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1/15 IN THE HIGH COURT OF KARNATAKA, BENGALURU
DATED THIS THE 7TH DAY OF AUGUST 2018
PRESENT
THE HON’BLE DR.JUSTICE VINEET KOTHARI
AND
THE HON’BLE MRS.JUSTICE S.SUJATHA
I.T.A. No.395/2017
BETWEEN : 1. THE PR. COMMISSIONER
OF INCOME-TAX
5TH FLOOR, BMTC BUILDING
80 FEET ROAD, KORMANGALA
BENGALURU-560095.
THE DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-3[1][1] 2ND FLOOR, BMTC BUILDING 80 FEET ROAD, KORMANGALA BENGALURU-560095.
...APPELLANTS
(BY SRI ARAVIND.K.V., ADV.)
AND : M/s. INTEVA PRODUCTS INDIA AUTOMOTIVE PVT. LTD., [FORMERLY KNOWN AS MERITOR LVS INDIA PVT. LTD.,] No.69, AI-AMEEN TOWERS, HOSUR ROAD, NEAR LALBAGH MAIN GATE BENGALURU-560027.
…RESPONDENT
(BY SRI K.R.VASUDEVAN AND SRI ANKUR PAI, ADVS.)
Date of Judgment 07-08-2018, ITA No.395/2017 The Pr. Commissioner of Income-tax & Another Vs. M/s. Inteva Products India Automotive Pvt. Ltd.,
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THIS INCOME TAX APPEAL IS FILED UNDER SECTION 260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 20.07.2016 PASSED IN IT[TP]A No.136/BANG/2015, FOR THE ASSESSMENT YEAR 2010-11, ANNEXURE-D, PRAYING TO [i] FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED ABOVE. [ii] ALLOW THE APPEAL AND SET ASIDE THE ORDER PASSED BY THE ITAT, BENGALURU IN IT[TP]A No.136/BANG/2015 DATED 20.07.2016, ANNEXURE-D, CONFIRMING THE ORDER OF THE DRP AND CONFIRM THE ORDER PASSED BY THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-3[1][1], BENGALURU.
THIS APPEAL COMING ON FOR ADMISSION, THIS DAY, S. SUJATHA, J., DELIVERED THE FOLLOWING:
J U D G M E N T
Mr. Aravind.K.V., Adv. for Appellants – Revenue. Mr. K.R.Vasudevan, Adv. And Mr. Ankur Pai, Adv. for Respondent – Assessee.
This Appeal is filed by the Revenue purportedly raising substantial questions of law arising from the Order of the Income Tax Appellate Tribunal, Bangalore Bench ‘B’, Bangalore, in IT[TP]A No.136/Bang/2015 dated 20.07.2016, relating to the Assessment Year 2010-11.
The substantial questions of law framed by the Revenue in the Memorandum of Appeal are as under:
Date of Judgment 07-08-2018, ITA No.395/2017 The Pr. Commissioner of Income-tax & Another Vs. M/s. Inteva Products India Automotive Pvt. Ltd.,
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“1. Whether on the facts and in the circumstances of the case, the Tribunal is right in law in directing the AO/TPO to confine Arms Length Adjustment to the value of international transactions in the manufacturing segment of the assessee by relying on the decision of it in case of assessee itself which has not reached finality without appreciating that TPO has chosen TNMM method as the most appropriate method for determination of ALP with regard to the manufacturing segment and has accepted same comparable as selected by assessee for bench marking analysis?
Whether on the facts and in the circumstances of the case, the Tribunal is right in directed the AO/TPO to compute operating margin of the assessee as well as companies including forex gain/loss to foreign exchange fluctuation in respect of sale proceeds by following its earlier decision in case of M/s. Triology E-Business Software?
Whether on the facts and in the circumstances of the case, the Tribunal is right in setting aside issue of working capital adjustment by following its earlier order which has not reached finality without appreciating that
Date of Judgment 07-08-2018, ITA No.395/2017 The Pr. Commissioner of Income-tax & Another Vs. M/s. Inteva Products India Automotive Pvt. Ltd.,
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working capital is calculated to find out as to how much is cost of capital that must be recovered from the customers by increasing sales price and working capital is equal to sum of total of current assets in the balance sheet firm?
Whether on the facts and in the circumstances of the case, the Tribunal is right in setting aside treatment of royalty by assessing authority even though the assessing authority has given detailed reasoning’s?
Whether on the facts and in the circumstances of the case, the Tribunal is right in setting aside the issue pertaining to the record of the TPO to re-compute the operating margin of the assessee excluding the corresponding lease expenditure from the operating cost?
Whether on the facts and in the circumstances of the case, the Tribunal is right in excluding certain comparable on the basis of functional dissimilarity by following its earlier order on the ground of functional dissimilarity even though the said decision has not reached finality and even when the TPO had chosen the comparables as it satisfies qualitative and quantitative filters applied by the TPO and
Date of Judgment 07-08-2018, ITA No.395/2017 The Pr. Commissioner of Income-tax & Another Vs. M/s. Inteva Products India Automotive Pvt. Ltd.,
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Tribunal ought to have decided the comparability of these companies on the basis of specific facts brought out on record by the TPO in the case of the assessee?”
The learned Tribunal, after discussing the rival contentions of both the Appellants-Revenue and Respondent-Assessee, has returned the findings as under: Regarding Substantial Question of Law Nos.1 & 6:
“28. Having considered the rival submissions and careful perusal of the record, we note that the TPO has rejected this company on the ground that it has 90% of its income from Dubai operations in comparison to the assessee's 100% income from the Indian operations. It appears that the TPO has considered the export income from Dubai clients of the company as income from Dubai operations. Accordingly, we set aside the issue of comparability of this company to the record of the A.O./TPO for readjudication of the same after considering the correct and proper facts and details of the company.
Date of Judgment 07-08-2018, ITA No.395/2017 The Pr. Commissioner of Income-tax & Another Vs. M/s. Inteva Products India Automotive Pvt. Ltd.,
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30.3 We have considered the rival submissions as well as the relevant material on record. There is no dispute that this company is earning its revenue from the ‘on site’ services provided to the off shore clients. Further this company is a leader in the industry and enjoyed a huge brand value and owns intellectual property. By considering all these facts, the co- ordinate bench of this Tribunal in assessee's own case (IT(TP)A No.1534/Bang/2012 vide order Dt.11.04.2014 for the Assessment Year 2008-09 has held in paras 11.2 to 11.4 as under :
“xxxxx”
Accordingly, when no substantial difference in the business activity of the company for the year under consideration we do not find any error or illegality in the directions of the DRP for exclusion of this company.”
Regarding Substantial Question of Law No.2: “3. We have heard the learned Authorised Representative as well as learned Departmental Representative and considered the relevant material on record on admission of the additional ground raised by the assessee. As it is clear that
Date of Judgment 07-08-2018, ITA No.395/2017 The Pr. Commissioner of Income-tax & Another Vs. M/s. Inteva Products India Automotive Pvt. Ltd.,
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the additional ground raised by the assessee is only in respect of inclusion of foreign exchange fluctuation in the operating margins of the assessee as well as comparable companies. We find that this issue is now settled by various decisions of this Tribunal that if any gain or loss due to the foreign exchange fluctuation arising in respect of the sale proceeds, the same will be part of the operating margin of the assessee as well as comparable companies. Since the TPO/ TPO has excluded the foreign exchange gain/loss from the operating margins of the assessee therefore it would be a serious injustice to the assessee if a parity treatment has not been given to the foreign exchange fluctuation gain/loss while computing the operating margins of the comparable companies. Accordingly, we find that the additional ground raised by the assessee is not in the form of fresh issue but it is part of the existing issue of the Transfer Pricing Adjustment and based on the principle of consistent treatment of operating margins of the tested party as well as comparables. Hence in the facts and circumstances of the case, we admit the additional ground raised by the assessee for adjudication.”
Date of Judgment 07-08-2018, ITA No.395/2017 The Pr. Commissioner of Income-tax & Another Vs. M/s. Inteva Products India Automotive Pvt. Ltd.,
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Regarding Substantial Question of Law No.3: “10. Having considered the rival submissions and careful perusal of the record, we note that the DRP in para 3.16 directed the TPO to compute the working capital adjustment in respect of the comparables after giving the effect to the directions as under :
“xxxxx”
Since the TPO has not complied with the directions given by the DRP therefore, we set aside this issue to the record of the TPO/A.O. for giving the proper working capital adjustment without any restriction as held by the co-ordinate bench of this Tribunal in the case of Citrix R & D India Pvt. Ltd. in IT(TP)A No.1289/Bang/2014 wherein it was held that the TPO cannot restrict the working capital adjustment artificially from the actual computation.”
Regarding Substantial Question of Law No.4: “20. We have considered the rival submissions as well as the relevant material on record. At the outset we note that the TPO has treated the ALP of royalty in question at Nil on the ground that the assessee failed to produce any
Date of Judgment 07-08-2018, ITA No.395/2017 The Pr. Commissioner of Income-tax & Another Vs. M/s. Inteva Products India Automotive Pvt. Ltd.,
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supporting evidence as to how the royalty has been computed and further the assessee has failed to show that the assessee has derived some benefit from the transfer of technology for which the royalty to be paid to the AE. As far as the justification and deriving the benefit from transfer of technology is concerned this is beyond the scope of the process of determining the ALP by the TPO, therefore we do not agree with the view of the TPO that the assessee was required to establish the benefit derived from the technology transfer by the AE against which the royalty has been paid. Once the assessee is under obligation as per the license agreement to manufacture the items under the license owned by the AE then it is irrelevant to prove that the assessee has derived special benefit from the technology transferred by the AE. When the manufacturing activity itself has been carried out as per the license granted by the AE under the terms and conditions of the license agreement then the TPO is not allowed to outrightly reject the claim of royalty. The jurisdiction and power of the TPO is only to determine the ALP of the royalty in comparison to the comparable price. The TPO has not made any endeavour or took any step to examine the royalty payment by considering with
Date of Judgment 07-08-2018, ITA No.395/2017 The Pr. Commissioner of Income-tax & Another Vs. M/s. Inteva Products India Automotive Pvt. Ltd.,
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comparable prices. We further note that for the Assessment Year 2012-13, the TPO vide its order dt.12.2.2016 has accepted the royalty and service charges at in para 6 as under :
“xxxxx”
As the assessee has produced the relevant evidence including the license agreement under which the Royalty has been paid to AE therefore, in the facts and circumstances of the case, we set aside this issue to the record of the TPO / TPO to re-examine the issue as per the provisions of transfer pricing and in the light of the evidence produced by the assessee as well as the T.P. order passed under Section 92CA for the Assessment Year 2012-13. Needless to say that the assessee be given an appropriate opportunity of hearing before deciding the issue.”
Regarding Substantial Question of Law No.5: “21. Ground Nos.7 & 8 are regarding incorrect computation of operating margin of the assessee and proportionate T.P. Adjustment. The learned Authorised Representative has submitted that the TPO has excluded sub lease income from the operating margins however the corresponding lease expenses has not been excluded from the
Date of Judgment 07-08-2018, ITA No.395/2017 The Pr. Commissioner of Income-tax & Another Vs. M/s. Inteva Products India Automotive Pvt. Ltd.,
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operating cost. Thus the learned Authorised Representative has contended that if the sub- lease income is excluded from the operating margin then the corresponding expenditure shall also be excluded from the operating cost for the purpose of computing the operating margin. Further the TPO has made adjustment on the entire manufacturing segment instead of value of international transactions.
The learned D. R. has relied upon the orders of the authorities below.
Having considered the rival submissions as well as the relevant material on record, we find merit in the contention of the assessee that if sub-lease income is excluded from the operating profit then corresponding lease expenditure shall also be excluded from the operating cost while computing the operating margin of the assessee. Accordingly, we set aside this issue to the record of the A.O./TPO to compute the operating margin of the assessee after excluding the corresponding lease expenditure from the operating cost. The TPO is also directed to confine the adjustment to the value of international transactions only.”
Date of Judgment 07-08-2018, ITA No.395/2017 The Pr. Commissioner of Income-tax & Another Vs. M/s. Inteva Products India Automotive Pvt. Ltd.,
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However, this Court in a recent judgment in I.T.A. Nos.536/2015 c/w 537/2015 delivered on 25.06.2018 (Prl. Commissioner of Income Tax & Anr. –v- M/s Softbrands India Pvt. Ltd.,) has held that in these type of cases, unless an ex-facie perversity in the findings of the learned Income Tax Appellate Tribunal is established by the appellant, the appeal at the instance of an assessee or the Revenue under Section 260-A of the Act is not maintainable.
The relevant portion of the said judgment is quoted below for ready reference: “Conclusion: 55.
A substantial quantum of international trade and transactions depends upon the fair and quick judicial dispensation in such cases. Had it been a case of substantial question of interpretation of provisions of Double Taxation Avoidance Treaties (DTAA), interpretation of provisions of the Income Tax Act or Overriding Effect of the
Date of Judgment 07-08-2018, ITA No.395/2017 The Pr. Commissioner of Income-tax & Another Vs. M/s. Inteva Products India Automotive Pvt. Ltd.,
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Treaties over the Domestic Legislations or the questions like Treaty Shopping, Base Erosion and Profit Shifting (BEPS), Transfer of Shares in Tax Havens (like in the case of Vodafone etc.), if based on relevant facts, such substantial questions of law could be raised before the High Court under Section 260-A of the Act, the Courts could have embarked upon such exercise of framing and answering such substantial question of law. On the other hand, the appeals of the present tenor as to whether the comparables have been rightly picked up or not, Filters for arriving at the correct list of comparables have been rightly applied or not, do not in our considered opinion, give rise to any substantial question of law.
We are therefore of the considered opinion that the present appeals filed by the Revenue do not give rise to any substantial question of law and the suggested substantial questions of law do not meet the requirements of Section 260-A of the Act and thus the appeals filed by the Revenue are
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found to be devoid of merit and the same are liable to be dismissed.
We make it clear that the same yardsticks and parameters will have to be applied, even if such appeals are filed by the Assessees, because, there may be cases where the Tribunal giving its own reasons and findings has found certain comparables to be good comparables to arrive at an ‘Arm’s Length Price’ in the case of the assessees with which the assessees may not be satisfied and have filed such appeals before this Court. Therefore we clarify that mere dissatisfaction with the findings of facts arrived at by the learned Tribunal is not at all a sufficient reason to invoke Section 260-A of the Act before this Court.
The appeals filed by the Revenue are therefore dismissed with no order as to costs.”
Having heard the learned counsels appearing for the parties, we are therefore of the opinion
Date of Judgment 07-08-2018, ITA No.395/2017 The Pr. Commissioner of Income-tax & Another Vs. M/s. Inteva Products India Automotive Pvt. Ltd.,
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that no substantial question of law arises in the present case also. The Appeal filed by the Appellants-Revenue is liable to be dismissed and it is dismissed accordingly. No costs.
Sd/- JUDGE
Sd/- JUDGE
NC.