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IN THE HIGH COURT OF KARNATAKA, BENGALURU
DATED THIS THE 31st DAY OF JULY 2018
PRESENT
THE HON'BLE Dr.JUSTICE VINEET KOTHARI
AND
THE HON’BLE Mrs.JUSTICE S.SUJATHA
I.T.A.No.529/2016 BETWEEN:
PR. COMMISSIONER OF INCOME TAX-4, BMTC COMPLEX, KORAMANGALA, BANGALORE-560001.
THE ASSITANT COMMISSIONER OF INCOME TAX, CIRCLE-12(1), BANGALORE.
…APPELLANTS (By Mr. E.I. SANMATHI, ADV.)
AND:
M/S. KSHEMA TECHNOLOGIES LIMITED, (Merged with Mphasis Ltd) BAGMANE WORLD TECHNOLOGY CENTRE, K.R.PURAM, WTC 3, BLOCK B, 1ST FLOOR, MARATHAHALLI, ORR, DODDENEKUNDI, BANGALORE-560048. PAN: AACCB6820C.
…RESPONDENT (By Mr. SANDEEP HUILGOL, ADV. FOR Mr. T.SURYANARAYANA, ADV.,)
THIS I.T.A. IS FILED UNDER SECTION 260-A OF I.T. ACT 1961, PRAYING TO DECIDE THE FOREGOING QUESTION OF LAW AND/OR SUCH OTHER QUESTIONS OF LAW AS MAY BE
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FORMULTED BY THE HON’BLE COURT AS DEEMED FIT AND TO SET ASIDE THE APELLATE ORDER DATED 22/04/2016 PASSED BY THE ITAT, ‘B’ BENCH, BENGALURU, IN APPEAL PROCEEDINGS NO. IT(TP)A No.1105/BANG/2012 FOR A.Y. 2005- 06 ANNEXURE A & GRANT SUCH OTHER RELIEF AS DEEMED FIT, IN THE INTEREST OF JUSTICE.
THIS I.T.A. COMING ON FOR ADMISSION, THIS DAY S. SUJATHA J. DELIVERED THE FOLLOWING:-
JUDGMENT
Mr. Sanmathi E.I. Adv. for Appellants - Revenue Mr. Sandeep Huilgol and Mr. T.Suryanarayana, Advs. for Respondent - Assessee
The Appellants-Revenue have filed this appeal u/s.260A of the Income Tax Act, 1961, raising purportedly certain substantial questions of law arising from the order of the ITAT, Bangalore Bench ‘B’, Bangalore, dated 22.04.2016 passed in IT(TP)A No.1105/Bang/2012 (M/s.Kshema Technologies Ltd., vs. Asst.Commissioner of Income Tax) for A.Y.2005-06.
The proposed substantial questions of law framed in the Memorandum of appeal by the
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Appellants-Revenue are quoted below for ready reference:- “1. Whether on the facts and in the circumstances of the case and in law,, the Tribunal was justified in imposing the decisions of its co-ordinate benches without doing any FAR analysis of the tax payer with those other cases?
Whether on the facts and in the circumstances of the case and in law,, the Tribunal was justified in seeking exact comparability, while searching for comparable companies of the assessee under Transaction Net Margin Method whereas requirement of law and international jurisprudence require seeking similar comparable companies?
Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in imposing condition beyond law where the requirement of law is to acknowledge only those differences that are likely to materially affect the margin?
Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in not acknowledging that
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determination of Arms Length Price by carrying out comparability analysis of the companies is an art and not exact science as no two companies are exactly same?
Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in demanding comparability standards that may itself defeat the purpose of law relating to determination of ALP under the Income Tax Act?
Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in directing the exclusion of comparables companies having RPT transaction more than 15% ignoring the TPO’s observation that the basis for determining the threshold for eliminating companies having RPT transactions more than 25% was through the determination of Indian companies with foreign shareholding greater than 26% and therefore had its basis in the provision of the Act and the accounting standards As-18?”
The learned Tribunal, after discussing the rival contentions of both the Appellants-Revenue and the
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Respondent-assessee, has given the following findings against Revenue with regard to various issues raised before it with regard to ‘Transfer Pricing’ and ‘Transfer Pricing Adjustments’ made by the concerned authorities below. We consider it appropriate to quote the relevant portions hereunder:- “ 11.3 We have heard the rival submissions and considered the relevant material on record. We find that the assessee took its operating margin at entity level and then compared the same with the mean margins of the selected comparables. The TPO has not objected to its methodology of the assessee but rejected certain comparables selected by the assessee and included the some more comparables in the set of comparables for determining the ALP. It is pertinent to note that as per the provisions of Transfer Pricing, the entity level margin of the assessee cannot be considered for the purpose of bench marking the international transactions when the assessee is having both international as well as third party transactions. Though there is a strength in the contention of the learned Authorised Representative that in view of the
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complexity of the transactions between the assessee and its AEs as well as the third party transactions in which the assessee has to pay the selling commission to the AE, the assessee adopted entity level operating margin for the purpose of bench marking its international transactions. However, this method is not permitted as per the provisions and rules of the transfer pricing under Income Tax Act and I.T. Rules and therefore to that extent, we find that the learned CIT (Appeals) was justified in rejecting the methodology applied by the assessee as well as by the TPO. Once the CIT (Appeals) has rejected the entity level profit margin of the assessee for the purpose of bench marking the international transactions with ALP, the CIT (Appeals) was required to redo exercise of determination of ALP as per the provisions of transfer pricing. Instead of following the proper procedure stipulated under Chapter X of the I.T. Act as well as Rule 10 of I.T. Rules, the CIT (Appeals) has proceeded to take the AEs of the assessee as tested party and further recomputed their profit margin by excluding certain expenses which we find is not permitted under the provisions of transfer pricing. Not only changing the tested party from the assessee to its AE, the
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CIT (Appeals) has also selected a domestic company as a comparable to the AE of the assessee. Therefore the entire exercise of determining the ALP by the CIT (Appeals) is contrary to the provisions of transfer pricing under the I.T. Act. Hence in view of the facts and circumstances of the case, we set aside the impugned order of the authorities below and remit the issue to the record of the Assessing Officer / TPO for deciding the matter afresh by considering the segment-wise data of the assessee and then compare the same with the comparable companies in the light of various decisions relied upon by the assessee. We find that in the series of decisions, this Tribunal has come to a conclusion that the threshold limit of the RPT should not be more than 15% in normal circumstances where there is no difficulty in selecting the comparable companies. Therefore we direct the TPO to apply the RPT filter at 15% instead of 25% and then consider the comparability of the companies. Since the assessee did not fully cooperate with the authorities below in the first round of the proceedings therefore we direct the assessee to co-operate in the proceedings before the A.O./TPO and furnish the relevant and requisite details in
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order determining the ALP. Needless to say that the Assessing Officer/TPO also consider the benefit of tolerance range of + / - 5% as per the proviso to Section 92C (2) as well as working capital adjustment”.
However, this Court in a recent judgment in ITA No.536/2015 C/w ITA No.537/2015 delivered on 25.06.2018 (Prl. Commissioner of Income Tax & Anr. Vs. 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
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interpretation of provisions of Double Taxation Avoidance Treaties (DTAA), interpretation of provisions of the Income Tax Act or Overriding Effect of the 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. 56. 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
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filed by the Revenue are 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. 58. The appeals filed by the Revenue are therefore dismissed with no order as to costs.”
Having heard the learned counsels for the parties, we are therefore of the opinion that no substantial question of law arises in the present case also. The appeal filed by the Appellants-Revenue is
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liable to be dismissed and it is dismissed accordingly. No costs.
Sd/- JUDGE
Sd/-
JUDGE Srl.