AI Drafter 
TaxTMI 
TaxTMI 
2019 (3) TMI 401
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....position of penalty under section 271(1)(c). 2. The main issue involved in these cross appeals relates to the addition of Rs. 6,06,06,000/- made by the Assessing Officer/Transfer Pricing Officer on account of transfer pricing adjustment, which is sustained by the ld. CIT(Appeals) to the extent of Rs. 2,60,32,000/-. 3. The assessee in the present case is a 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's 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, nuclear medicine, 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 asses....
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....computed by him at 1.79%. As regards the 10 entities selected as comparables by the assessee-company, the Assessing Officer found that four of them had substantial related party transaction, while three entities were not functionally similar to the assessee-company. He also found that out of the remaining three entities selected by the assessee-company as comparables, two entities were having very high or very low turnover as compared to the assessee-company, while the third company was engaged in trading of computer-graphic equipments and not medical equipments or any other product closely comparable to the medical equipments distributed by the assessee. He, therefore, rejected all the entities selected by the assessee-company as comparables. 6. The TPO, on his own, selected four entities, which were engaged in dealing of medical equipments as comparables and proposed to consider the same for the purpose of determining the arm's length price of the international transactions of the assessee with its AEs. He, accordingly obtained their annual reports by issuing notices under section 133(6) and provided copies of the same to the assessee. The assessee-company raised a prelimi....
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.... 10.44% 2. Biomed Imports Pvt. Ltd 5.80% Average profit margin: 8.12% Applying the said average operating profit margin of 8.12% to the total turnover of the assessee-company, the transfer pricing adjustment was worked out by the TPO at Rs. 6,06,06,000/- and accordingly the addition to that extent was made by the Assessing Officer to the total income of the assessee on account of transfer pricing adjustment in the assessment completed under section 143(3) vide an order dated 30.03.2005. 8. Against the order passed by the Assessing Officer under section 143(3), an appeal was preferred by the assessee before the ld. CIT(Appeals) challenging the addition made by the Assessing Officer/TPO on account of transfer pricing adjustment by raising various issues. One of the issues raised by the assessee before the ld. CIT(Appeals) was relating to the treatment given by the TPO to the loss on account of fluctuation in foreign exchange 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 same for the following reasons given in paragraph nos. 26 & 27 of his impugned order:- "26. In so....
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....(Appeals), however, did not find merit in the same. According to him, the restriction as stipulated in Rule 10D was applicable only in case of an auditor and there was no such fetters placed on the Assessing Officer or Transfer Pricing Officer, who could collect any information that they consider as comparables and, therefore, necessary in the determination of the arm's length price. He also did not find merit in the other submissions made on behalf of the assessee-company seeking exclusion of the said two entities selected by the TPO as comparables and upheld the action of the TPO in considering the said two entities as comparables. 11. Accordingly five of the ten entities identified by the assessee and two entities identified by the TPO were finally selected by the ld. CIT(Appeals) as comparables and their average operating profit margin was worked out by him at 4.53% as under:- Sl. No. Name of the Company NPM 2002 1. Ador Fontech Limited 6.11% 2. Business Link Automation (India) Ltd. 3.26% 3. Compunics Information Systems 0.39% 4. Digital Electronics Ltd. 4.08% 5. Redington India Ltd. 1.66% 6. South India Surg....
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....3 - Rejection of comparables selected by the Appellant 3.1 The learned CIT(A) erred in holding, considering the submissions made, facts and circumstances of the case, that Remi Sales & Engineering Limited is not comparable to benchmark the Appellant's international transactions. 3.2 The learned CIT(A) erred in holding, considering the submissions made, facts and circumstances of the case, that other income disclosed in the financials of Remi Sales & Engineering Limited has no relationship to the business activity of the Company. 3.3 The learned CIT(A) erred in holding, considering the submissions made, facts and circumstances of the case, that comparables having transactions with Indian associated enterprises cannot be considered as comparables as per the provisions of Rule 10D(3)(ii) of the Income-tax Rules, 1962. 3.4 The Appellant prays that the Remi Sales & Engineering Limited and other comparables selected by the Appellant should be accepted as comparables for benchmarking the Appellants international transactions. 4. Ground No. 4 - Foreign exchange fluctuation loss 4.1 The learned CIT(A) failed to appreciate, considerin....
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....additional grounds which are related to the issue of transfer pricing adjustment:- "Ground No. 1- Transfer pricing adjustment to be restricted to international transactions The Transfer Pricing Officer (the TPO) and Assessing Officer (the AO) and Commissioner of Income Tax (Appeals)-VIII, Mumbai (The CIT(A) have erred in law and on facts in attributing the entire alleged short fall in the profit margin of the appellant to the international transactions, in making the transfer pricing adjustment amounting to INR 26,032,000 instead of computing the transfer pricing adjustment only to the extent of the proportionate share of the value of the international transactions. Ground No. 2 - The befit of +/-5% variation computed on Arm's Length Price On the facts and in the circumstances of the case, the TPO and the AO have erred in proposing and the CIT(A) has further erred in rejecting the benefit o +/-5% to appellant under second proviso to section 92C(2) of the Income Tax Act, 1961. 14. As regards the issue involved in Ground No. 1 relating to selection of comparables by the TPO whose results are not available in the public domain, the ld. Counse....
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....red by the said entity. 16. The ld. Counsel for the assessee further invited our attention to the copy of catalogue placed at page no. 323 of the paper book and pointed out from the functional profile of the said company given therein that SISCO was engaged in manufacturing of extensive range of surgical instruments. He contended that SISCO thus was also engaged in manufacturing activity and there was functional dissimilarity between the said entity and the assessee-company. He contended that no segmental details in respect of manufacturing and trading were available and in the absence of the same, SISCO cannot be taken as comparable. He submitted that this functional difference between the assessee-company and SISCO was accepted by the ld. CIT(Appeals) in paragraph no. 45 of his impugned order, but still he chose to ignore the same on the ground that it was a case of contract manufacturing rather than of own manufacturing. He contended that the ld. CIT(Appeals) as well as the TPO also erred in placing the entire reliance on the Director's report indicating that SISCO was primarily engaged in trading activity ignoring completely the details reflected in the financial stateme....
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....ng with the products in the same medical field. He submitted that the assessee-company itself has taken one entity as comparable, which is not even dealing in medical equipments. He contended that the broad functional and product similarity is sufficient when TNMM is applied as the most appropriate method and the SISCO, therefore, is rightly included in the list of final comparables. 19. In the rejoinder, the ld. Counsel for the assessee clarified that even if two of four factories of SISCO are in the nature of sales & service centres going by the nomenclature used, there is nothing to show that there is no manufacturing activity in other two factories. 20. We have considered the rival submissions and also perused the relevant material available on record. It is observed that the assessee is seeking exclusion of one of the entities selected by the TPO, namely SISCO from the list of final comparables on the ground that the same is not functionally similar. In this regard, the ld. Counsel for the assessee has contended that SISCO during the year under consideration was engaged in trading as well as manufacturing activity and the same, therefore, is not functionally similar to t....
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....Neither the authorities below in their respective orders nor the ld. D.R. at the time of hearing before us has disputed these facts and figures highlighted on behalf of the assessee. They, however, have taken a view that the activity of SISCO was in the nature of contract manufacturing and the same was only incidental to the main activity of trading and rendering related services. We are unable to concur with this view in the absence of any material or information to support and substantiate the same. When the CIF value of raw materials imported by the assessee-company during the year under consideration was Rs. 10.72 crores, vis-a-vis the total sales of Rs. 20.86 crores and the expenses incurred by it, which were in the nature of direct manufacturing expenses amounting to above Rs. 30 lakhs, it is difficult to say that the manufacturing activity of SISCO was insignificant and the same was only incidental to its trading activity. 23. In support of the revenue's case for inclusion of SISCO in the list of final comparables, heavy reliance is placed by the authorities below as well as by the ld. D.R. on the Director's report of SISCO, wherein it was stated that the Company ....
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....is determined by applying the average operating profit margin of the remaining comparables, the same would fall within the tolerance limit of 5% as compared to the price actually charged by the assessee-company to its AEs for the said international transactions, the benefit of which is being claimed in additional ground no. 1. We accordingly direct the Assessing Officer/TPO to re-compute the arm's length price of the international transactions of the assessee-company with its AE by excluding SISCO from the list of final comparables and if the same is found to be within the tolerance limit of 5%, the Assessing Officer/TPO is directed to delete the addition made on account of transfer pricing adjustment. Additional Ground No. 2 of the assessee's appeal is accordingly allowed. 25. As a result of our decision rendered above while deciding the issue involved in Ground No. 2 and additional Ground No. 2 of the assessee's appeal, the other issues raised in Grounds No. 3, 4, 5 & 6 and additional Ground No. 1 of the assessee's appeal as well as in Ground No. 1 of the Revenue's appeal relating to the addition made on account of transfer pricing adjustment have become in....
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....see to establish that the debt, in fact, has become irrecoverable. As further held by the Hon'ble Supreme Court, it is enough if the bad debt is written off as irrecoverable in the accounts of the assessee. Respectfully following the said decision of the Hon'ble Apex Court, we delete the disallowance made by the Assessing Officer and confirmed by the ld. CIT(Appeals) on account of assessee's claim for deduction on account of bad debts written off and allow Ground No. 7 of the assessee's appeal. 29. As regards the Revenue's appeal, the only other issue involved therein besides the addition made on account of Transfer Pricing Adjustment as raised in Ground No. 2 relates to the deletion by the ld. CIT(Appeals) of the disallowance of Rs. 11,32,532/- made by the Assessing Officer on account of interest paid on capital borrowings. 30. During the course of assessment proceedings, it was noticed by the Assessing Officer that the assessee has utilized the borrowed funds for acquiring a new business. According to him, interest attributable to the borrowed funds to the extent utilized for acquiring the new business was an expenditure of capital nature and the same wa....
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....is directed against the order of the ld. CIT(Appeals)-15, Kolkata dated 20.10.2010, whereby he cancelled the penalty of Rs. 92,93,424/-imposed by the Assessing Officer under section 271(1)(c) of the Act, it is observed that the penalty imposed by the Assessing Officer under section 271(1)(c) of the Act in respect of addition made to the total income of the assessee on account of transfer pricing adjustment as sustained in the first appeal to the extent of Rs. 2,60,32,000/- was deleted by the ld. CIT(Appeals) vide paragraphs no. 4 to 10 of his impugned order, which read as under:- "4. I have perused the assessment order, penalty order as well as the case laws cited by the appellant. Penalty proceedings are separate from quantum proceedings (assessment proceedings) and simply because an addition has been made in the assessment order which even has been confirmed at the appellant level will not ipso facto lead to levy of penalty u/s. 271(1)(c). This is because the considerations which prevail in penalty proceedings are different from those which obtain at the assessment proceedings. 5. This aspect assumes greater significance as penalty relating to adjustments made u....