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TMI Blog2018 (10) TMI 419X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee-company by taking its operating margin after excluding the provision for bad and doubtful debts and if the same is found within the tolerance limit of 5%, the Assessing Officer/TPO is directed to delete the addition made on account of transfer pricing adjustment. The additional Ground No. 2 of the assessee’s appeal is accordingly allowed. Disallowance on account of employer’s contribution to P.F. and Pension Fund and employees contribution to P.F. and Pension Fund - Held 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 [2009 (11) TMI 27 - SUPREME COURT] and CIT –vs.- Vinay Cement Limited [2007 (3) TMI 346 - SUPREME COURT OF INDIA], 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 as per relevant Acts. Penalty u/s 271(1)(c) - addition on account of transfer pricing adjustment - Held that:- Even the addition made on account of transfer pricing adjust ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nning 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 ₹ 1,50,41,144/-. As declared in the said return, the assessee-company had entered into the following international transactions with its Associated Enterprises (AE) during the year under consideration:- Sr. No. Nature of international transaction Amount (Rs. In crores) Method 1. Import of equipment and spares (after set off of credit note received of ₹ 23.09 crores on account of transfer pricing adjustment) 74.40 TNMM 2. Commission income earned 5.57 TNMM 3. IT charges-cost sharing amount paid by assessee 1.69 Accrual 4. Reimbursement paid to AE-: received Paid 716 3.28 Accrual 4. In order to determine the Arm s Length Price of the above Inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tem. 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 the said two entities as comparables. Out of the remaining ten entities taken as comparables by the assessee, the TPO accepted only two and rejected eight entities after applying different criteria as under:- (a) Advanced Micronic Devices Ltd.: On a reference to the balance sheet of this company it appears that the same is engaged in trading in healthcare devices and cardiac care equipment. It appears to be functionally comparable to the assessee and hence accepted as a comparable case. (b) WH Brady Co. Ltd. : This company has entered into significant relative party transactions. If the consolidated balan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 dealt by it, it cannot be regarded as comparable to the assessee s distribution activity. (j) Redington India Ltd.: This company is dealing in computer, printers, spares and software. This company has a turnover of ₹ 1500 crores in terms of volume of business it is too large to be compared with the assessee s business activities. Further it has also entered into some related party transactions. Hence, the same is rejected . 7. The TPO, on his own, selected three more entities, which were engaged in dealing of medical equipments as comparables and considered the same for the purpose of determining the arm s length price of the Intern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at 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 of functions performed this company is closely comparable to the assessee company s distribution activity. Once a company is established to be comparable, there is no discretion to reject the same, under the Indian regulations merely on the ground that the profit margins are very high or very low. Further the quantitative information provided in the schedule to accounts under the head production refers only to the assembling of the products imported by this company. If the company had been engaged in manufacturing activity the same would have been disclosed in the form of some expenditure in the profit and loss account. Hence, the same is accepte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ellant. 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 the cases of big companies and multinational corporations. The business of HSG was acquired in earlier year when the debtors of that company merged with the debtors of the appellant company. Hence, these debtors and bad debts pertaining to them cannot be any more identified separately in successive years. Therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble 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 same. According to him, the restriction as stipulated in Rule 10D was applicable only in case of an auditor and there was no such fetter placed on the Assessing Officer or Transfer Pricing Officer, who could collect any information that they considered as comparables and, therefore, necessary in the determination ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase 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 ₹ 22.62 crores and other income was ₹ 22.02 lacs. There is no major consumption of power and fuel and no manufacturing account was prepared. Also, from the accounts of the company it is seen that no revenue expenditure on R D or decision, development activity has been booked. There is a minor amount of capital expenditure ofRs.43.13 lacs on R D. It is seen that this company like SISCO Ltd. also assembles some of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ven to the appellant against the findings of the TPO. 1.4. The Ld CIT(A) erred in determining the arithmetic mean of arm's length net profit margin of 6.31% and a transfer pricing adjustment of ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ication. 16. Ground No. 2 of the assessee s appeal involves the issue relating to the treatment to be given to the provision for bad and doubtful debts for determining the operating margin. 17. The ld. Counsel for the assessee submitted that the provision of ₹ 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 ₹ 4.13 crores ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... debts had become doubtful. In these facts and circumstances as involved in the case of Marble India Pvt. Limited (supra), the 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 certa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee s appeal is accordingly allowed. 23. 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 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 filin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rch in public database and identified 2 companies as comparables to its distribution activities in India. The TPO has not found 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-MU ..... 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