M.Y.Maharshi vs. The Asst. Commissioner of Income-Tax

1 IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 17TH DAY OF DECEMBER 2020 PRESENT THE HON’BLE MR. JUSTICE ALOK ARADHE AND THE HON’BLE MR. JUSTICE H.T.NARENDRA PRASAD I.T.A. NO.282 OF 2013 BETWEEN: 1. THE COMMISSIONER OF INCOME-TAX

C.R. BUILDING, QUEENS ROAD

BANGALORE. 2. THE DY. DIRECTOR OF INCOME-TAX

CIRCLE-11(3)

RASHTROTHANA BHAVAN

NRUPATHUNGA ROAD, BANGALORE. .... APPELLANTS (BY SRI. DILIP KUMAR, ADV., FOR SRI. K.V. ARAVIND, ADV.,) AND: M/S. GE INDIA TECHNOLOGY CENTRE PVT. LTD., NO.122, EXPORT PROMOTION INDL. PARK, WHITEFIELD ROAD BANGALORE-560066. ... RESPONDENT (BY SRI. SACHIT JOLLY, ADV., FOR SRI. B.N. PRAKASH, ADV.,) - - - THIS I.T.A. IS FILED UNDER SEC. 260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 31.12.2012 PASSED

2 IN ITA NO.925/BANG/2011 FOR THE ASSESSMENT YEAR 2006-07, PRAYING TO: (i) FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN. (ii) ALLOW THE APPEAL AND SET ASIDE THE ORDER DATED 31.12.2012 IN ITA NO.925/BANG/2011 PASSED BY THE ITAT, BANGALORE AND CONFIRM THE ORDER OF THE DISPUTE RESOLUTION PANEL AND THE CONSEQUENTIAL ORDER PASSED BY THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-11(3), BANGALORE. THIS I.T.A. COMING ON FOR HEARING, THIS DAY, ALOK ARADHE J., DELIVERED THE FOLLOWING: JUDGMENT This appeal under Section 260-A of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’, for short) has been filed by the revenue. The subject matter of the appeal pertains to the Assessment Year 2006-07. The appeal was admitted by a Bench of this Court vide order dated 06.01.2015 on the following substantial questions of law: "(1) Whether the Appellate Authorities were correct in holding that telecommunication expenses and traveling expenses incurred in foreign currency reduced from export turnover has to be reduced from total turnover for computing

3 deduction under Section 10A of the Act in the absence of any provisions in Section 10A of the Act which requires the concerned expenses to be reduced from total turnover also? (2) Whether the Tribunal on the facts and in circumstances of the case was correct in setting aside the arms length price adjustment on account of interest on external commercial borrowings on the ground the rate of interest is not disputed in the earlier assessment years upto assessment year 2008-09 except for 2006-07 without taking into consideration the Transfer Pricing Officer has not examined the controversy in detail in the earlier years and the determination of arms length price is independent in each of the assessment year and recorded a perverse finding? (3) Whether the Tribunal committed an error in not appreciating the fact that loans or external commercial borrowings between the cross border entities resulting

4 in an international transaction and each transaction has to be considered every year with respect to the arms length price?." 2. Factual background in which the aforesaid substantial questions of law arise for our consideration need mention. The assessee is engaged in the business of research and development in the area of material sciences and process technology and providing and related software development services. The assessee filed return of income for the Assessment Year 2006-07 on 31.10.2006 and declared an income of Rs.2,12,18,961/-. The return of income was processed under Section 143(1) on 10.09.2007. Subsequently, the case of the assessee was selected for scrutiny and notice under Section 143(2) of the Act was issued on 05.10.2007. During the relevant financial year, it was observed that the assessee had international transactions exceeding Rs.15 Crores. Therefore, with prior approval of the Commissioner of Income Tax

5 (Appeals), Bangalore-I, Bangalore, a reference was made to the Transfer Pricing Officer to determine the arms length price as per Section 92CA of the Act. The order dated 27.10.2009 under Section 92CA of the Act was passed by the Joint Director, Transfer Pricing-II, Bangalore, by which it was held that adjustment to the arms length price to the extent of Rs.1,04,96,20,245/- is required to be made under Section 92CA of the Act. 3. The order of the Transfer Pricing Officer was sent to the assessee vide communication dated 13.11.2009 in order to enable the assessee to respond to the order. Thereafter, the assessee disputed the draft assessment and preferred objections before the Dispute Resolution Panel. The Dispute Resolution Panel, by order dated 27.08.2010, upheld the determination of arms length price in respect of interest paid / payable by the assessee to the associated enterprises. Thereafter, an order of assessment dated 22.08.2011 was passed by which the Assessing Officer gave effect to the orders

6 passed by the Transfer Pricing Officer and the Dispute Resolution Panel and recomputed the interest paid / payable by the assessee at the rate of 5.67% instead of 7.50% and 8.49% as calculated by the assessee. The Assessing Officer further noticed that the assessee had claimed deduction under Section 10A of the Act without reducing communication expenses from export turn over. The Assessing Officer recomputed the same by excluding the said expenses from export turn over. Thereafter, the assessee filed an appeal before the Income Tax Appellate Tribunal (hereinafter referred to as 'the Tribunal' for short). The Tribunal, by an order dated 31.12.2012, inter alia held that in respect of the computation of deduction under Section 10A of the Act, communication expenses and traveling expenses incurred in foreign currency reduced from export turn over has to be reduced from total turn over. It was further held that the interest was paid at the same rates on the basis of loan agreements entered into by the

7 assessee during the Assessment Year 2000-01 and the same was accepted by the revenue for the Assessment Years 2004-05, 2005-06 and 2008-09 and therefore, the same cannot be disputed for the Assessment Year 2006- 07 while determining the interest at the arms length price. Accordingly, the transfer pricing adjustment on account of interest on external commercial borrowings was set aside. In the aforesaid factual background, the revenue has filed this appeal. 4. Learned counsel for the assessee, at the outset, submitted that the first substantial question of law has already been answered against the revenue by a decision of the Supreme Court in 'COMMISSIONER OF INCOME TAX, CENTRAL-III VS. HCL TECHNOLOGIES LTD.' in Civil Appeal Nos.8469- 90/2013. The aforesaid aspect of the matter could not disputed by the learned counsel for the revenue.

8 5. In view of the decision of the Supreme Court, the first substantial question of law involved in this appeal is answered against the revenue and in favour of the assessee. 6. With reference to the second and third substantial questions of law, it is submitted that the Tribunal, without examining the controversy in terms of Rule 10B(4) of the Income Tax Rules, 1962 (hereinafter referred to as 'the Rules' for short), by merely relying on the statement of the assessee that similar rate of interest paid by the assessee has been accepted by the revenue in earlier Assessment Years i.e. 2002-03, 2003- 04, 2004-05, 2005-06 and 2008-09, recorded a finding in favour of the assessee. It is further submitted that the order of the Tribunal is without application of mind and is contrary to the manner of determination of arms length price provided under Rule 10B of the Rules. It is also submitted that the aforesaid issue of determination of interest on external commercial borrowings to the

9 related party was never an issue in previous Assessment Years and therefore, the finding recorded by the Tribunal is perverse. It is also pointed out that the Reserve Bank of India, in order to regulate the foreign exchange, prescribes the minimum and maximum rate of interest payable on external commercial borrowings and the Reserve Bank of India does not determine the arms length nature of interest paid between the related parties. The rate of interest has to be determined on the basis of the rate of interest applicable between the unrelated parties. It is also submitted that the finding of the Tribunal by placing reliance on the order passed by the Transfer Pricing Officer for the Assessment Year 2008-09 is perverse. 7. Alternatively, it is submitted that even assuming that the issue with regard to rate of interest was adjudicated in the previous years, the Tribunal ought to have appreciated that the principles of res judicata are not applicable and each Assessment Year is a different

10 unit. It is submitted that if any mistake / error in the application of law, if at all is committed, the same could not be perpetuated for the Assessment Year in question. It is also argued that the transfer pricing issues have to be determined on the basis of financial sun transactions of the previous financial year relevant to the assessment year involved as mandated under Rule 10B of the Rules. Alternatively, it is submitted that the order passed by the Tribunal has been passed without any reasons and suffers from the vice of non-application of mind and therefore, the matter has to be remitted to the Tribunal by re-adjudication. 8. On the other hand, learned counsel for the assessee has invited our attention to paragraphs 55 and 57 of the order passed by the Tribunal and has submitted that the material was produced by the assessee before the Tribunal that the rate of interest in the previous assessment years was accepted by the revenue and therefore, the revenue could not be

11 permitted to take out a stand for the Assessment Year 2006-07. It is also submitted that the rate of interest has to be determined with reference to the date on which the transaction takes place. It is also submitted that the Reserve Bank of India has given approval with regard to the rate of interest which is a relevant consideration to determine the rate of interest. In support of aforesaid submission, reliance has been placed on the judgment dated 18.11.2015 of the Bombay High Court in 'COMMISSIONER OF INCOME- TAX-X Vs. SGS PVT. LTD.' in ITA No.1807/2013 and the judgment dated 18.05.2020 of Delhi High Court in 'PRL. COMMISSIONER OF INCOME-TAX-7 Vs. OPEN SOLUTIONS SOFTWARE SERVICES PVT. LTD.' in ITA No.201/2018. 9. We have considered the submissions made on both sides and have perused the record. Section 10B deals with determination of Arms Length Price under Section 92C of the Act. In the instant case, the assessee

12 had calculated the rate of interest at 7.50% and 8.49%. However, the Assessing Officer has scaled down the same to 5.67%. It is pertinent to mention here that Reserve Bank of India has given the approval in respect of the rate of interest and the approval given by the Reserve Bank of India with regard to rate of interest is a relevant factor while determination of the rate of interest. It is equally well settled that rate of interest should be determined on the basis of rate of interest prevailing at the time of availing the loan. From perusal of the order passed by the tribunal, it is evident that before the tribunal, the assessee had filed the copy of show cause notice issued by Transfer Pricing Officer, the assessee's submission in response to the same and order of the Transfer Pricing Officer for Assessment Year 2008-09. The tribunal has further found that the loans were obtained by the assessee in the year 2000-01 at the rate of 7.5% and 8.49% respectively. The tribunal has further recorded the finding that assessee has

13 obtained theloans in the year 2001 and the issue has been considered by the Transfer Pricing Officer for the Assessment Years 2004-05 and 2005-06 and also for the Assessment Year 2008-09. It has further been held that Transfer Pricing Officer after considering the assessee's submission has accepted the rate of interest fixed in the loan agreements. It is also pertinent to mention here that the rate of interest has been accepted by the Assessing Officer for the years 2002-03 to Assessment Year 2008-09 except the Assessment Year 2006-07. Therefore, the tribunal has rightly held that the revenue cannot be allowed to make a departure in case of rate of interest for Assessment Year 2006-07. 10. The Supreme Court in RADHASOAMI SATSANG Vs. COMMISSIONER OF INCOME-TAX’ (1992) 60 TAXMAN 248 (SC) has held that even though principles of res judicata do not apply to income tax proceedings, but where a fundamental aspect permeating through the different Assessment Years has

14 been found as the fact one way or the other and the parties have allowed the position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in subsequent year. For this reason also, in the facts of the case, a different view cannot be taken. In view of preceding analysis, substantial questions of law 2 and 3 are answered against the revenue and in favour of the assessee. In the result, we do not find merit in this appeal, the same fails and is hereby dismissed. Sd/- JUDGE Sd/- JUDGE RV/SS