TaxTMI 
TaxTMI 
2018 (10) TMI 419
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....e cross appeals relates to the addition of Rs. 7,42,23,000/- made by the Assessing Officer on account of transfer pricing adjustment, which is sustained by the ld. CIT(Appeals) to the extent of Rs. 3,62,46,000/-. 3. The assessee in the present case is 100% subsidiary of Philips Medical Systems International BV (PMS Netherlands), which belongs to the Group of Royal Philips Electronics of Netherlands. The group has seven product divisions, out of which the Philips Medical Systems is one of the world leading suppliers of medical imaging modalities and patient monitoring systems. It is a global leader in the product segments of X-ray, ultrasound, nuclear medicine, patient monitoring, magnetic resonance, computed tomography, PET, radiation oncology systems etc. The assessee-company is a distributor and commission agent for medical equipments in India. The products distributed by the assessee are high end products and generally used in operations, scanning of patients, MRI, etc. The return of income for the year under consideration was filed by the assessee-company on 27.11.2003 declaring a loss of Rs. 1,50,41,144/-. As declared in the said return, the assessee-company had entered int....
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....oubtful debts was a normal operating expense of any business and there was no reason for excluding the same for the purpose of determining the operating profits of a Company. Secondly, it was noted by the TPO that the assessee during the year under consideration had realized a sum of Rs. 1.16 crores on account of exchange fluctuation and although the same was treated as part of its operating income for the purpose of determining the operating profit margins, a loss on account of exchange fluctuation was completely ignored for the purpose of determining the operating cost on the ground that it constituted an abnormal item. This inconsistent stand taken by the assessee-company was not accepted by the Assessing Officer and the loss on account of exchange fluctuation was treated by him as a part of the operating cost. Accordingly, the operating profit margin of the assessee company on sales was recomputed by him at 3.75%. 6. Out of the 12 entities taken by the assessee as comparables, no data relating to the two companies had been provided by the assessee on the basis of which any conclusion regarding there functional comparability could be established. The TPO, therefore, rejected ....
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....services activity. The various expenses incurred for the purpose of generating these income would be part of the company's operating expenses. Hence, this company is not treated as a comparable case. (f) George Oakes Ltd.: The company is essentially dealing in automobile s pares parts, tractors and agricultural implements. It has also entered into significant relative party transactions. The kind of goods dealt by the company cannot be regarded as comparable to the assessee's distribution business in medical equipment. Hence, the same is rejected. (g) Ador Fontech Ltd.: The primary business of this company is manufacturing activity. The company also deals in welding alloys, rods and wires. Having regard to the nature of products dealt by this company, the same cannot be regarded as comparable to the assessee. (h) Lucas Indian Service Ltd.: This company essentially deals in automobile parts. It has significant dealings with related parties. Hence the same is rejected. (i)Positive Electronics Ltd.: This company is a dealer in colour TV sets, and other household electronic items, such as audio and video players. In view of the nature of products dea....
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....laty balloons, catheters, stents, connectors etc. These are clearly medical equipments and hence comparable to the assessee. The total turnover of the company is Rs. 2262 crores. From the details of the sundry debtors and creditors, it is seen that this company is dealing with hospitals. Hence, it is prima facie a comparable case. Regarding the doubt expressed by the assessee that the company is engaged in manufacturing activity It was confirmed by the company itself that the various products dealt by them have all been im0orted from overseas parties. Considering the fact that the profit margin of the company was on the higher side and the fact that R&D expenses have been disclosed in the P/L account, this company was not considered for the purpose of determining the arms length price in the assessment of last year. Regarding the R&D expenses, it is quite evident that the company is not performing any research and development and the amount shown in the profit and loss account is only on account of write off of some earlier expenses, considering the fact that the assessee is entirely importing the products sold by it, the write-off of old expenses is not relevant. Hence, in terms o....
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....and doubtful debts as part of operating cost. The ld. CIT(Appeals), however, did not find merit in the case of the assessee on this issue and rejected the stand of the assessee for the following reasons given in paragraph no. 8.5 of his impugned order:- "8.5. I have considered the submissions of the appellant. The provision for bad and doubtful debts during the year is about 3.15% on sales as against an average of 1% on total sales in earlier years as stated. The said increase is stated to be on account of HSG business acquired during the preceding year whose debts could not be recovered in that year. I agree with the argument of the TPO that bad debts arising from carrying out of a business are normal and regular feature of the business. Hence. they should be treated as normal business expense. The appellant cannot claim exclusion of the provision of bad and doubtful debts for justification of its arm's length price. This argument is also strengthened on account of the fact that such a feature of excessive bad debts may also be present in the comparable cases selected by the appellant as well as TPO specially because mergers and takeovers are now regular features in t....
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.... electronic motors, fans and related consumables. The TPO's observation that it is engaged in financial service activity is not correct. The company has trading turnover of Rs. 20.41 crores and other income of only Rs. 67.34 lacs. In the preceding year, however, this company was not considered to be a comparable case by my predecessor; because from the trading activity, the exclusion of other income resulted in net loss. However, in the current year i.e. A. Y.2003-04, there is neither any share dealing nor any such resultant loss. Hence, this case is accepted to be a comparable case". 12. As regards the three entities selected by the TPO as comparables, the assessee-company reiterated its objection before the ld. CIT(Appeals) that the said entities could not be taken as comparables as their data was not available in the public domain. Reliance in this regard was placed on behalf of the assessee on Rule 10D of the Income Tax Rules, 1962, which provided that the auditor had to restrict his analysis in regard to the international transactions only with reference to the records and documents available in public domain. The ld. CIT(Appeals), however, did not find merit in the sam....
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....of the traded medical equipments which would explain the narration of raw material in inventories. But the raw materials are nothing but surgical equipments which are assembled and then traded. There is vast difference in the terminology of assembling and manufacturing. Hence, I consider SISCO Ltd. to be a comparable case and hold accordingly. 8.25. In so far as the objection to inclusion of Vascular Concepts (P) Ltd. as a comparable case is concerned, two fold arguments have been given by the appellant. Firstly, it is stated that this case was rejected by the TPO herself in earlier year due to functional difference: hence it should not have been selected. Secondly, it is stated that the company is mainly in design, development and manufacture of Endovascular medical devices and hence, it is not a normal distributor/trader. I have perused the documents submitted by the appellant in respect of above company. It is seen that the company is engaged only in trading of medical equipments related to surgery including heart surgery. The trading turnover in F.Y.2002-03 was Rs. 22.62 crores and other income was Rs. 22.02 lacs. There is no major consumption of power and fuel and no ....
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.....31% and a transfer pricing adjustment of Rs. 36,246,000/-. 2. Ground No. 2 - Treatment of provision for bad and doubtful debts for determining operating margin The Ld CIT(A) erred in law and facts in holding that provision for doubtful debt related to HSG business taken over during the year was normal business expenses, hence should not be ignored while computing the operating margin of the appellant. 3. Ground No. 3 - Selection of comparable whose results are not available in the public database 3.1. The Ld CJT(A) failed to appreciate that 'secret comparables' which are not available in public database should not be considered as it is bad in law and against the principle of natural justice. 3.2. The Ld CJT(A) erred in law in holding that the restriction to use publicly available data as per the provisions of Rule 10D(4) of the Income-tax Rules, 1962 does not apply to the Assessing Officer. 4. Ground No. 4 - Arbitrary rejection/selection of comparables 4.1. The Ld CJT CA) has erred in selecting/rejecting comparables arbitrarily. Whereas the appellant has selected the comparables proper analysis of function per....
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.... provision for bad and doubtful debts for determining the operating margin. 17. The ld. Counsel for the assessee submitted that the provision of Rs. 4.13 crores made by the assessee-companay for bad and doubtful debts has been treated by the TPO as well as by the ld. CIT(Appeals) as part of operating expenses without considering the relevant facts and circumstances of the case. He contended that the said provision was made for the debts related to HSG business, which had become bad and irrecoverable. He submitted that the HSG business was acquired by the assessee-company during the financial year 2001-02 and in the course of the said acquisition, debtors of HSG were also taken over by the assessee company. He submitted that the assessee-company, however, could not recover part of the debtors so taken over and accordingly a provision was made in its books for the year under consideration for doubtful debts. He invited our attention to the details of such debts given at pages no. 291 to 300 of his paper book and pointed out that the amount of Rs. 4.13 crores in question was entirely provided for the debts related to HSG business, which was taken over by the assesee-company in the ....
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.... Bangalore Bench of this Tribunal held that such provision for doubtful debts cannot be reduced for determining the operating profit for the purpose of transfer pricing analysis either in the case of tested party or comparables. The Tribunal took a note of the whole purpose of transfer pricing analysis as well as the method followed for determining the arm's length price including TNMM and held that if the provision for doubtful debts made with respect to the sale of the earlier year is reduced from the profit of the subsequent year, the numerator is reduced but the denominator is not reduced because corresponding sale stood considered in earlier year, which could not be considered in the subsequent year. It was held that such provision for bad and doubtful debts thus has to be ignored and added back to the operating profit of the tested party or of the comparables as the case may be for determining the operating margin while making the transfer pricing analysis. While arriving at this conclusion, the Bangalore Bench of ITAT also took into consideration certain decisions of the Tribunal rendered earlier on this issue on which reliance is placed by the ld. D.R. in support of the rev....
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....round No. 2 and additional Ground No. 2 of the assessee's appeal, the other issues raised in Grounds No. 3 to 8 and additional Ground No. 1 of the assessee's appeal and Ground No. 1 of the Revenue's appeal relating to the addition made on account of transfer pricing adjustment have become infructuous or rendered academic only. We, therefore, do not consider it necessary or expedient to decide the same. 24. As regards the remaining issues raised in Ground No. 9 of the assessee's appeal and Ground No. 2 of the Revenue's appeal relating to the disallowance on account of employer's contribution to P.F. and Pension Fund and employees contribution to P.F. and Pension Fund respectively, it is observed that the same are squarely covered in favour of the assessee by the decision of the Hon'ble Supreme Court in the case of CIT -vs.- Alom's Extrusions Limited [185 Taxman 416] and CIT -vs.- Vinay Cement Limited [213 CTR 268], wherein it was held that the employer's/employees contribution towards Provident Fund and Pension Fund paid before the due date of filing of the return of income for the relevant year cannot be disallowed under section 43B, even if it has been paid after the due date a....
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.... fault in the search process for selection of comparable companies submitted by the appellant. On the other hand, the TPO by invoking powers u/s 133(6), picked up 3 companies to arrive at the margin of 8.99%. The information collected by the TPO by invoking section 133(6) of the I.T. Act in respect of these companies, was not available in public domain. 8. It will be unfair to penalize the appellant in respect of data/ information gathered by invoking the provisions of Section 133(6) of the I.T. Act, which the appellant cannot exercise. The Ld. CIT(A) partly agreed with the contention of the tax payer and included its 3 comparable companies out of final set of comparables and arrived at the operating margin of 6.31% as against 8.99% determined by the appellant. It is clear that the whole exercise is a subjective one based on selection and rejection of comparables and so levying a concealment penalty on this exercise would be unfair in the light of the decision of the Mumbai ITAT in the case of Firmenich Aeromatics (India) Pvt. Ltd. 2010-TII-17-ITAT-MUM-TP. 9. Based on the above facts and circumstances, it cannot be said that the appellant either acted in bad faith....