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TMI Blog2019 (3) TMI 401X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee before the ld. CIT(Appeals) under letter dated 24.12.2005 and although the ld. D.R. has contended that this general catalogue cannot conclusively establish the manufacturing activity of SISCO, we are of the view that the same coupled with the other relevant details reflected in the financial statements and annual report of SISCO are sufficient to establish that the SISCO was engaged in manufacturing also as a significant activity and in the absence of segmental details, the same cannot be taken as comparable to the assessee-company, which is mainly engaged in trading activity. We accordingly direct the TPO to exclude SISCO from the list of final comparables and allow Ground No. 2 of the assessee's appeal. We accordingly direct the AO/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 AO/TPO is directed to delete the addition made on account of transfer pricing adjustment. Addition of bad debts written off - claim disallowed by AO on the ground that there was a failure on the part of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d addition is not sustainable and the impugned order of the ld. CIT(Appeals) cancelling the penalty imposed by the Assessing Officer deserves to be upheld on this ground also. - I.T.A. No.2723 /MUM/2006, I.T.A. No.164/MUM/2011 And I.T.A. No.3183/MUM/2006 - - - Dated:- 26-9-2018 - Shri P.M. Jagtap, Accountant Member And Shri Satbeer Singh Godara, Judicial Member For The Assessee : Shri Farrokh Irani , Sr. Counsel , Shri Ketan K. Ved, A.R. Shri G.P. Srivastava For The Department : Shri G. Mal l ikarjuna, CIT, D.R. Sk. Zafarul Haq Tanveer, Addl . CIT, Sr. D.R. , ORDER P.M. Jagtap, Accountant Member. Out of these three appeals, two appeals being ITA No. 2723/MUM/2006 (Assessee's appeal) and ITA No. 3183/MUM/2006 (Revenue's appeal) are cross appeals for assessment year 2002-03, which are directed against the order of ld. Commissioner of Income Tax (Appeals)-VIII, Mumbai dated 01.03.2006, while the third appeal being ITA No.164/MUM/2011 filed by the Revenue involves the consequential issue relating to imposition of penalty under section 271(1)(c). 2. The main issue involved in these cross appeals relates to the addition of ₹ 6,06,06,000/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed Enterprises was made by the assessee as per the different methods, the assessee-company during the course of proceedings before the TPO made the transfer pricing analysis by applying the Transactional Net Margin Method (TNMM) at entity level by taking operating profit to sales as the profit level indicator. On search in the public database, 10 entities were identified as comparables and since the arithmetic mean of the operating margins of the said comparables as worked out at 3.11% was less than the Operating Profit Margin on sales of the assessee-company as worked out at 5.07%, the International Transactions entered into with its AEs were claimed by the assessee-company to be at Arm's Length. 5. As noted by the TPO, there was a mistake on the part of the assessee-company in working out its operating profit margin on sales at 5.07%, inasmuch as, the loss suffered on account of exchange fluctuation was completely ignored by the assessee-company for the purpose of determining the operating cost on the ground it constituted an abnormal item. The Assessing Officer did not accept this treatment given by the assessee-company and by treating the loss on account of exchange fluc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s clearly stated that the company is presently engaged only in trading activity. In view of the specific statement in the director's report, this company is considered as comparable to the assessee. Further, this is a Public Limited Company. (c) Vascular Concepts Pvt. Ltd.:- The assessee's contention that this company is also engaged in manufacturing activity is entirely incorrect. In this connection, a letter was addressed to the said company and it has been confirmed by them categorically that during the previous year they have only imported the various products dealt by them and sold the same in India. Hence, clearly they are engaged only in trading activity and not in any manufacturing or production activities. Hence this company can be considered as a comparable company. (d) Biomed Importers Pvt. Ltd.:- In view of the fact that the assessee considers the same to be comparable to it, the same is treated as a comparable company. 7. Out of the above three entities, TPO further excluded M/s. Vascular Concepts Pvt. Ltd. and the average operating profit margin of the two entities finally selected as comparables was worked out by the TPO at 8.12% as under:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inary liability that would have arisen on account of the appellant having taken the loan in convertible foreign exchange. Such loss or gain in trading is always to be anticipated. It has arisen as a normal incidence of the business and hence is an integral part of the profit arising to the appellant. Therefore, the claim in this respect is liable for rejection . 9. The action of the TPO in rejecting all the ten entities selected by it as comparables was also challenged by the assessee before the ld. CIT(Appeals) by making various submissions. After considering the submissions made by the assessee as well as the material available on record, the ld. CIT(Appeals) agreed with the TPO as regards the rejection of five entities selected by the assessee as comparables. He, however, did not agree with the TPO as regards the other five entities selected by the assessee as comparables. 10. As regards the two 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ective appeals:- Assessee's appeal 1. Ground No. 1 - Selection of comparable whose results are not available in the public domain. 1.1 The Commissioner of Income-tax (Appeals) - VIII, Mumbai [the CIT(A)] erred 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. 1.2 The learned CIT(A) failed to appreciate, considering the submissions made, facts and circumstances of the case, the appellant's claim that the judicial principle of 'Impossibility of Performance' should be given due consideration while using secret comparables. 1.3 The learned CIT(A) failed to appreciate, considering the submissions made, facts and circumstances of the case, that the secret comparable considered by the learned TPO is bad in law and against the principle of natural justice. 1.4 The Appellant prays that the comparable whose results are not available in the public domain should be rejected for benchmarking its international transactions. 2. Ground No. 2 - Selection of South India Surgical Co. Limited (SISCO) as comparable 2.1 The lear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in of the Appellant. Ground No. 5 - Use of multiple year data 5.1 The learned CIT(A) erred in holding that there is no useful purpose is served in taking into consideration the material data available in respect of the earlier accounting years where said provisions were not applicable. 5.2 The learned CIT(A) erred in holding that for the relevant assessment year there was no error or omission on the part of the TPO to consider single year data only. 5.3 The learned CIT(A) failed to appreciate, considering the submissions made, facts and circumstances of the case that the operating margin of the comparable companies should be computed by using multiple year data. 5.4 The Appellant prays that multiple year data should be used for computing the operating profit margin of the comparables. 6. Ground No. 4 - Use of +/-5% range 6.1 The learned CIT(A) erred in rejecting the Appellant's claim that the benefit of +/-5% range while computing the arm's length price. 6.2 The Appellant prays that the benefit of plus 5% range be granted to the Appellant while computing the arm's length price and consequent adjustment to total income. Reven ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ind no merit in Ground No. 1 of the assessee's appeal and dismiss the same. 15. As regards the issue involved in Ground No. 2 of the assessee's appeal challenging the selection of M/s. South India Surgical Co. Limited (SISCO) as comparable by the TPO, the ld. Counsel for the assessee explained the functional profile of the assessee-company. He submitted that the assessee-company is mainly a trading company, which deals in high-end medical equipment with market confined to India. He invited our attention to the profit loss account of the assessee-company for the year under consideration placed at page 37 of the paper book to point out that the major source of income of the assessee-company was from sales and service and commission. He contended that the assessee-company thus was not engaged in manufacturing activity at all while the SISCO taken by the TPO as comparable was very much engaged in the manufacturing activity. In this regard, he invited our attention to the relevant portion of the annual report of the SISCO at page no. 2 of the annual report binder to show that the said entity had four factories at different locations. He also pointed out from page no. 23 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be some manufacturing activity carried on by SISCO during the relevant year as pointed out by the ld. Counsel for the assessee from the annual report but it was a case of contract manufacturing only as evident from the relevant expenses claimed by SISCO and the quantum of such contract manufacturing was also very insignificant. He contended that such manufacturing activity was only incidental to the main activity of trading and servicing carried on by the SISCO and the same was not relevant or material when the transfer pricing analysis was undertaken by adopting TNMM. He submitted that there was no mention at all in the annual report of SISCO regarding installed capacity, utilized capacity, etc., which again goes to show that there was hardly any manufacturing activity carried out by SISCO on its own and it was a case of contract manufacturing which was only incidental to the main activity of SISCO of trading and servicing. 18. As regards the addresses of four factories of SISCO given in the annual report as pointed out by the ld. Counsel for the assessee, the ld. D.R. submitted that two of the said units indicated as factories were named as sales office and service centre. He ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e annual report to point out that raw materials and stores and spares were being valued at cost by SISCO while finished goods were being valued at cost or market value, whichever is less. This shows that the inventory of SISCO was classified into raw materials and finished goods which indicates that SISCO was engaged in the activity of converting raw materials into finished goods, i.e. manufacturing. 21. As prescribed under Paragraph 3, 4(c) 4(d) of Part-II of Schedule VI of the Companies Act, 1956, the Company is required to furnish the relevant quantitative particulars in its annual report. As pointed out by the ld. Counsel for the assessee from the relevant portion of the annual report of SISCO at page no. 23, it was mentioned that the relevant quantitative particulars of principal items traded and manufactured could not be given as it was not quantified in terms of any particular items since the Company was dealing in numerous varieties of products. These details furnished by SISCO in its annual report further goes to show that it was engaged in the business of trading as well as manufacturing. 22. On page no. 23 of the annual report, SISCO had also given the informatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there was no manufacturing activities, especially when the relevant details reflected in the financial statements were clearly showing that manufacturing activity was carried out by SISCO in the year under consideration besides trading. The ld. Counsel for the assessee has placed on record a copy of catalogue of SISCO at pages 323 to 326 of the paper book, wherein it is mentioned that SISCO manufactures extensive range of surgical instruments from General Surgery, Cardio-Vascular, Neuro, Urology, Plastic, Obstetrics and Gynaecology, Tungsten Carbide, Minimal Invasive Instruments. It is also mentioned that SISCO had 4-5 years ago started its full-fledged production of Disposables Syringes and Foley Catheter and had proved its significance notably. The copy of this catalogue was filed by the assessee before the ld. CIT(Appeals) under letter dated 24.12.2005 and although the ld. D.R. has contended that this general catalogue cannot conclusively establish the manufacturing activity of SISCO, we are of the view that the same coupled with the other relevant details reflected in the financial statements and annual report of SISCO are sufficient to establish that the SISCO was engaged in m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... actually become bad and irrecoverable during the year under consideration. Before the ld. CIT(Appeals), it was contended on behalf of the assessee that after the amendment made to section 36(1)(vii) read with section 36(2) w.e.f. 1st April, 1989, it was no longer necessary for the assessee to establish that the relevant debts had actually become bad during the relevant year in order to claim deduction on account of bad debts written off and the only requirement was that the said debts representing trading debts were written off in the books of account as irrecoverable. Reliance in support of the contention was placed by the assessee on the CBDT Circular No. 551 dated 23.01.1990. The ld. CIT(Appeals) did not find merit in this contention raised on behalf of the assessee. According to him, it was necessary for the assessee to establish that the relevant debts had actually become bad during the relevant year in order to claim deduction under section 36(1)(vii) read with section 36(2) and this position had remained unchanged even after the amendment made in the said provision w.e.f. 1.4.1989. He accordingly confirmed the disallowance made by the Assessing Officer on account of bad debt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any had acquired Healthcare Solution Group of Agilent Technologies India Pvt. Limited as a going concern and even the profit from the said business earned during the year under consideration was offered to tax by the assessee. He held that the borrowed funds thus were utilized by the assessee-company for the purpose of its business and interest paid thereon was allowable as deduction under section 36(1)(iii) of the Act. 31. We have heard the arguments of both the sides on this issue and also perused the relevant material available on record. As rightly held by the ld. CIT(Appeals), the only requirement for allowing deduction on account of interest under section 36(1)(iii) for the year under consideration was that such interest was paid in respect of capital borrowed for the purpose of assessee's business or profession and the proviso to section 36(1)(iii) putting a bar on the allowability of interest paid in respect of capital borrowed for acquisition of assets has been inserted in the Statute only w.e.f. 1.4.2004 applicable to A.Y. 2004-05 and onwards. In the present case, the borrowed funds having been utilized by the assessee-company for acquiring a going concern and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... propriate method. In doing so, it compared the price of similar equipments sold by its related overseas party to a non-related party in India. Wherever CUP was not available, TNMM method was considered as the most appropriate method. The very fact that the appellant had tried to benchmark its transaction on the CUP, demonstrates its willingness and confidence to determine its Arm's Length Price by the most direct and reliable method. 8. Even while carrying out TNMM, it undertook its search in public database and identified 10 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 2 companies to arrive at the margine of 8.12%. 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. 9. 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 agr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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