Try saving your Word file as
Webpage-filtered. This will remove a lot of the excess baggage in the HTML file.
Then reimport to Calibre and convert with 'Remove spacing between paras' unchecked.
For your info, the problem with the original HTML seems to be the MS tags
at the end of each paragraph. Calibre seems to be converting them into a <p/> tag. This is not something I've seen before so it may be a Calibre bug, but I'm not sure. Perhaps you should raise a ticket.
Nevertheless, saving as Webpage-filtered will not create the excess MS-specific tags and so should avoid the problem.