tribunal. In Demag Cranes and Components (India) Pvt. Limited (supra), the Tribunal has considered the decision in the case of E-gairt Communication (P.) Ltd. v. ITO (2009) 118 ITO 243 and stated that when TNMM is applied to a case " the differences which are likely to materially affect the price, cost charged or paid in, or the profit in the open market are to be taken into consideration with the idea to mate reasonable and accurate adjustment to eliminate the differences having material ettea". It is further stated that if these differences are not eliminated or removed, the comparison becomes unsound and unreliable. The Pune Bench of the Tribunal in the case of Demag Cranes &. Components (India) Pvt Ltd (supra) has stated in paragraph 22 that working capital constitutes an item of difference in matters of computation of arm's length price/net margin and it constitutes a subject matter of adjustment in the matters relating to ALP in Transfer Pricing. The above observations of the Tribunal has been substantiated by relying on the earlier decision of the Delhi Bench of the Tribunal in the case of Mentor Graphics (Noida) (P.) Ltd. v. Dy. CIT (2007) 109 ITO 101 (Del) and stated working capital adjustments constitutes one which is required to be adjusted for the purpose of establishing the ALP. It is relevant to state para 27 of the said order which reads as under: "It is a simple principle of economics that the greater the risk, the greater the expected return (compensation), if there are material and significant-differences in the risk invoked, then the comparable identified are not correct as appropriate adjustments for differences In such cases are not possible. Therefore, while performing search for potential comparable companies; not only turnover and operating profit but functions petfol7nea and risk profile are also to be considered. However, it can always be shown on the given facts of the case that comparables found are similar or almost similar to the controlled transaction and no adjustments are needed. His useful to See the level of intangible assets in comparison to an appropriate base. Depending on facts of the case, final set of comparables may need to eliminate differences by making adjustments for the following: (a) Working capital; (b) Adjustment for risk and growth; (c) Adjustment of R&D expenses. The risk not only due to human resources, infrastructure and quality which are normally taken into account yet more significant risks like market risk, contract risk, credit and collection risk and risk of infringement of intellectual property are being ignored here. In most of 12 & 2446/Mum/2017 M/s. Glenmark Exports Ltd., the comparable analysis carried in India, the latter type of risks is not being taken into consideration although these can lead to major difference in market value of transactions."

7. Against the above order of CIT(A), Revenue is in further appeal before us.

8. Learned AR placed on record the order of the Tribunal in assessee’s own case dated 26/07/2013 for the A.Y.2007-08 wherein exactly similar issue was considered by the Tribunal wherein appeal of the assessee was allowed after having the following observation:-

14. We have carefully considered the orders of the authorities below and the submissions of the ld. Representatives of the parties. We have also gone through the cases cited before us (supra). We observe that the assessee filed the return of income for the assessment under consideration declaring total income of Rs.

Zero". During the course of assessment proceedings, the AO on perusal of 3CEB form revealed 13 & 2446/Mum/2017 M/s. Glenmark Exports Ltd., that during the assessment year under consideration, the assessee entered into an international transactions with Associated Enterprises viz GIR exceeding Rs.15,00,00,000/- and accordingly made a reference to TPO for determination of ALP. That the assessee contended that it assisted GPL to supply pharmaceutical products in Russia to GIR which is also an Associated Enterprises belonging to Glenmark Pharmaceutical Group. The contention of the assessee is that GPL supplied its pharmaceutical products to the assessee at the same rate as the final export price to GIR and also reimbursed cost incurred by the assessee. The details of the said expenses are mentioned hereinabove in para 9.1 hereinabove. The assessee contended that it acted only as a conduit for export of pharmaceutical products of GPL to GIR and its role was of only risk free services provided to GPL in the transactions of export by GPL to GIR because GPL could not export pharmaceutical product to GIR as GPL was not registered and did not have required permission to supply pharmaceutical products to Russia, but the same were available with the assessee company. It is not in dispute that GPL owns intellectual rights of pharmaceutical products to export to GIR. There is also no dispute to the facts that the products were shipped to GIR in the same packing which was originally done by GPL. However, there is no dispute to the fact also that the assessee also entered into an agreement with GIR in terms of which the assessee provided services of shipping the GPL pharmaceutical product to GIR in Russia. Therefore, TPO considered that as per the agreement, the risk of quality, packing, marking, quality of the goods, insurance of the goods etc. lie with the assessee. Hence, the assessee owned up all risks under the said agreement. In view of above, we observe, that TPO proceeded to make profit margin of three companies and arrived at mean of the profit margin at 11.94%, the details of which are given hereinabove in paras 9.6 and 9.7 hereinabove. Thus, the TPO suggested the bench markup on the cost of the assessee for the above transactions and suggested ALP adjustment of Rs.2,92,23,457/-. It is a fact that the said adjustment was recommended by TPO and accordingly addition has been made by the AO by considering the above mentioned three comparables as mentioned in para in 9.6 of this order. However, we agree with the ld. CIT(A) that the above mentioned three comparables companies are (i) Dr.Reddy Laboratories Ltd, (ii) Ipca Laboratories Ltd. And (iii) Strides Acrolabs Limited are not comparables with the assessee because the above mentioned three entities are not only in the manufacturing of pharmaceuticals products but are also in the business of sale/exports of pharmaceutical products, and whereas assessee has only acted on behalf of the GPL to effect export of the pharmaceutical products to GIR which at the most is in the nature of trading. Therefore, the assessee has functioned only as a trader. As observed hereinabove, the assessee is not adding any margin on the product sold in such trading activity though the assessee initially incurred the expenditure to undertake activity of advertisement, shipment, insurance and tours and 14 & 2446/Mum/2017 M/s. Glenmark Exports Ltd., also used its assets /rights in the shape of permission and registration possess by it. There is no dispute that all expenses incurred by the assessee have been reimbursed to it by GPL. We, therefore, agree with ld. CIT(A) that it cannot be said that the assessee did not employ any assets for such export activity undertaken by it. In view of the above we are of the considered view that the ld. CIT(A) has rightly held that the three comparables considered by TPO in its order dated 28.10.2010 and taking operating profit margin of 11.94% is not correct as those comparable companies/entities are in the manufacturing of pharmaceutical products and are also in the sales/ export of the same whereas the assessee is in a non-manufacturing export activities. Hence, on the facts, ld. CIT(A) has rightly considered the additional evidence and to seek remand report from the AO in respect of the three comparables entities furnished before him by the assessee, the details of which are given in paragraph 11.1 of this order.

15. We observe that the ld. CIT(A) has finally considered only two comparables companies viz. Lyka Exports Ltd and Megafine Pharmachem P.Ltd and has directed AO/TPO to work out the quantum of adjustment by considering their operating profit margin to arrive at ALP of the international transaction in question. During the course of hearing ld.AR submitted before us that exclusion of third comparable company viz. Shelesha Pharmachem Pvt.Ltd is not justified as the assessee furnished requisite data viz balance sheet, profit and loss account and operating profit margin for Financial Year 2006-07 and had not merely given the name of the said comparable company and not put onus on the TPO to find out other particulars. During the course of hearing, ld. AR submitted that assessee furnished copy of Balance Sheet, Profit and Loss Account to CIT(A) and whereas the ld. DR supported the order of the ld. CIT(A) in excluding the said company viz. Shelesha Pharmachem Pvt.Ltd on the ground that the full details of the current Financial Year were not made available and TPO is not bound to gather the information at the time of making his studies. He submitted that onus is on the assessee to furnish the results of the comparables which the assessee failed to do so. The ld. DR, substantiated his submissions by referring Rule 10(B)(e)(4) of the Rules. Considering the above facts and the facts that ld.DR has agreed to restore the matter to AO to examine ALP afresh after giving due adjustments of working capital as per Rules, we are of the considered view that when the reference is made to the TPO and the TPO makes his analysis to work out the bench mark of the operating profit of the assessee in respect of international transactions undertaken by it on the basis of said two comparable companies on which there is no dispute between the parties. However, in respect of 3rd comparable Co. namely M/s Shelesha Pharmachem Private Limited requisite information is not available and therefore, it is not rightly considered to determine ALP.

15 & 2446/Mum/2017 M/s. Glenmark Exports Ltd., 16. Now, the question arises as to whether assessee is entitled for adjustment of the operative profit margin on account of difference in the working capital and other difference between itself and the comparable companies. We observe that the ld. CIT(A) while restoring the matter to the AO to determine ALP, has not stated about the appropriate adjustments to be given on account of working capital and other risks profile while computing ALP. It is well settled that the TPO while arriving at the profit level indicator of the comparable entities with the appropriate level margin of the assessee, to arrive at ALP of the international transaction with the Associated Enterprises, has to give due adjustments on account of working capital as provided in Rule 10B(2) of the Rules r.w.section 92C(2) of the Act. A similar issue has also been considered in various decisions of the various Benches of the Income Tax Appellate Tribunal. In Demag Cranes and Components (India) Pvt. Limited (supra), the Tribunal has considered the decision in the case of E-gain Communication (P.) Ltd. v. ITO (2009) 118 ITD 243 and stated that when TNMM is applied to a case "the differences which are likely to materially affect the price, cost charged or paid in, or the profit in the open market are to be taken into consideration with the idea to make reasonable and accurate adjustment to eliminate the differences having material effect". It is further stated that if these differences are not eliminated or removed, the comparison becomes unsound and unreliable. The Pune Bench of the Tribunal in the case of Demag Cranes & Components (India) Pvt Ltd (supra) has stated in paragraph 22 that working capital constitutes an item of difference in matters of computation of arm's length price/net margin and it constitutes a subject matter of adjustment in the matters relating to ALP in Transfer Pricing. The above observations of the Tribunal has been substantiated by relying on the earlier decision of the Delhi Bench of the Tribunal in the case of Mentor Graphics (Noida) (P.) Ltd. v. Dy. CIT (2007) 109 ITD 101 (Del) and stated working capital adjustments constitutes one which is required to be adjusted for the purpose of establishing the ALP. It is relevant to state para 27 of the said order which reads as under : "It is a simple principle of economics that the greater the risk, the greater the expected return (compensation). If there are material and significant differences in the risk involved, then the comparables identified are not correct as appropriate adjustments for differences in such cases are not possible. Therefore, while performing searches for potential comparable companies, not only turnover and operating profit but functions performed and risk profile are also to be considered. However, it can always be shown on the given facts of the case that comparables found are similar or almost similar to the controlled transaction and no adjustments are needed. It is useful to see the level of intangible assets in comparison to an appropriate base.

16 & 2446/Mum/2017 M/s. Glenmark Exports Ltd., Depending on facts of the case, final set of comparables may need to eliminate differences by making adjustments for the following: (a) Working capital (b) Adjustment for risk and growth; (c) Adjustment of R&D expenses. The risk not only due to human resources, infrastructure and quality which are normally taken into account yet more significant risks like market risk, contract risk, credit and collection risk and risk of infringement of intellectual property are being ignored here. In most of the comparable analysis carried in India, the latter type of risks is not being taken into consideration although these can lead to major difference in market value of transactions."

17. Considering the above cases and the provisions of Rule 10B(2) and ( 3) of the Rules, we are of the considered view that due adjustment of the working capital assumed by the assessee as well as the comparable entities are to be considered for determining the ALP of the transaction. During the course of hearing ld. AR reiterated before us that the assessee had not assumed any risk in respect of marketing of the product, realization of sales proceeds, risk of quality etc. Since the said ground of adjustment of other risk is not before us, we refrain to give any such direction to AO/TPO while arriving at the margin of profit of the assessee in respect of transaction under consideration.

20. At the time of hearing, it was contended by ld. DR that the amendment has been made by Finance Act, 2012 by inserting Sub- section (2A) to section 92C(2) with retrospective effect from 1.4.2002 and if the arithmetic mean of the profit margin of the comparable is 17 & 2446/Mum/2017 M/s. Glenmark Exports Ltd., beyond ± 5%, the assessee is not entitled for the said ±5% adjustment as it is not a standard deduction.

Computation of arm's length price Amount in Rs Cost of Assessee (A) 35,03,41,832 Arm's Length markup (B) 5.99% Arm's Length price of export (C) 37,13,27,308 Adjustment required (D= C-A) 2,09,85,476

, also filed two additional grounds for allowing appropriate adjustment on account of difference of working capital and risk of the assessee company and of that of the comparable entities. During the course of appellate proceeding, the assessee company filed an application of additional evidence for benchmarking the said transaction with a set of 6 new comparables which were non-manufacturing export entities based on the order of the CIT(A) and ITAT in assessees' own case for AY 2007-08.

12. From the record, we found that the CIT(A) as well as the ITAT for AY 2007-08 in the assessee's case held that the 3 comparables (i) Dr. 20 & 2446/Mum/2017 M/s. Glenmark Exports Ltd., Reddy Laboratories Ltd, (ii) Ipca Laboratories Ltd. And (iii) Strides Acrolabs Limited cannot be compared with the assessee company, because the above mentioned three entities are in the manufacturing of pharmaceuticals products, whereas GEL has only acted on behalf of the GPL effect export of the pharmaceutical products to GIR which at the most is in the nature of trading. Accordingly, the details of following comparables were submitted as additional evidence during the remand proceedings along with the search process of these comparables, FAR analysis of GEL, computation of PLI and annual reports of the trading pharmaceuticals: Sr. No. Company Name Operating margin 1 Guj. Terce Laboratories Limited 3.29% 2 Welcare Drugs and Pharmaceutical Limited -9.87% 3 Polydrug Laboratories Limited 1.22% 4 Cosme Farma Laboratories Ltd 2.36% 5 Megafme Pharma Pvt Ltd 5.70% 6 Lyka Exports Limited 3.22% MEAN 0.99%

13. We found that the CIT(A) allowed appropriate adjustment for working capital following the decision of the Hon'ble Mumbai ITAT in the assessee's own case for AY 2007-08. Regarding risk adjustment, the CIT(A) held that the assessee company did not bear any risk /or bear 21 & 2446/Mum/2017 M/s. Glenmark Exports Ltd., very minimal risk as compared to the comparable companies. Accordingly, following the decision in the case of E-gain communication (P.) Ltd vs ITO (2009) 118 ITD 243 (Pune) allowed 1% risk adjustment. Against the said order of the CIT(A), the department has preferred an appeal before the Hon'ble ITAT. We found that the six pharmaceutical trading entities used for the purpose of bench marking and determination of ALP of the transaction are appropriate and comparable. The assessee company at the time of search process had applied export filter, however at the end no comparable was left. Hence, the assessee has expanded the search without any export filter. We also observe that the benchmarking of the assessee should be accepted. It is further submitted that the assessee company has consistently applied the same filter in AY 2008-09 and AY 2009-10. The TPO has also accepted the non-application of export filter in A.Y 2009-10 also. Out of the 6 comparables submitted for AY 2008-09, 2 comparables were accepted by CIT(A) and Hon'ble ITAT in AY 2007-08 and 3 comparables were accepted in AY 2009-10 by the TPO and CIT(A). A comparative chart showing the same is provided as under:- Sr Comparables used for AY Comparables used for AY Comparables used for AY 2009- 2007-08 2008-09 10 No. 1 Lyka Exports Ltd Lyka Exports Ltd Lyka Exports Ltd 2 Megafine Pharrna Pvt Ltd Megafine Pharma Pvt Ltd Sicagen India Ltd 3 Gujarat Terce Laboratories Gujarat Terce Laboratories -------- 4 -------- Poly drug Laboratories Pvt Ltd Polydrug Laboratories Pvt Ltd 22 ITA No.2445 & 2446/Mum/2017 M/s. Glenmark Exports Ltd., 5 --------- Welcure Drugs & Duchem Laboratories Limited Pharmaceuticals Limited 6 --------- Cosme Farma Laboratories Syncom Health Limited Ltd

III. Further, though this comparable did not appear in the search process for A.Y 2009-10, the assessee has additionally considered the same for A.Y 2009-10, since the given comparable was considered in A.Y 2007-08 & A.Y. 2009-10 as well. Further, the Ld. TPO has accepted this company as a comparable in A.Y 2009-10 and did not raise any objection for the same.

IV. This comparable has also been accepted by Ld. TPO in A.Y 2009-10. V. Further, TP does not restrict to consider a comparable which is other-wise comparable but did not appear in a TP software's current year's search process. This is in line with the fact that the department also uses the data obtained u/s 133(6) after providing the same to the tax payer. It is submitted that the annual report of the said company is available in the public domain and the same has also been provided to your goodself. Hence, it should be accepted as a comparable.

24 & 2446/Mum/2017 M/s. Glenmark Exports Ltd., VI. Accordingly, since Lyka Exports Ltd is functionally comparable and accepted in earlier years, the same should be accepted for the year under consideration as well.

17. Even Megafine Pharma Pvt. Ltd., is liable to be included as comparable on the following reasoning. I. It is submitted that this company is functionally comparable to the assessee.

II. Your goodself mentioned that this company did not appear in the given year's search process. However, we submit that Megafine Pharma Pvt Ltd did appear in the search process. The same was eliminated due to a preset search filter criteria wherein trading sales were to be at-least 85% of total sales. The given comparable's trading sales are 50 % of its total sales (i.e 17.62 crores/ 35.24 crores).

III. Given the fact that this comparable has trading activities similar to the assessee's, the company is functionally comparable and must be accepted.

V. It is pertinent to note that transfer pricing regulations do not restrict the assessee to take a comparable which is otherwise comparable but does not appear in a TP software's current year's search process. The annual reports of the above companies are available in the public domain and have also been provided to your goodself.

VI. In line with the above concept, the department also uses data obtained u/s 133(6) after providing the same to the tax payer.

VII. Accordingly, given that Megafine Pharma Pvt Ltd is in the business of trading in pharmaceutical products & functionally comparable with the assesse, and that it has also been accepted as a comparable in A.Y 2007-08, the same should be accepted as a comparable for the year under consideration as well.

18. In view of the above, we found that the comparable selected by the assessee are correct and should be accepted.

26 & 2446/Mum/2017 M/s. Glenmark Exports Ltd., 19. With regard to the working capital adjustment, we observe that the Income Tax Appellate Tribunal, Mumbai in assessee's own case for A.Y. 2007-08 (ITA No 8611/Mum/2011), held that due adjustment of the working capital should be considered for determining the ALP of the transaction. The relevant para 16 and 17 of the order is reproduced as under:

16. Now, the question arises as to whether assessee is entitled for adjustment of the operative profit margin on account of difference in the working capital and other difference between itself and the comparable companies. We observe that the ld. CIT(A) while restoring the matter to the AO to determine ALP, has not stated about the appropriate adjustments to be given on account of working capital and other risks profile while computing ALP. It is well settled that the TPO while arriving at the profit level indicator of the comparable entities with the appropriate level margin of the assessee, to arrive at ALP of the international transaction with the Associated Enterprises, has to give due adjustments on account of working capital as provided in Rule 10B(2) of the Rules r.w.section 92C(2) of the Act. A similar issue has also been considered in various decisions of the various Benches of the Income Tax Appellate Tribunal. In Demag Cranes and Components (India) Pvt. Limited (supra), the Tribunal has considered the decision in the case of E-gain Communication (P.) Ltd. v. ITO (2009) 118 ITD 243 and stated that when TNMM is applied to a case the differences which are likely to materially affect the price, cost charged or paid in, or the profit in the open market are to be taken into consideration with the idea to make reasonable and accurate adjustment to eliminate the differences having material effect". It is further stated that if these differences are not eliminated or removed, the comparison becomes unsound and unreliable. The Pune Bench of the Tribunal in the case of Demag Cranes & Components (India) Pvt Ltd (supra) has stated in paragraph 22 that working capital constitutes an item of difference in matters of computation of arm's length price/net margin and it constitutes a subject matter of adjustment in the matters relating to ALP in Transfer Pricing. The above observations of the Tribunal has been substantiated by relying on the earlier decision of the Delhi Bench of the Tribunal in the case of Mentor Graphics (Noida) (P.) Ltd. v. Dy. CIT (2007) 109 ITD 101 (Del) and stated working capital adjustments constitutes one which is required to be adjusted for the purpose of 27 & 2446/Mum/2017 M/s. Glenmark Exports Ltd., establishing the ALP. It is relevant to state para 27 of the said order which reads as under : "It is a simple principle of economics that the greater the risk, the greater the expected return (compensation). If there are material and significant differences in the risk involved, then the comparables identified are not correct as appropriate adjustments for differences in such cases are not possible. Therefore, while performing searches for potential comparable companies, not only turnover and operating profit but functions performed and risk profile are also to be considered. However, it can always be shown on the given facts of the case that comparables found are similar or almost similar to the controlled transaction and no adjustments are needed. It is useful to see the level of intangible assets in comparison to an appropriate base. Depending on facts of the case, final set of comparables may need to eliminate differences by making adjustments for the following: (a) Working capital; (b) Adjustment for risk and growth; (c) Adjustment of R&D expenses. The risk not only due to human resources, infrastructure and quality which are normally taken into account yet more significant risks like market risk, contract risk, credit and collection risk and risk of infringement of intellectual property are being ignored here. In most of the comparable analysis carried in India, the latter type of risks is not being taken into consideration although these can lead to major difference in market value of transactions."

17. Considering the above cases and the provisions of Rule 10B(2) and ( 3) of the Rules, we are of the considered view that due adjustment of the working capital assumed by the assessee as well as the comparable entities are to be considered for determining the ALP of the transaction.

28 & 2446/Mum/2017 M/s. Glenmark Exports Ltd., A.Y.2009-10 21. Similarly, as discussed in the A.Y.2008-09, in the A.Y.2009-10 also TPO made addition of Rs.1,76,54,892/- on account of Arm’s Length price in respect of international transactions entered by the assessee.

22. We have considered rival contentions and found form record that the CIT(A) after giving detailed finding vide its order dated 29/12/2010 held that cost plus (+) method can be applied in the case of manufacturer and not in the case of assessee company who is a trader. Accordingly, he held that cost plus(+) method selected by TPO was not correct. In respect of the working capital adjustment, the CIT(A) followed the decision of the Hon'ble ITAT 'in the assessee own case for AY 2007-08 and accordingly allowed the working capital adjustment. With regard, to risk adjustment. The C1T(A) held that the assessee company did not bear any risk /or bear very minimal risk as compared to the comparable companies. Accordingly following the decision in the case of E-gain communication (P.) Ltd vs 1TO (2009) 118 ITD 243 (Pune) allowed 1% risk adjustment. Further the CIT(A) in his order has also held that Syncom Health Limited has trading sales of 50.63% only and manufacturing sales of 49.47% and since manufacturing company has different function, asset and risk as compared to trading comparables hence suitable adjustment needs to be made. Further margin earned by manufacturer would generally be more than traders due to higher risk borne by them. Based on the above the CIT(A) held that the assessee company being a trader, 29 & 2446/Mum/2017 M/s. Glenmark Exports Ltd., a company having less than 75% trading income cannot be compared. Accordingly, he directed the/ AO to exclude Syncom Health Ltd from the final list of comparables. We do not find any infirmity in the order of CIT(A).

30 & 2446/Mum/2017 M/s. Glenmark Exports Ltd., 25. Considering the totality of facts and circumstances of the case, we do not find any infirmity in the order of CIT(A). 26. In the result, appeal of the Revenue is dismissed.