DCIT - 8(2), MUMBAI V. M/s. PHILIPS MEDICAL SYSTEMS INDIA P. LTD., MUMBAI

ITA 4114/MUM/2008

• Counselvise Citation: [2018] 121 COUNSELVISE.COM (IT) 9813 (ITAT-KOLKATA)
• Duration Of Justice: 10 year(s) 3 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-09-2018
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 13-10-2014
• Assessment Year: 2003-2004
• Appeal Filed On: 09-06-2008
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: G MALLIKARJUNA; SK ZAFARUL H
• Assessee Lawyers: G P SRIVASTAVA
• Keywords: Business income; Transfer pricing; Business expenditure; Principle of natural justice; International transaction; Bad and doubtful debts; Revenue expenditure; Capital expenditure
• Section: 143(3); 133(6); 92

Judgement Text

I.T.A. NO 3412/MUM/2008 ASSESSMENT YEAR: 2003-2004 & I.T.A. NO. 4114/MUM/2008 ASSESSMENT YEAR: 2003-2004 & ITA-2722/MUM/2011 ASSESSMENT YEAR: 2003-2004 PAGE 1 OF 23 IN THE INCOME TAX APPELLATE TRIBUNAL, KOLKATA C BENCH, KOLKATA BEFORE SHRI P.M. JAGTAP, ACCOUNTANT MEMBER & SHRI SATBEER SINGH GODARA, JUDICIAL MEMBER I.T.A. NO.3412 /MUM/2008 ASSESSMENT YEAR: 2003-2004 M/S. PHILIPS MEDICAL SYSTEMS PRIVATE LIMITED,...... ......................APPELLANT (NOW MERGED WITH PHILIPS ELECTRONICS INDIA LIMITED) TECHNOPOLIS KNOWLEDGE PARK, MAHAKALI CAVES ROAD, MUMBAI-400 093 [PAN: AAACP 3231 B] -VS.- INCOME TAX OFFICER,................................ ........................................RESPONDENT WARD-8(2)(4), MUMBAI & I.T.A. NO.4114/MUM/2008 ASSESSMENT YEAR: 2003-2004 DEPUTY COMMISSIONER OF INCOME TAX,................. ..........................APPELLANT WARD-8(2), MUMBAI, ROOM NO. 216A, AAYAKAR BHAWAN, M.K. ROAD, MUMBAI-400 020 -VS.- M/S. PHILIPS MEDICAL SYSTEMS PRIVATE LIMITED,...... ......................RESPONDENT (NOW MERGED WITH PHILIPS ELECTRONICS INDIA LIMITED) CORPORATE FISCAL, BUILDING NO. 9B, DLF CYBER CITY, DLF PHASE-3, 8 TH FLOOR, GURGAON, HARYANA-122 002 [PAN: AAACP 3231 B] & I.T.A. NO.2722/MUM/2011 ASSESSMENT YEAR: 2003-2004 DEPUTY COMMISSIONER OF INCOME TAX,................. ..........................APPELLANT WARD-8(2), MUMBAI, ROOM NO. 216A, AAYAKAR BHAWAN, M.K. ROAD, MUMBAI-400 020 -VS.- PHILIPS ELECTRONICS INDIA LIMITED.................. ...............................RESPONDENT TECHNOPOLIS KNOWLEDGDE PARK, 2 ND FLOOR, MAHAKALI CAVES ROAD, CHAKALA, ANHDERI (E), MUMBAI-400 093 I.T.A. NO 3412/MUM/2008 ASSESSMENT YEAR: 2003-2004 & I.T.A. NO. 4114/MUM/2008 ASSESSMENT YEAR: 2003-2004 & ITA-2722/MUM/2011 ASSESSMENT YEAR: 2003-2004 PAGE 2 OF 23 APPEARANCES BY: SHRI FARROKH IRANI, SR. COUNSEL, SHRI KETAN K. VED, A.R. & SHRI G.P. SRIVASTAVA, A.R., FOR THE ASSESSEE SHRI G. MALLIKARJUNA, CIT, D.R. & SK. ZAFARUL HAQ T ANVEER, ADDL. CIT, SR. D.R. , FOR THE DEPARTMENT DATE OF CONCLUDING THE HEARING : JULY 18, 2018 DATE OF PRONOUNCING THE ORDER : SEPTEMBER 26, 2018 O R D E R PER SHRI P.M. JAGTAP, A.M. : THESE TWO APPEALS, ONE FILED BY THE ASSESSEE BEING ITA NO. 3412/KOL/2008 AND THE OTHER FILED BY THE REVENUE BE ING ITA NO. 4114/KOL/2008, ARE CROSS APPEALS, WHICH ARE DIRECTE D AGAINST THE ORDER OF LD. COMMISSIONER OF INCOME TAX (APPEALS)-XXXII, MUMBAI DATED 18.02.2008, WHILE THE THIRD APPEAL BEING ITA NO.272 2/MUM/2011 FILED BY THE REVENUE INVOLVES THE CONSEQUENTIAL ISSUE RELATI NG TO IMPOSITION OF PENALTY UNDER SECTION 271(1)(C). 2. THE MAIN ISSUE INVOLVED IN THESE CROSS APPEALS R ELATES 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% SUBSIDI ARY OF PHILIPS MEDICAL SYSTEMS INTERNATIONAL BV (PMS NETHERLANDS), WHICH BELONGS TO THE GROUP OF ROYAL PHILIPS ELECTRONICS OF NETHERLAN DS. THE GROUP HAS SEVEN PRODUCT DIVISIONS, OUT OF WHICH THE PHILIPS M EDICAL SYSTEMS IS ONE OF THE WORLD LEADING SUPPLIERS OF MEDICAL IMAGING M ODALITIES AND PATIENT MONITORING SYSTEMS. IT IS A GLOBAL LEADER IN THE PR ODUCT SEGMENTS OF X-RAY, ULTRASOUND, NUCLEAR MEDICINE, PATIENT MONITORING, M AGNETIC RESONANCE, COMPUTED TOMOGRAPHY, PET, RADIATION ONCOLOGY SYSTEM S ETC. THE ASSESSEE-COMPANY IS A DISTRIBUTOR AND COMMISSION AG ENT FOR MEDICAL I.T.A. NO 3412/MUM/2008 ASSESSMENT YEAR: 2003-2004 & I.T.A. NO. 4114/MUM/2008 ASSESSMENT YEAR: 2003-2004 & ITA-2722/MUM/2011 ASSESSMENT YEAR: 2003-2004 PAGE 3 OF 23 EQUIPMENTS IN INDIA. THE PRODUCTS DISTRIBUTED BY TH E ASSESSEE ARE HIGH- END PRODUCTS AND GENERALLY USED IN OPERATIONS, SCAN NING OF PATIENTS, MRI, ETC. THE RETURN OF INCOME FOR THE YEAR UNDER CONSID ERATION 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-COMPAN Y HAD ENTERED INTO THE FOLLOWING INTERNATIONAL TRANSACTIONS WITH ITS ASSOC IATED 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 RS.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 ARMS LENGTH PRICE OF THE ABOVE INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE ASSE SSEE-COMPANY WITH ITS A.ES, A REFERENCE WAS MADE BY THE ASSESSING OFFICER TO THE TRANSFER PRICING OFFICER UNDER SECTION 92CA(1) OF THE INCOME TAX ACT, 1961. IN THE TRANSFER PRICING STUDY REPORT FILED ALONG WITH ITS RETURN OF INCOME, THE TRANSACTIONAL NET MARGIN METHOD (TNMM) WAS SELECTED BY THE ASSESSEE- COMPANY AS THE MOST APPROPRIATE METHOD TO DETERMINE THE ARMS LENGTH PRICE OF ITS INTERNATIONAL TRANSACTION WITH ITS AES WITH OPERATING PROFITS TO SALES AS THE PROFIT LEVEL INDICATOR. ON SEARCH I N A PUBLIC DATABASE, 12 ENTITIES WERE IDENTIFIED AS COMPARABLES AND SINCE T HE ARITHMETIC MEAN OF THE MARGINS OF THE SAID COMPARABLES AS WORKED OUT A T 1.97% WAS LESS THAN THE OPERATING PROFIT MARGIN ON SALES OF THE AS SESSEE-COMPANY AS I.T.A. NO 3412/MUM/2008 ASSESSMENT YEAR: 2003-2004 & I.T.A. NO. 4114/MUM/2008 ASSESSMENT YEAR: 2003-2004 & ITA-2722/MUM/2011 ASSESSMENT YEAR: 2003-2004 PAGE 4 OF 23 WORKED OUT AT 6.78%, THE INTERNATIONAL TRANSACTIONS ENTERED INTO WITH ITS AES WERE CLAIMED BY THE ASSESSEE-COMPANY TO BE AT A RMS LENGTH. 5. ON VERIFICATION OF ITS OWN OPERATING PROFIT MARG IN ON SALES AS WORKED OUT BY THE ASSESSEE-COMPANY AT 6.78%, THE AS SESSING OFFICER FOUND CERTAIN MISTAKES. FIRSTLY HE FOUND THAT A PRO VISION OF RS.4.13 CRORES MADE FOR BAD AND DOUBTFUL DEBTS DURING THE YEAR UND ER CONSIDERATION WAS NOT CONSIDERED BY THE ASSESSEE-COMPANY AS A PART OF OPERATING EXPENSES AND THE SAME WAS LIABLE TO BE ADDED BACK TO WORK OU T THE OPERATING PROFIT MARGIN ON SALES. IN THIS REGARD, THE EXPLANATION OF FERED BY THE ASSESSEE THAT THE SAID PROVISION HAS BEEN MADE IN RESPECT OF BAD DEBTS RELATING TO HSG BUSINESS ACQUIRED BY IT DURING THE YEAR UNDER C ONSIDERATION PURSUANT TO THE GLOBAL ACQUISITION OF THE HSG GROUP BY THE P ARENT COMPANY AND THUS REPRESENTED AN EXTRA ORDINARY ITEM WAS NOT FOU ND ACCEPTABLE BY THE ASSESSING OFFICER. HE HELD THAT A PROVISION FOR BAD AND DOUBTFUL DEBTS WAS A NORMAL OPERATING EXPENSE OF ANY BUSINESS AND THER E WAS NO REASON FOR EXCLUDING THE SAME FOR THE PURPOSE OF DETERMINING T HE OPERATING PROFITS OF A COMPANY. SECONDLY, IT WAS NOTED BY THE TPO THA T THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION HAD REALIZED A SUM OF RS.1.16 CRORES ON ACCOUNT OF EXCHANGE FLUCTUATION AND ALTHOUGH THE SA ME WAS TREATED AS PART OF ITS OPERATING INCOME FOR THE PURPOSE OF DET ERMINING THE OPERATING PROFIT MARGINS, A LOSS ON ACCOUNT OF EXCHANGE FLUCT UATION WAS COMPLETELY IGNORED FOR THE PURPOSE OF DETERMINING THE OPERATIN G COST ON THE GROUND THAT IT CONSTITUTED AN ABNORMAL ITEM. THIS INCONSIS TENT STAND TAKEN BY THE ASSESSEE-COMPANY WAS NOT ACCEPTED BY THE ASSESSING OFFICER AND THE LOSS ON ACCOUNT OF EXCHANGE FLUCTUATION WAS TREATED BY H IM AS A PART OF THE OPERATING COST. ACCORDINGLY, THE OPERATING PROFIT M ARGIN 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 I.T.A. NO 3412/MUM/2008 ASSESSMENT YEAR: 2003-2004 & I.T.A. NO. 4114/MUM/2008 ASSESSMENT YEAR: 2003-2004 & ITA-2722/MUM/2011 ASSESSMENT YEAR: 2003-2004 PAGE 5 OF 23 BASIS OF WHICH ANY CONCLUSION REGARDING THERE FUNCT IONAL COMPARABILITY COULD BE ESTABLISHED. THE TPO, THEREFORE, REJECTED THE SAID TWO ENTITIES AS COMPARABLES. OUT OF THE REMAINING TEN ENTITIES TAKE N AS COMPARABLES BY THE ASSESSEE, THE TPO ACCEPTED ONLY TWO AND REJECTE D 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 S AME IS ENGAGED IN TRADING IN HEALTHCARE DEVICES AND CARDIA C 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 CON SOLIDATED BALANCE SHEET IS TO BE CONSIDERED, THEN IT IS FOUND THAT IT IS ENGAGED IN MANUFACTURING ACTIVITIES ALSO. HENCE THE SAME IS REJECTED. (C) BUSINESS LINK AUTOMATION INDIA LTD.: THERE IS V ERY LITTLE INFORMATION AVAILABLE ABOUT THE OPERATIONS OF THE C OMPANY IN THE DIRECTORS REPORT AND THE BALANCE SHEET. THE COMPANY IS DEALING IN COMPUTER HARDWARE AND IS ALSO ENGAGED IN PROVIDING SOFTWARE. IT IS NOT CONSIDERED TO BE COMPARABLE TO THE ASSESSEES DISTRIBUTION ACTIVITY (D) ASHCO INDUSTRIES LTD. : AS PER THE MANAGEMENT DISCUSSION AND ANALYSIS PROVIDED IN THE BALANCE SHE ET, THIS COMPANY IS DEALING IN ANALYTICAL 9INSTRUMENTS AND PROVIDING ANALYTICAL SERVICES TO DIFFERENT INDUSTRI ES SUCH AS AGRICULTURE, BIOCHEMISTRY, ENVIRONMENTAL STUDIES, F OOD, FORENSIC, GEOCHEMISTRY, METALLURGICAL, PHARMACEUTIC ALS, PETROCHEMICALS, PETROLEUM, PLASTICS, PAINTS AND TEX TILE INDUSTRY TO STRENGTHEN THE QUALITY CONTROL. THE COM PANY HAS SET UP THREE LABORATORIES AT HYDERABAD, MUMBAI AND NOIDA, WHICH CATER TO THE REQUIREMENTS OF THE AFORE SAID INDUSTRIES, WHO DO NOT POSSESS THE SOPHISTICATED AN ALYTICAL INSTRUMENTS. HENCE IDEALLY THIS COMPANY IS NOT COMP ARABLE TO THE ASSESSEES DISTRIBUTION BUSINESS. HOWEVER, D UE TO THE NON-AVAILABILITY OF MANY COMPARABLE CASES, AND AS I T HAS TRADED IN ANALYTICAL INSTRUMENTS AND ACCESSORIES WH ICH COULD BE REGARDED AS COMPARABLE TO THE ASSESSEES DISTRIBUTION ACTIVITY, THE SAME IS INCLUDED AS A CO MPARABLE CASE. I.T.A. NO 3412/MUM/2008 ASSESSMENT YEAR: 2003-2004 & I.T.A. NO. 4114/MUM/2008 ASSESSMENT YEAR: 2003-2004 & ITA-2722/MUM/2011 ASSESSMENT YEAR: 2003-2004 PAGE 6 OF 23 (E) REMI SALES AND ENGINEERING LTD. : VERY SCANTY INFORMATION RELATING TO THE OPERATIONS OF THE COMPA NY IS AVAILABLE FROM THE BALANCE-SHEET. THE COMPANY HAS B EEN RECEIVING INCOME ON ACCOUNT OF DEALING IN SHARES, R ENT, INTEREST, DIVIDEND AND COMMISSION. ALL THESE CLEARL Y INDICATE THAT THE COMPANY IS INTO FINANCIAL SERVICE S ACTIVITY. THE VARIOUS EXPENSES INCURRED FOR THE PUR POSE OF GENERATING THESE INCOME WOULD BE PART OF THE COMPAN YS OPERATING EXPENSES. HENCE, THIS COMPANY IS NOT TREA TED AS A COMPARABLE CASE. (F) GEORGE OAKES LTD.: THE COMPANY IS ESSENTIALLY D EALING IN AUTOMOBILE S PARES PARTS, TRACTORS AND AGRICULTU RAL IMPLEMENTS. IT HAS ALSO ENTERED INTO SIGNIFICANT RE LATIVE PARTY TRANSACTIONS. THE KIND OF GOODS DEALT BY THE COMPANY CANNOT BE REGARDED AS COMPARABLE TO THE ASSESSEES 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 REG ARD TO THE NATURE OF PRODUCTS DEALT BY THIS COMPANY, THE S AME CANNOT BE REGARDED AS COMPARABLE TO THE ASSESSEE. (H) LUCAS INDIAN SERVICE LTD.: THIS COMPANY ESSENTI ALLY DEALS IN AUTOMOBILE PARTS. IT HAS SIGNIFICANT DEALI NGS WITH RELATED PARTIES. HENCE THE SAME IS REJECTED. (I)POSITIVE ELECTRONICS LTD.: THIS COMPANY IS A DEA LER IN COLOUR TV SETS, AND OTHER HOUSEHOLD ELECTRONIC ITEM S, SUCH AS AUDIO AND VIDEO PLAYERS. IN VIEW OF THE NATURE O F PRODUCTS DEALT BY IT, IT CANNOT BE REGARDED AS COMP ARABLE TO THE ASSESSEES DISTRIBUTION ACTIVITY. (J) REDINGTON INDIA LTD.: THIS COMPANY IS DEALING I N COMPUTER, PRINTERS, SPARES AND SOFTWARE. THIS COMPA NY HAS A TURNOVER OF RS.1500 CRORES IN TERMS OF VOLUME OF BUSINESS IT IS TOO LARGE TO BE COMPARED WITH THE ASSESSEES BUSINESS ACTIVITIES. FURTHER IT HAS ALSO ENTERED INTO SOME R ELATED PARTY TRANSACTIONS. HENCE, THE SAME IS REJECTED. 7. THE TPO, ON HIS OWN, SELECTED THREE MORE ENTITIE S, WHICH WERE ENGAGED IN DEALING OF MEDICAL EQUIPMENTS AS COMPARA BLES AND CONSIDERED I.T.A. NO 3412/MUM/2008 ASSESSMENT YEAR: 2003-2004 & I.T.A. NO. 4114/MUM/2008 ASSESSMENT YEAR: 2003-2004 & ITA-2722/MUM/2011 ASSESSMENT YEAR: 2003-2004 PAGE 7 OF 23 THE SAME FOR THE PURPOSE OF DETERMINING THE ARMS L ENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE-COMPANY WITH ITS AES. HE ACCORDINGLY OBTAINED THEIR ANNUAL REPORTS BY ISSUIN G NOTICES UNDER SECTION 133(6) AND PROVIDED COPIES OF THE SAME TO T HE ASSESSEE. THE ASSESSEE RAISED A PRELIMINARY OBJECTION TO THE SELE CTION OF THESE THREE ENTITIES BY THE TPO AS COMPARABLES ON THE GROUND TH AT THE DATA RELATING TO THE SAID ENTITIES WAS NOT AVAILABLE IN THE PUBLIC D OMAIN. THE ASSESSEE FURTHER RAISED SPECIFIC OBJECTIONS IN RESPECT OF EA CH OF THE THREE ENTITIES SELECTED BY THE TPO IN SUPPORT OF ITS CONTENTION TH AT THE SAME WERE NOT COMPARABLE. THIS OBJECTION RAISED BY THE ASSESSEE W AS NOT FOUND SUSTAINABLE BY THE TPO AND HE OVERRULED THE SAME FO R THE FOLLOWING REASONS GIVEN IN PARAGRAPH NO. 17 OF HIS ORDER:- (A) SOUTH INDIA SURGICAL COMPANY LTD.: THE ASSESSE ES CONTENTION THAT THE SAID COMPANY IS ENGAGED IN MANUFACTURING ACTIVITY IS ENTIRELY BASELESS. IN THI S CONNECTION, IT IS OBSERVED THAT THE DIRECTORS REPOR T CATEGORICALLY MAKES A STATEMENT IN THIS REGARD, IT IS CLEARLY STATED THAT THE COMPANY IS PRESENTLY ENGAGE D ONLY BY TRADING ACTIVITY. IN VIEW OF THE SPECIFIC STATEM ENT IN THE DIRECTORS REPORT, THIS COMPANY IS CONSIDERED A S COMPARABLE TO THE ASSESSEE. FURTHER, AS PER THE PRO DUCT DESCRIPTION GIVEN IN THE ANNUAL REPORT, THE COMPANY DEALS IN SURGICAL ITEMS AND SURGICAL STERILIZERS. ON A RE FERENCE TO ALL THE HEADS OF EXPENSES, IT IS SEEN THAT THEY ARE ALL IN THE NATURE OF EXPENSES INCURRED BY A TRADING COMPAN Y. IT IS FURTHER EVIDENT THAT THE EXPENSES ARE ONLY FOR PERFORMING THE FUNCTIONS OF ASSEMBLING, TESTING AND POLISHING ETC. THIS COMPANY IS THEREFORE CLEARLY COMPARABLE TO THE ASSESSEE. (B) VASCULAR CONCEPTS PVT. LTD.: THIS COMPANY DEALS IN VARIOUS PRODUCTS SUCH AS VALVUPLATY BALLOONS, CATHE TERS, STENTS, CONNECTORS ETC. THESE ARE CLEARLY MEDICAL EQUIPMENTS AND HENCE COMPARABLE TO THE ASSESSEE. TH E TOTAL TURNOVER OF THE COMPANY IS RS.2262 CRORES. FR OM THE DETAILS OF THE SUNDRY DEBTORS AND CREDITORS, IT IS SEEN THAT THIS COMPANY IS DEALING WITH HOSPITALS. HENCE, IT I S PRIMA FACIE A COMPARABLE CASE. REGARDING THE DOUBT EXPRES SED BY THE ASSESSEE THAT THE COMPANY IS ENGAGED IN MANUFACTURING ACTIVITY IT WAS CONFIRMED BY THE COMP ANY I.T.A. NO 3412/MUM/2008 ASSESSMENT YEAR: 2003-2004 & I.T.A. NO. 4114/MUM/2008 ASSESSMENT YEAR: 2003-2004 & ITA-2722/MUM/2011 ASSESSMENT YEAR: 2003-2004 PAGE 8 OF 23 ITSELF THAT THE VARIOUS PRODUCTS DEALT BY THEM HAVE ALL BEEN IM0ORTED FROM OVERSEAS PARTIES. CONSIDERING TH E FACT THAT THE PROFIT MARGIN OF THE COMPANY WAS ON THE HI GHER SIDE AND THE FACT THAT R&D EXPENSES HAVE BEEN DISCL OSED 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 AN Y RESEARCH AND DEVELOPMENT AND THE AMOUNT SHOWN IN TH E PROFIT AND LOSS ACCOUNT IS ONLY ON ACCOUNT OF WRITE OFF OF SOME EARLIER EXPENSES, CONSIDERING THE FACT THAT TH E ASSESSEE IS ENTIRELY IMPORTING THE PRODUCTS SOLD BY IT, THE WRITE-OFF OF OLD EXPENSES IS NOT RELEVANT. HENCE, I N TERMS OF FUNCTIONS PERFORMED THIS COMPANY IS CLOSELY COMPARABLE TO THE ASSESSEE COMPANYS DISTRIBUTION ACTIVITY. ONCE A COMPANY IS ESTABLISHED TO BE COMPA RABLE, THERE IS NO DISCRETION TO REJECT THE SAME, UNDER TH E INDIAN REGULATIONS MERELY ON THE GROUND THAT THE PROFIT MA RGINS ARE VERY HIGH OR VERY LOW. FURTHER THE QUANTITATIVE INFORMATION PROVIDED IN THE SCHEDULE TO ACCOUNTS UN DER THE HEAD PRODUCTION REFERS ONLY TO THE ASSEMBLING OF THE PRODUCTS IMPORTED BY THIS COMPANY. IF THE COMPANY H AD BEEN ENGAGED IN MANUFACTURING ACTIVITY THE SAME WOU LD HAVE BEEN DISCLOSED IN THE FORM OF SOME EXPENDITURE IN THE PROFIT AND LOSS ACCOUNT. HENCE, THE SAME IS ACC EPTED AS A COMPARABLE CASE. (C) BIOMED IMPORTERS PVT. LTD.: THIS CASE HAD BEEN CONSIDERED BY THE ASSESSEE TO BE COMPARABLE TO IT I N THE COURSE OF THE TRANSFER PRICING ASSESSMENT DURING TH E PRECEDING YEAR. IT WAS ALSO CONSIDERED FOR THE PURP OSE OF DETERMINING THE ARMS LENGTH PRICE LAST YEAR. HENCE , THE SAME IS TREATED AS A COMPARABLE COMPANY. 8. THE TPO THUS FINALLY SELECTED FIVE COMPARABLES, TWO FROM THE SET OF 12 COMPARABLES SELECTED BY THE ASSESSEE AND THREE C ONSIDERED BY HIM AS COMPARABLES AND WORKED OUT THERE AVERAGE OPERATING PROFIT MARGIN AT 8.99% AS UNDER:- SL. NO. NAME OF THE COMPANY OPERATING PROFIT MARGIN 1. SOUTH INDIA SURGICAL CO. LTD. 14.09% I.T.A. NO 3412/MUM/2008 ASSESSMENT YEAR: 2003-2004 & I.T.A. NO. 4114/MUM/2008 ASSESSMENT YEAR: 2003-2004 & ITA-2722/MUM/2011 ASSESSMENT YEAR: 2003-2004 PAGE 9 OF 23 2. BIOMED IMPORTERS PVT. LTD. 6.84% 3. VASCULAR CONCEPTS PVT. LTD. 14.64% 4. ASHCO INDUSTRIES LTD. 4.47% 5. ADVANCED MICRONIC D EVICES LTD. 4.89% ARITHMETIC MEAN 8.99% 9. APPLYING THE SAID OPERATING PROFIT MARGIN OF 8.9 9% TO THE TOTAL TURNOVER OF THE ASSESSEE-COMPANY, THE TRANSFER PRIC ING ADJUSTMENT WAS WORKED OUT BY THE TPO AT RS.7,42,23,000/- AND ACCOR DINGLY ADDITION TO THAT EXTENT WAS MADE BY THE ASSESSING OFFICER TO TH E TOTAL INCOME OF THE ASSESSEE ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT IN THE ASSESSMENT COMPLETED UNDER SECTION 143(3) VIDE AN ORDER DATED 27.03.2006. 10. AGAINST THE ORDER PASSED BY THE ASSESSING OFFIC ER UNDER SECTION 143(3), AN APPEAL WAS PREFERRED BY THE ASSESSEE BEF ORE THE LD. CIT(APPEALS) CHALLENGING THE ADDITION MADE BY THE A SSESSING OFFICER/TPO ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT BY RAISIN G VARIOUS ISSUES. ONE OF THE ISSUES RAISED BY THE ASSESSEE BEFORE THE LD. CIT(APPEALS) WAS RELATED TO THE TREATMENT GIVEN BY THE TPO TO THE PR OVISIONS FOR BAD AND DOUBTFUL DEBTS AS PART OF OPERATING COST. THE LD. C IT(APPEALS), HOWEVER, DID NOT FIND MERIT IN THE CASE OF THE ASSESSEE ON T HIS 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 APPE LLANT. 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 IN CREASE IS STATED TO BE ON ACCOUNT OF HSG BUSINESS ACQUIRED DU RING THE PRECEDING YEAR WHOSE DEBTS COULD NOT BE RECOVER ED IN THAT YEAR. I AGREE WITH THE ARGUMENT OF THE TPO THA T BAD DEBTS ARISING FROM CARRYING OUT OF A BUSINESS ARE N ORMAL AND REGULAR FEATURE OF THE BUSINESS. HENCE. THEY SH OULD BE TREATED AS NORMAL BUSINESS EXPENSE. THE APPELLANT C ANNOT CLAIM EXCLUSION OF THE PROVISION OF BAD AND DOUBTFU L DEBTS FOR JUSTIFICATION OF ITS ARM'S LENGTH PRICE. THIS A RGUMENT I.T.A. NO 3412/MUM/2008 ASSESSMENT YEAR: 2003-2004 & I.T.A. NO. 4114/MUM/2008 ASSESSMENT YEAR: 2003-2004 & ITA-2722/MUM/2011 ASSESSMENT YEAR: 2003-2004 PAGE 10 OF 23 IS ALSO STRENGTHENED ON ACCOUNT OF THE FACT THAT SU CH 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 REG ULAR FEATURES IN THE CASES OF BIG COMPANIES AND MULTINAT IONAL CORPORATIONS. THE BUSINESS OF HSG WAS ACQUIRED IN E ARLIER YEAR WHEN THE DEBTORS OF THAT COMPANY MERGED WITH T HE DEBTORS OF THE APPELLANT COMPANY. HENCE, THESE DEBT ORS AND BAD DEBTS PERTAINING TO THEM CANNOT BE ANY MORE IDENTIFIED SEPARATELY IN SUCCESSIVE YEARS. THEREFOR E, THIS ITEM CANNOT BE CONSIDERED TO BE AN ABNORMAL ITEM QUALIFYING FOR EXCLUSION IN TRANSFER PRICING ANALYS IS. HENCE, I AGREE WITH THE TPO THAT WHENEVER ANY PROVI SION IS CREATED OR THERE IS WRITE BACK OF THE PROVISIONS , WHETHER IN THE CASE OF THE APPELLANT OR IN THE CASE OF COMPARABLE CASES, SAME IS CONSISTENTLY TREATED AS P ART OF OPERATING COSTS OR OPERATING REVENUES. THE APPELLAN T'S ARGUMENT IS, THEREFORE, REJECTED. 11. THE ACTION OF THE TPO IN REJECTING TEN OF THE T WELVE ENTITIES SELECTED BY IT AS COMPARABLES WAS ALSO CHALLENGED BY THE ASS ESSEE BEFORE THE LD. CIT(APPEALS) BY MAKING VARIOUS SUBMISSIONS. AFTER C ONSIDERING THE SUBMISSIONS MADE BY THE ASSESSEE-COMPANY AS WELL AS THE MATERIAL AVAILABLE ON RECORD, THE LD. CIT(APPEALS) AGREED WI TH THE TPO AS REGARDS THE REJECTION OF SEVEN ENTITIES SELECTED BY THE ASS ESSEE AS COMPARABLES. HE, HOWEVER, DID NOT AGREE WITH THE TPO AS REGARDS THE REJECTION OF THE OTHER THREE ENTITIES TAKEN AS COMPARABLES BY THE AS SESSEE AND ACCEPTED THE SAME AS COMPARABLES FOR THE FOLLOWING REASONS G IVEN IN HIS IMPUGNED ORDER:- (A)BUSINESS LINK AUTOMATION LTD. ; - THIS COMPANY IS ENGAGED IN TRADING OF SYSTEMS AND HARDWARE AND ABOUT 88% OF RECEIPTS ARE FROM TRADING. THE BALANCE 12% RECEIPTS ARE FROM MAINTENANCE SERVICE CONTRACTS ETC. WHICH IS A RELAT ED ACTIVITY. THUS, THE PRODUCT AND FUNCTIONAL PROFILE OF THIS CO MPANY IS QUITE SIMILAR TO THAT OF THE APPELLANT. SINCE TPO W AS NOT IN POSSESSION OF DATA (THOUGH SUBMITTED BY THE APPELLA NT AS CLAIMED) SHE COULD NOT TAKE PROPER DECISION IN THIS REGARD. (B) COMPUNICS INFORMATION SVSTEMS LTD. ;- THIS COMP ANY ALSO DEALS IN PRODUCTS LIKE COMPUTER SYSTEMS, PRINTERS, MOBILE I.T.A. NO 3412/MUM/2008 ASSESSMENT YEAR: 2003-2004 & I.T.A. NO. 4114/MUM/2008 ASSESSMENT YEAR: 2003-2004 & ITA-2722/MUM/2011 ASSESSMENT YEAR: 2003-2004 PAGE 11 OF 23 PHONES AND RELATED CONSUMABLES AND HENCE, IT IS ALS O COMPARABLE TO THE CASE OF THE APPELLANT. IN THIS CA SE ALSO, THE TPO COULD NOT TAKE PROPER DECISION DUE TO NON-AVAIL ABILITY OF DETAILS THOUGH IT IS CLAIMED BY THE APPELLANT THAT SUCH DATA WAS FURNISHED TO THE TPO VIDE LETTER DTD.14.03 .2006. (C) REMI SALES & ENGINEERING LTD. ;- THIS COMPANY I S ENGAGED IN TRADING OF SCIENTIFIC TOOLS, ELECTRONIC MOTORS, FANS AND RELATED CONSUMABLES. THE TPO'S OBSERVATION THAT IT IS ENGAGED IN FINANCIAL SERVICE ACTIVITY IS NOT CORRECT. THE C OMPANY HAS TRADING TURNOVER OF RS.20.41 CRORES AND OTHER INCOM E OF ONLY RS.67.34 LACS. IN THE PRECEDING YEAR, HOWEVER, THIS COMPANY WAS NOT CONSIDERED TO BE A COMPARABLE CASE BY MY PR EDECESSOR; BECAUSE FROM THE TRADING ACTIVITY, THE EXCLUSION OF OTHER INCOME RESULTED IN NET LOSS. HOWEVER, IN THE CURREN T YEAR I.E. A. Y.2003-04, THERE IS NEITHER ANY SHARE DEALING NOR A NY SUCH RESULTANT LOSS. HENCE, THIS CASE IS ACCEPTED TO BE A COMPARABLE CASE. 12. AS REGARDS THE THREE ENTITIES SELECTED BY THE T PO AS COMPARABLES, THE ASSESSEE-COMPANY REITERATED ITS OBJECTION BEFOR E THE LD. CIT(APPEALS) THAT THE SAID ENTITIES COULD NOT BE TAKEN AS COMPAR ABLES AS THEIR DATA WAS NOT AVAILABLE IN THE PUBLIC DOMAIN. RELIANCE IN THI S REGARD WAS PLACED ON BEHALF OF THE ASSESSEE ON RULE 10D OF THE INCOME TA X RULES, 1962, WHICH PROVIDED THAT THE AUDITOR HAD TO RESTRICT HIS ANALY SIS IN REGARD TO THE INTERNATIONAL TRANSACTIONS ONLY WITH REFERENCE TO T HE RECORDS AND DOCUMENTS AVAILABLE IN PUBLIC DOMAIN. THE LD. CIT(A PPEALS), HOWEVER, DID NOT FIND MERIT IN THE SAME. ACCORDING TO HIM, THE R ESTRICTION AS STIPULATED IN RULE 10D WAS APPLICABLE ONLY IN CASE OF AN AUDIT OR AND THERE WAS NO SUCH FETTER PLACED ON THE ASSESSING OFFICER OR TRAN SFER PRICING OFFICER, WHO COULD COLLECT ANY INFORMATION THAT THEY CONSIDE RED AS COMPARABLES AND, THEREFORE, NECESSARY IN THE DETERMINATION OF T HE ARMS LENGTH PRICE. HE ALSO DID NOT FIND MERIT IN THE OTHER SUBMISSIONS MADE ON BEHALF OF THE ASSESSEE-COMPANY SEEKING EXCLUSION OF THE SAID THRE E ENTITIES SELECTED BY THE TPO AS COMPARABLES AND UPHELD THE ACTION OF THE TPO IN CONSIDERING THE SAID THREE ENTITIES AS COMPARABLES FOR THE FOLL OWING REASONS GIVEN IN PARAGRAPH NOS. 8.23 TO 8.25 OF HIS IMPUGNED ORDER:- I.T.A. NO 3412/MUM/2008 ASSESSMENT YEAR: 2003-2004 & I.T.A. NO. 4114/MUM/2008 ASSESSMENT YEAR: 2003-2004 & ITA-2722/MUM/2011 ASSESSMENT YEAR: 2003-2004 PAGE 12 OF 23 8.23. IN SO FAR AS THE RESERVATION OF THE APPELLAN T IN THE SELECTION OF BIOMED IMPORTER PVT. LTD. AS COMPARABL E CASE BY THE TPO IT IS TO BE SAID THAT THE OBJECTION IS B ASICALLY ON ACCOUNT OF THE FACT THAT INFORMATION RELATING TO SA ID COMPANY IS NOT AVAILABLE IN THE PUBLIC DOMAIN, HOWE VER THAT BASIS HAS ALREADY BEEN REJECTED AFTER DUE DISC USSION. 8.24. IN SO FAR AS THE APPELLANT'S OBJECTION TO THE INCLUSION OF THE SOUTH INDIA SURGICAL CO. LTD (SISCO) AS A COMPARABLE CASE IS CONCERNED, IT IS NOTICED THAT TH E MAIN OBJECTION IS ON THE GROUND THAT IT IS ESSENTIALLY I N THE BUSINESS OF MANUFACTURING UNLIKE THE CASE OF THE AP PELLANT WHICH IS EITHER IN THE BUSINESS OF TRADING AND INDE NTING. I HAVE CAREFULLY CONSIDERED THE SUBMISSION OF THE APP ELLANT AND THE VARIOUS DOCUMENTS SUBMITTED ON THE BACKGROU ND FACTS OF SISCO. AFTER CONSIDERING THE SAME, I AM OF THE VIEW THAT SISCO IS A COMPARABLE CASE BECAUSE IT IS NOT A T ALL INVOLVED IN ANY MAJOR MANUFACTURING ACTIVITY DURING THE YEAR. ON 1 ST PAGE OF DIRECTOR'S REPORT IN RESPECT OF PARTICULARS OF CONSERVATION OF ENERGY, IT IS STATED THAT THE COMPANY BEING ENGAGED PRIMARILY IN TRADING ACTIVITI ES, THE CONSUMPTION OF POWER AND FUEL IS NEGLIGIBLE. THE CO MPANY DEALS IN SURGICAL ITEMS AND SURGICAL STERILIZERS ET C. WHICH ARE MEDICAL EQUIPMENTS SIMILAR TO THE CASE OF THE APPELLANT. THE TPO HAS ALSO OBSERVED THESE FACTS WH ICH ARE INCORPORATED IN HER ORDER QUOTED ABOVE. IN THIS REG ARD, THE APPELLANT'S OBSERVATIONS AS PER PARA 8.12 ABOVE THO UGH APPLICABLE TO SISCO IN THE PAST ARE NOT APPLICABLE FOR F.Y.2002-03 IN WHICH NO MANUFACTURING ACTIVITY HAS BEEN CARRIED OUT. AT THE MOST, THE COMPANY MAY ALSO BE I NVOLVED IN ASSEMBLING OF SOME OF THE TRADED MEDICAL EQUIPME NTS WHICH WOULD EXPLAIN THE NARRATION OF RAW MATERIAL I N INVENTORIES. BUT THE RAW MATERIALS ARE NOTHING BUT SURGICAL EQUIPMENTS WHICH ARE ASSEMBLED AND THEN TRADED. THE RE IS VAST DIFFERENCE IN THE TERMINOLOGY OF ASSEMBLING AN D 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 V ASCULAR CONCEPTS (P) LTD. AS A COMPARABLE CASE IS CONCERNED , TWO FOLD ARGUMENTS HAVE BEEN GIVEN BY THE APPELLANT. FI RSTLY, IT IS STATED THAT THIS CASE WAS REJECTED BY THE TPO HE RSELF 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 HEN CE, IT I.T.A. NO 3412/MUM/2008 ASSESSMENT YEAR: 2003-2004 & I.T.A. NO. 4114/MUM/2008 ASSESSMENT YEAR: 2003-2004 & ITA-2722/MUM/2011 ASSESSMENT YEAR: 2003-2004 PAGE 13 OF 23 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 ONL Y IN TRADING OF MEDICAL EQUIPMENTS RELATED TO SURGERY IN CLUDING 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 MANUFACTURING ACCOUNT WAS PREPARED. ALSO, FROM THE ACCOUNTS OF THE COMPANY IT IS SEEN THAT NO REVENUE EXPENDITURE ON R&D OR DECISION, DEVELOPMENT ACTIVIT Y 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 MEDICAL EQUIPMENTS WHICH ARE TRADED. HENCE, NONE OF THE OBJECTIONS OF THE APPELLANT ARE VALID. THEREFORE, T HE CASE OF VASCULAR CONCEPTS (P) LTD. IS ALSO VERY MUCH COMPAR ABLE AND I HOLD ACCORDINGLY. 13. THE LD. CIT(APPEALS) THUS FINALLY APPROVED A LI ST OF EIGHT COMPARABLES AND WORKED OUT THEIR AVERAGE OPERATING PROFIT MARGIN AT 6.31% AS UNDER:- SR. NO. NAME OF COMPANY NPM 2003 1. SISCO LTD. 14.09% 2. BUSINESS LINK AUTOMATION (INDIA) LTD. 3.30% 3. COMPUNICS INFORMATION SYSTEMS 0.41% 4. VASCULAR CONCEPTS (P) LTD. 14.64% 5. ASHCO INDUSTRIES LTD. 4.47% 6. BIOMED IMPORTERS PVT. LTD. 6.84% 7. ADVANCED MICRONIC DEVICES LTD. 4.89% 8. REMI SALES & ENGINEERING LTD. 1.85% ARITHMETICAL MEAN 6.31% 14. APPLYING THE ABOVE OPERATING PROFIT MARGIN OF 6 .31% AS AGAINST THE AVERAGE OPERATING PROFIT MARGIN OF 8.99% AS APPLIED BY THE TPO, THE ADDITION OF RS. 7,42,23,000/- MADE BY THE ASSESSING OFFICER/TPO ON I.T.A. NO 3412/MUM/2008 ASSESSMENT YEAR: 2003-2004 & I.T.A. NO. 4114/MUM/2008 ASSESSMENT YEAR: 2003-2004 & ITA-2722/MUM/2011 ASSESSMENT YEAR: 2003-2004 PAGE 14 OF 23 ACCOUNT OF TRANSFER PRICING ADJUSTMENT WAS RESTRICT ED BY THE LD. CIT(APPEALS) TO RS.3,62,46,000/-. AGGRIEVED BY THE SAME, THE ASSESSEE AND REVENUE HAVE RAISED THE FOLLOWING GROUNDS IN TH EIR RESPECTIVE APPEALS:- ASSESSEES APPEAL (1) GROUND NO. 1 - ASSESSMENT AND REFERENCE TO T PO ARE BAD IN LAW 1.1. THE ORDERS PASSED BY THE ASSESSING OFFICER (AO) UN DER SECTION 143(3) OF THE INCOME TAX. ACT, AND THE COMMISSIONER OF INCOME-TAX (APPEALS) - XXXII, MUMBA I [THE LD CIT(A)] UNDER SECTION 250 OF THE ACT, ARC B AD IN LAW AND ON FACTS. 1.2. THE LD. CIT(A) ERRED IN LAW IN HOLDING THAT AO WAS NOT REQUIRED TO INFORM REASONS FOR DISREGARDING THE ARM S LENGTH PRICE COMPUTED BY APPELLANT BEFORE REFERRING THE CO MPUTATION OF THE ARM'S LENGTH PRICE TO TRANSFER PRICING OFFICER (TPO). 1.3. THE LD CIT(A) ERRED IN HOLDING THAT OPPORTU NITY OF BEING HEARD IS NOT REQUIRED TO BE GIVEN TO THE APPELLANT AGAINST THE FINDINGS OF THE TPO. 1.4. THE LD CIT(A) ERRED IN DETERMINING THE ARITH METIC MEAN OF ARM'S LENGTH NET PROFIT MARGIN OF 6.31% AND A TRANS FER PRICING ADJUSTMENT OF RS 36,246,000/-. 2. GROUND NO. 2 - TREATMENT OF PROVISION FOR BA D AND DOUBTFUL DEBTS FOR DETERMINING OPERATING MARGIN THE LD CIT(A) ERRED IN LAW AND FACTS IN HOLDING THA T PROVISION FOR DOUBTFUL DEBT RELATED TO HSG BUSINESS TAKEN OVER DU RING THE YEAR WAS NORMAL BUSINESS EXPENSES, HENCE SHOULD NOT BE I GNORED WHILE COMPUTING THE OPERATING MARGIN OF THE APPELLANT. 3. GROUND NO. 3 - SELECTION OF COMPARABLE WHOSE RE SULTS 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 DATA BASE SHOULD NOT BE CONSIDERED AS IT IS BAD IN LAW AND AG AINST THE PRINCIPLE OF NATURAL JUSTICE. 3.2. THE LD CJT(A) ERRED IN LAW IN HOLDING THAT THE RES TRICTION TO USE PUBLICLY AVAILABLE DATA AS PER THE PROVISION S OF RULE I.T.A. NO 3412/MUM/2008 ASSESSMENT YEAR: 2003-2004 & I.T.A. NO. 4114/MUM/2008 ASSESSMENT YEAR: 2003-2004 & ITA-2722/MUM/2011 ASSESSMENT YEAR: 2003-2004 PAGE 15 OF 23 10D(4) OF THE INCOME-TAX RULES, 1962 DOES NOT APPLY TO THE ASSESSING OFFICER. 4. GROUND NO. 4 - ARBITRARY REJECTION/SELECTION O F COMPARABLES 4.1. THE LD CJT CA) HAS ERRED IN SELECTING/REJECTING COMPARABLES ARBITRARILY. WHEREAS THE APPELLANT HAS SELECTED THE COMPARABLES PROPER ANALYSIS OF FUNCTIO N PERFORMED, THE ASSETS EMPLOYED AND THE RISK ASSUMED ON DATA WHICH IS AVAILABLE IN PUBLIC DOMAIN. 4.2. WITHOUT PREJUDICE TO THE GROUND NO 4.1, THE LD CJT (A) HAS FAILED TO APPRECIATE THAT NO SEARCH PROCESS HAD BEE N UNDERTAKEN BY TPO TO SELECT THESE TWO NEW COMPARABL ES. 5. GROUND NO. 5 - SELECTION OF SOUTH INDIA SURGIC AL CO. LIMITED (SISCO) AND VASCULAR CONCEPTS (P) LTD. AS COMPARABL E 5.1. THE LD CIT(A) ERRED IN FACT IN CONFIRMING THE SELEC TION OF SOUTH INDIA SURGICAL CO. LTD AND VASCULAR CONCEPTS (P) LTD. AS COMPARABLES. 5.2. THE LD CIT(A) ERRED IN FACTS IN NOT APPRECIATING TH AT THESE NEW COMPANIES ARE FUNCTIONALLY NOT COMPARABLE WITH THE APPELLANT. 5.3.THE LD CIT(A) IGNORED THE FACT THAT IN IMMEDIAT E PREVIOUS ASSESSMENT YEAR ( AY 2002- 03), THE TPO HERSELF REJ ECTED VASCULAR CONCEPTS (P) LTD DUE TO FUNCTIONAL DIFFERE NCE. 6. GROUND NO. 6- REJECTION OF COMPARABLES SELECT ED BY THE APPELLANT THE LD CIT(A) ERRED IN FACTS IN CONFIRMING THE REJE CTION OF WH BRADY & COMPANY, REDINGTON (INDIA) LTD. AND ADOR FONTECH LIMITED AS COMPARABLES, WITHOUT PROVING THAT THESE COMPARABLE COMPANIES WERE DEFICIENT OR INSUFFICIENT. 7. GROUND NO. 7 - USE OF MULTIPLE YEAR DATA THE LD CIT(A) ERRED LAW AND FACTS IN HOLDING THAT T HERE IS NO USEFUL PURPOSE IS SERVED IN TAKING INTO CONSIDERATION THE MATERIAL DATA AVAILABLE IN RESPECT OF THE EARLIER ACCOUNTING YEAR S WHERE SAID PROVISIONS WERE NOT APPLICABLE. 8. GROUND NO. 8 - USE OF +/-5% RANGE THE CIT(A) ERRED IN LAW IN NOT GRANTING THE BENEFIT OF +/- 5 PER CENT VARIANCE AS PER PROVISO TO SECTION 92C(2) OF T HE ACT. I.T.A. NO 3412/MUM/2008 ASSESSMENT YEAR: 2003-2004 & I.T.A. NO. 4114/MUM/2008 ASSESSMENT YEAR: 2003-2004 & ITA-2722/MUM/2011 ASSESSMENT YEAR: 2003-2004 PAGE 16 OF 23 REVENUES APPEAL 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LD. CIT(A) ERRED IN DETERMINING THE OPERAT ING PROFIT OF THE ASSESSEE COMPANY AT 6.31% BEING AVERA GE PROFIT MARGIN OF THE COMPARABLE CASES WORKED OUT IN THE APPELLATE ORDER AS AGAINST THE OPERATING PROFIT AT 8.99% DETERMINED BY THE TPO IN THE ORDER UNDER SECTION 92 AC(3) RESULTING INTO ADJUSTMENT OF RS.7,42,23,000/- TO TH E INCOME SHOWN BY THE ASSESSEE. 15. GROUND NO. 1 RAISED IN THE APPEAL OF THE ASSESS EE IS GENERAL IN NATURE AND AS SUBMITTED BY THE LD. COUNSEL FOR THE ASSESSEE, THE SAME DOES NOT CALL FOR ANY SPECIFIC ADJUDICATION. 16. GROUND NO. 2 OF THE ASSESSEES 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 RS.4.13 CRORES MADE BY THE ASSESSEE-COMPANAY FOR BA D AND DOUBTFUL DEBTS HAS BEEN TREATED BY THE TPO AS WELL AS BY THE LD. C IT(APPEALS) AS PART OF OPERATING EXPENSES WITHOUT CONSIDERING THE RELEVANT FACTS AND CIRCUMSTANCES OF THE CASE. HE CONTENDED THAT THE SA ID PROVISION WAS MADE FOR THE DEBTS RELATED TO HSG BUSINESS, WHICH HAD BE COME BAD AND IRRECOVERABLE. HE SUBMITTED THAT THE HSG BUSINESS W AS ACQUIRED BY THE ASSESSEE-COMPANY DURING THE FINANCIAL YEAR 2001-02 AND IN THE COURSE OF THE SAID ACQUISITION, DEBTORS OF HSG WERE ALSO TAKE N OVER BY THE ASSESSEE- COMPANY. HE SUBMITTED THAT THE ASSESSEE-COMPANY, HO WEVER, COULD NOT RECOVER PART OF THE DEBTORS SO TAKEN OVER AND ACCOR DINGLY 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 AMOU NT OF RS.4.13 CRORES IN QUESTION WAS ENTIRELY PROVIDED FOR THE DEBTS REL ATED TO HSG BUSINESS, I.T.A. NO 3412/MUM/2008 ASSESSMENT YEAR: 2003-2004 & I.T.A. NO. 4114/MUM/2008 ASSESSMENT YEAR: 2003-2004 & ITA-2722/MUM/2011 ASSESSMENT YEAR: 2003-2004 PAGE 17 OF 23 WHICH WAS TAKEN OVER BY THE ASSESEE-COMPANY IN THE EARLIER YEARS. HE CONTENDED THAT THE SAID PROVISION THUS WAS NOT WITH RESPECT TO SALES OF THE YEAR UNDER CONSIDERATION AND IT, THEREFORE, CAN NOT BE TREATED AS PART OF OPERATING EXPENSES OF THE YEAR UNDER CONSIDERATI ON IN ORDER TO DETERMINE THE OPERATING MARGIN. IN SUPPORT OF THIS CONTENTION, HE RELIED ON THE DECISION OF THE BANGALORE BENCH OF THIS TRIB UNAL IN THE CASE OF M/S. MARBLE INDIA PVT. LIMITED VS.- ACIT RENDERED VIDE ITS ORDER DATED 06.04.2018 IN ITA NO.2173/BANG./2017. 18. THE LD. D.R., ON THE OTHER HAND, CONTENDED THAT THE PROVISION FOR BAD DEBTS IS A PART OF OPERATING EXPENSES AS ALREAD Y HELD BY THE TRIBUNAL IN CERTAIN CASES. HE CONTENDED THAT THE CASE OF M/S . MARBLE INDIA PVT. LIMITED (SUPRA) DECIDED BY THE BANGALORE BENCH OF T HE ITAT AND CITED BY THE LD. COUNSEL FOR THE ASSESSEE INVOLVED DIFFERENT FACTS AND CIRCUMSTANCES AND THE DECISION RENDERED BY THE TRIB UNAL THEREIN IS NOT APPLICABLE IN THE PRESENT CASE. 19. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND AL SO PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. IT IS OBSERV ED THAT THE AMOUNT IN QUESTION PROVIDED FOR BAD AND DOUBTFUL DEBTS WAS EN TIRELY RELATED TO HSG BUSINESS, WHICH HAD BEEN ACQUIRED BY THE ASSESSEE D URING THE FINANCIAL YEAR 2001-02 AND THIS POSITION CLEARLY EVIDENT FROM THE RELEVANT DETAILS FURNISHED BY THE ASSESSEE AT PAGES NO. 291 TO 300 I S NOT DISPUTED EVEN BY THE LD. D.R. AS SUBMITTED BY THE LD. COUNSEL FOR TH E ASSESSEE, THE DEBTORS OF HSG WERE TAKEN OVER BY THE ASSESSEE-COMPANY AS A PART OF THE SAID ACQUISITION AND THE AMOUNT OF SUCH DEBTS TO THE EXT ENT COULD NOT BE RECOVERED WAS PROVIDED FOR AS BAD AND DOUBTFUL DEBT S. IT IS THUS CLEAR THAT THE PROVISION IN QUESTION MADE FOR BAD AND DOU BTFUL DEBTS WAS NOT WITH RESPECT TO SALES MADE BY THE ASSESSEE-COMPANY DURING THE YEAR UNDER CONSIDERATION BUT THE SAME WAS WITH RESPECT T O SALES MADE DURING THE EARLIER YEAR AND THAT TOO BY HSG. I.T.A. NO 3412/MUM/2008 ASSESSMENT YEAR: 2003-2004 & I.T.A. NO. 4114/MUM/2008 ASSESSMENT YEAR: 2003-2004 & ITA-2722/MUM/2011 ASSESSMENT YEAR: 2003-2004 PAGE 18 OF 23 20. IN THE CASE OF MARBLE INDIA PVT. LIMITED (SUPRA ) CITED BY THE LD. COUNSEL FOR THE ASSESSEE, ACTUAL SALES WERE ACCOUNT ED FOR IN THE EARLIER YEARS AND THE CORRESPONDING DEBTS WERE ALSO CREATED IN THE EARLIER YEARS ON THE BASIS OF SUCH SALES. THE PROVISION FOR BAD A ND DOUBTFUL DEBTS, HOWEVER, WAS MADE IN THE SUBSEQUENT YEAR WHEN IT WA S SEEN THAT THE RECOVERY OF SUCH DEBTS HAD BECOME DOUBTFUL. IN THES E FACTS AND CIRCUMSTANCES AS INVOLVED IN THE CASE OF MARBLE IND IA PVT. LIMITED (SUPRA), THE BANGALORE BENCH OF THIS TRIBUNAL HELD THAT SUCH PROVISION FOR DOUBTFUL DEBTS CANNOT BE REDUCED FOR DETERMINING TH E 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 WHO LE PURPOSE OF TRANSFER PRICING ANALYSIS AS WELL AS THE METHOD FOL LOWED FOR DETERMINING THE ARMS 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 CORRESPO NDING SALE STOOD CONSIDERED IN EARLIER YEAR, WHICH COULD NOT BE CONS IDERED IN THE SUBSEQUENT YEAR. IT WAS HELD THAT SUCH PROVISION FO R 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 REN DERED EARLIER ON THIS ISSUE ON WHICH RELIANCE IS PLACED BY THE LD. D.R. I N SUPPORT OF THE REVENUES CASE. 21. AS ALREADY NOTED, THE RELEVANT BAD DEBTS FOR WH ICH THE AMOUNT IN QUESTION WAS PROVIDED FOR BY THE ASSESSEE-COMPANY I N THE YEAR UNDER CONSIDERATION WERE NOT ONLY IN RESPECT OF SALES MAD E IN THE EARLIER YEARS BUT THE SAME WERE RELATED TO HSG BUSINESS, WHICH WA S ACQUIRED BY THE I.T.A. NO 3412/MUM/2008 ASSESSMENT YEAR: 2003-2004 & I.T.A. NO. 4114/MUM/2008 ASSESSMENT YEAR: 2003-2004 & ITA-2722/MUM/2011 ASSESSMENT YEAR: 2003-2004 PAGE 19 OF 23 ASSESSEE-COMPANY IN THE FINANCIAL YEAR 2001-02. KEE PING IN VIEW THIS UNDISPUTED FACTUAL POSITION AND THE DECISION OF THE BANGALORE BENCH OF ITAT IN THE CASE OF MARBLE INDIA PVT. LIMITED (SUPR A), WE ARE INCLINED TO AGREE WITH THE CONTENTION OF THE LD. COUNSEL FOR TH E ASSESSEE THAT THE PROVISION FOR BAD AND DOUBTFUL DEBTS AMOUNTING TO R S.4.13 CRORES CANNOT BE TREATED AS A PART OF OPERATING COST FOR THE PURP OSE OF COMPUTING OPERATING PROFIT OF THE ASSESSEE-COMPANY FOR THE YE AR UNDER CONSIDERATION. WE ACCORDINGLY DIRECT THE ASSESSING OFFICER/TRANSFER PRICING OFFICER TO RE-COMPUTE THE OPERATING MARGIN OF THE ASSESSEE- COMPANY BY REDUCING THE SAID AMOUNT AND ALLOW GROUN D NO. 2 OF THE ASSESSEES APPEAL. 22. AT THE TIME OF HEARING BEFORE US, THE LD. COUNS EL FOR THE ASSESSEE HAS SUBMITTED THAT IF THE PROVISION FOR BAD AND DOUBTFU L DEBTS AMOUNTING TO RS.4.13 CRORES IS REDUCED FROM THE OPERATING COST F OR THE PURPOSE OF COMPUTING THE OPERATING MARGIN OF THE ASSESSEE-COMP ANY AND ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS OF T HE ASSESSEE-COMPANY WITH ITS ASSOCIATED ENTERPRISES IS DETERMINED BY AP PLYING THE AVERAGE OPERATING PROFIT MARGIN OF THE COMPARABLES AS SELEC TED BY THE TPO, 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. 2. WE ACCORDINGLY DIRECT THE ASSESSING OFFICER/TPO TO RE-COMPUTE THE DIFFERENCE BETWEEN THE ARMS LENG TH PRICE OF THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE COMPANY WITH ITS AES AS DETERMINED BY THEM AND THE PRICE CHARGED BY THE ASS ESSEE-COMPANY BY TAKING ITS OPERATING MARGIN AFTER EXCLUDING THE PRO VISION 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 ADDITIO NAL GROUND NO. 2 OF THE ASSESSEES APPEAL IS ACCORDINGLY ALLOWED. I.T.A. NO 3412/MUM/2008 ASSESSMENT YEAR: 2003-2004 & I.T.A. NO. 4114/MUM/2008 ASSESSMENT YEAR: 2003-2004 & ITA-2722/MUM/2011 ASSESSMENT YEAR: 2003-2004 PAGE 20 OF 23 23. AS A RESULT OF OUR DECISION RENDERED ABOVE WHIL E DECIDING THE ISSUE INVOLVED IN GROUND NO. 2 AND ADDITIONAL GROUND NO. 2 OF THE ASSESSEES APPEAL, THE OTHER ISSUES RAISED IN GROUNDS NO. 3 TO 8 AND ADDITIONAL GROUND NO. 1 OF THE ASSESSEES APPEAL AND GROUND NO . 1 OF THE REVENUES APPEAL RELATING TO THE ADDITION MADE ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT HAVE BECOME INFRUCTUOUS OR RENDERED ACAD EMIC ONLY. WE, THEREFORE, DO NOT CONSIDER IT NECESSARY OR EXPEDIEN T TO DECIDE THE SAME. 24. AS REGARDS THE REMAINING ISSUES RAISED IN GROUN D NO. 9 OF THE ASSESSEES APPEAL AND GROUND NO. 2 OF THE REVENUES APPEAL RELATING TO THE DISALLOWANCE ON ACCOUNT OF EMPLOYERS CONTRIBUT ION TO P.F. AND PENSION FUND AND EMPLOYEES CONTRIBUTION TO P.F. AND PENSION FUND RESPECTIVELY, IT IS OBSERVED THAT THE SAME ARE SQUA RELY COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE HONBLE SUPR EME COURT IN THE CASE OF CIT VS.- ALOMS EXTRUSIONS LIMITED [185 TAXMAN 416] AND CIT VS.- VINAY CEMENT LIMITED [213 CTR 268], WHEREIN IT WAS HELD THAT THE EMPLOYERS/EMPLOYEES CONTRIBUTION TOWARDS PROVIDENT FUND AND PENSION FUND PAID BEFORE THE DUE DATE OF FILING OF THE RETU RN OF INCOME FOR THE RELEVANT YEAR CANNOT BE DISALLOWED UNDER SECTION 43 B, EVEN IF IT HAS BEEN PAID AFTER THE DUE DATE AS PER RELEVANT ACTS. RESPE CTFULLY FOLLOWING THE SAID DECISION OF THE HONBLE APEX COURT, WE DECIDE THIS ISSUE IN FAVOUR OF THE ASSESSEE. GROUND NO. 9 OF THE ASSESSEES APPEAL IS ACCORDINGLY ALLOWED, WHILE GROUND NO. 2 OF THE REVENUES APPEAL IS DISMISSED. 25. AS REGARDS THE REVENUES APPEAL BEING ITA NO. 2 722/MUM/2011, WHICH IS DIRECTED AGAINST THE ORDER OF LD. COMMISSI ONER OF INCOME TAX (APPEALS)-15, KOLKATA DATED 07.01.2011, WHEREBY HE CANCELLED THE PENALTY OF RS.1,39,56,548/- IMPOSED BY THE ASSESSIN G OFFICER UNDER SECTION 271(1)(C) OF THE ACT, IT IS OBSERVED THAT T HE PENALTY IMPOSED BY THE ASSESSING OFFICER UNDER SECTION 271(1)(C) OF TH E ACT IN RESPECT OF I.T.A. NO 3412/MUM/2008 ASSESSMENT YEAR: 2003-2004 & I.T.A. NO. 4114/MUM/2008 ASSESSMENT YEAR: 2003-2004 & ITA-2722/MUM/2011 ASSESSMENT YEAR: 2003-2004 PAGE 21 OF 23 ADDITION MADE TO THE TOTAL INCOME OF THE ASSESSEE O N ACCOUNT OF TRANSFER PRICING ADJUSTMENT AS SUSTAINED IN THE FIRST APPEAL TO THE EXTENT OF RS.3,62,46,000/- AS WELL AS IN RESPECT OF OTHER ADD ITION FOR DISALLOWANCE ON ACCOUNT OF BELATED PAYMENT OF EMPLOYEES CONTRIBU TION TOWARDS PROVIDENT FUND, ETC. WAS DELETED BY THE LD. CIT(APP EALS) VIDE PARAGRAPHS NO. 4 TO 9 OF HIS IMPUGNED ORDER, WHICH READ AS UND ER:- 4. I HAVE PERUSED THE ASSESSMENT ORDER, PENALTY O RDER AS WELL AS THE CASE LAWS CITED BY THE APPELLANT. PENAL TY PROCEEDINGS ARE SEPARATE FROM QUANTUM PROCEEDINGS (ASSESSMENT PROCEEDINGS) AND SIMPLY BECAUSE AN ADDI TION HAS BEEN MADE IN THE ASSESSMENT ORDER WHICH EVEN HA S BEEN CONFIRMED AT THE APPELLANT LEVEL WILL NOT IPSO FACTO LEAD TO LEVY OF PENALTY U/S. 271(1)(C). THIS IS BEC AUSE THE CONSIDERATIONS WHICH PREVAIL IN PENALTY PROCEEDINGS ARE DIFFERENT FROM THOSE WHICH OBTAIN AT THE ASSESSMENT PROCEEDINGS. 5. THIS ASPECT ASSUMES GREATER SIGNIFICANCE AS PENA LTY RELATING TO ADJUSTMENTS MADE UNDER THE SPECIAL PROV ISIONS OF THE I.T. ACT (TRANSFER PRICING) CONTAINED IN CHA PTER X ARE GOVERNED BY EXPLANATION 7 TO SECTION 271(1)(C). 6. EXPLANATION 7 BASICALLY REVOLVES AROUND TWO CORE ISSUES 'GOOD FAITH AND 'DUE DILIGENCE'. IT HAS TO BE SEEN IN OBJECTIVE MANNER WHETHER THE APPELLANT HAS ACTED IN 'GOOD FAITH' AND 'DUE DILIGENCE' OR NOT, BEFORE THE PENAL TY CAN BE LEVIED. BOTH THESE ADDITIONS HAVE TO BE SATISFIED CUMULATIVELY. 7. THE APPELLANT CARRIED OUT TRANSFER PRICING STUDY AND ADOPTED TNMM AS MAM. WHILE CARRYING OUT TNMM, IT UNDERTOOK ITS SEARCH IN PUBLIC DATABASE AND IDENTIF IED 2 COMPANIES AS COMPARABLES TO ITS DISTRIBUTION ACTIVI TIES IN INDIA. THE TPO HAS NOT FOUND FAULT IN THE SEARCH PR OCESS FOR SELECTION OF COMPARABLE COMPANIES SUBMITTED BY THE APPELLANT. ON THE OTHER HAND, THE TPO BY INVOKING P OWERS U/S 133(6), PICKED UP 3 COMPANIES TO ARRIVE AT THE MARGIN OF 8.99%. THE INFORMATION COLLECTED BY THE TPO BY I NVOKING I.T.A. NO 3412/MUM/2008 ASSESSMENT YEAR: 2003-2004 & I.T.A. NO. 4114/MUM/2008 ASSESSMENT YEAR: 2003-2004 & ITA-2722/MUM/2011 ASSESSMENT YEAR: 2003-2004 PAGE 22 OF 23 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 R ESPECT OF DATA/ INFORMATION GATHERED BY INVOKING THE PROVI SIONS OF SECTION 133(6) OF THE I.T. ACT, WHICH THE APPELL ANT CANNOT EXERCISE. THE LD. CIT(A) PARTLY AGREED WITH THE CONTENTION OF THE TAX PAYER AND INCLUDED ITS 3 COMP ARABLE COMPANIES OUT OF FINAL SET OF COMPARABLES AND ARRIV ED AT THE OPERATING MARGIN OF 6.31% AS AGAINST 8.99% DETERMINED BY THE APPELLANT. IT IS CLEAR THAT THE W HOLE EXERCISE IS A SUBJECTIVE ONE BASED ON SELECTION AND REJECTION OF COMPARABLES AND SO LEVYING A CONCEALM ENT PENALTY ON THIS EXERCISE WOULD BE UNFAIR IN THE LIG HT OF THE DECISION OF THE MUMBAI ITAT IN THE CASE OF FIRMENIC H AEROMATICS (INDIA) PVT. LTD. 2010-TII-17-ITAT-MUM-T P. 9. BASED ON THE ABOVE FACTS AND CIRCUMSTANCES, IT CANNOT BE SAID THAT THE APPELLANT EITHER ACTED IN B AD FAITH OR NEGLIGENTLY SO AS TO SATISFY THE CONDITIONS FOR LEVY OF PENALTY UNDER EXPLANATION 7 OF THE INCOME TAX ACT. THE EXPLANATION OFFERED BY THE APPELLANT IS HELD TO BE BONAFIDE AND HENCE THE PENALTY SO LEVIED, IS CANCELLED. 26. WHILE WE AGREE WITH THE REASONS GIVEN BY THE LD . CIT(APPEALS) FOR CANCELLING THE PENALTY IMPOSED BY THE ASSESSING OFF ICER UNDER SECTION 271(1)(C), IT IS PERTINENT TO NOTE THAT EVEN THE AD DITION MADE ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT AND DISALLOWANCE OF EMPLOYEES CONTRIBUTION TOWARDS PROVIDENT FUND, ETC. AS SUSTAI NED BY THE LD. CIT(APPEALS) ARE FOUND TO BE NOT SUSTAINABLE BY US WHILE DISPOSING OF THE QUANTUM APPEALS AS HELD IN THE FOREGOING PORTION OF THIS ORDER. CONSEQUENTLY THE PENALTY IMPOSED UNDER SECTION 271( 1)(C) IN RESPECT OF THE SAID ADDITION IS NOT SUSTAINABLE AND THE IMPUGN ED ORDER OF THE LD. CIT(APPEALS) CANCELLING THE PENALTY IMPOSED BY THE ASSESSING OFFICER IS LIABLE TO BE UPHELD ON THIS GROUND ALSO. WE ACCORDI NGLY UPHOLD THE I.T.A. NO 3412/MUM/2008 ASSESSMENT YEAR: 2003-2004 & I.T.A. NO. 4114/MUM/2008 ASSESSMENT YEAR: 2003-2004 & ITA-2722/MUM/2011 ASSESSMENT YEAR: 2003-2004 PAGE 23 OF 23 IMPUGNED ORDER OF THE LD. CIT(APPEALS) AND DISMISS THIS APPEAL OF THE REVENUE. 27. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS AL LOWED, WHILE THE REVENUES APPEALS ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON SEPTEMBER26, 2018. SD/- SD/- (SATBEER SINGH GODARA) (P.M. JAGTAP) JUDICIAL MEMBER ACCOUNTANT MEMBER KOLKATA, THE 26 TH DAY OF SEPTEMBER, 2018 COPIES TO : (1) M/S. PHILIPS MEDICAL SYSTEMS PVT. LIMITED, (NOW MERGED WITH M/S. PHILIPS ELECTRONICS INDIA LIM ITED), CORPORATE FISCAL BUILDING NO. 9B, DLF CYBER CITY, DLF P HASE-3, 8 TH FLOOR, GURGAON, HARYANA-122 002 (2) ITO/DCIT, WARD-8(2)(4), MUMBAI, ROOM NO. 216A, AAYAKAR BHAWAN, M.K. ROAD, MUMBAI-400 020 (3) PHILIPS ELECTRONICS INDIA LIMITED. TECHNOPOLIS KNOWLEDGDE PARK, 2 ND FLOOR, MAHAKALI CAVES ROAD, CHAKALA, ANHDERI (E), MUMBAI-400 093 (4) COMMISSIONER OF INCOME TAX (APPEALS)-XXXII, M UMBAI, (5) COMMISSIONER OF INCOME TAX- , (6) THE DEPARTMENTAL REPRESENTATIVE (7) GUARD FILE BY ORDER SENIOR PRIVATE SECRETARY, HEAD OF OFFICE/D.D.O. INCOME TAX APPELLATE TRIBUNAL, KOLKATA BENCHES, KOLKATA LAHA/SR. P.S.