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1/9 IN THE HIGH COURT OF KARNATAKA, BENGALURU
DATED THIS THE 30TH DAY OF JULY 2018
PRESENT
THE HON’BLE DR.JUSTICE VINEET KOTHARI
AND
THE HON’BLE MRS.JUSTICE S.SUJATHA
I.T.A. No.322/2016
BETWEEN : 1. THE Pr. COMMISSIONER OF INCOME-TAX, 5TH FLOOR, BMTC BUILDING 80 FEET ROAD, KORMANGALA BANGALORE-560095.
THE DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-3(1)[1], 2ND FLOOR BMTC BUILDING, 80 FEET ROAD KORMANGALA BANGALORE-560095.
...APPELLANTS
(BY SRI K.V.ARAVIND, ADV.)
AND : M/s. INDIGRA EXPORTS P. LTD., 46, 2ND FLOOR, CC VILLA EJIPURA MAIN ROAD, VIVEKNAGAR POST BANGALORE-560 095 PAN: AAACI 3513M.
…RESPONDENT
(BY SRI S.SHARATH, ADV. FOR SRI K.K.CHYTHANYA, ADV.)
Date of Judgment 30-07-2018, ITA No.322/2016 The Pr. Commissioner of Income-tax & Another Vs. M/s. Indigra Exports P. 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 10/11/2015 PASSED IN IT(TP)A NO.193/BANG/2015, FOR THE ASSESSMENT YEAR 2010-2011, ANNEXURE-D, PRAYING TO: 1. FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED ABOVE. 2. ALLOW THE APPEAL AND SET ASIDE THE ORDERS PASSED BY THE ITAT, BENGALURU IN IT(TP)A NO.193/BANG/2015 DATED: 10/11/2015, ANNEXURE-D AND CONFIRM THE ORDER OF THE DRP CONFIRMING THE ORDER PASSED BY THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-3[1](1), BENGALURU AND ETC.
THIS APPEAL COMING ON FOR HEARING, THIS DAY, S. SUJATHA, J., DELIVERED THE FOLLOWING:
J U D G M E N T
Mr. K.V.Aravind, Adv. for Appellants – Revenue. Mr. S.Sharath, Adv. for Mr. K.K.Chythanya, 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 ‘C’, Bangalore, in IT[TP]A No.193/Bang/2015 dated 10.11.2015, relating to the Assessment Year 2010-11.
The appeal has been admitted on 27.04.2018 to consider the following substantial questions of law:
Date of Judgment 30-07-2018, ITA No.322/2016 The Pr. Commissioner of Income-tax & Another Vs. M/s. Indigra Exports P. Ltd.,
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“1. Whether on the facts and circumstances of the case, the Tribunal is right in law in holding that the foreign exchange transactions are to be considered as operating in nature, when the Rule 10 B[2][d] stipulates that the net profit margin realized by the tax payer in the international transaction shall alone be computed for comparability analysis under Transaction Net Margin Method?
Whether on the facts and in the circumstances of the case, the Tribunal is right in not upholding the TPOs decision in not allowing the Working Capital Adjustments in the given case based on the facts of the case as any adjustment is provided to increase the comparability and not the profitability of the tax payer?”
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 No.1: “09. Vide its grounds 5 and 6, grievance raised by the Revenue is that DRP held the
Date of Judgment 30-07-2018, ITA No.322/2016 The Pr. Commissioner of Income-tax & Another Vs. M/s. Indigra Exports P. Ltd.,
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exchange loss / gain as operating in nature for working out the PLI of the assessee. As per the Revenue, DRP did not verify whether there was any nexus between foreign exchange loss / gain with the business activity of the assessee.
Financial results of the assessee showed that its earnings from export on granite slabs to AE were Rs.15,55,02,752/-. In our opinion, given this fact situation, foreign exchange gain / loss could have been considered as non- operational only if the AO could show that such gains / loss came out of hedging and transactions which were independent of the business revenue earning transaction of the assessee. The preponderance of probability will always weigh in favour of the assessee when its revenues are only from exports. In such a situation we cannot take a presumption that foreign exchange gain / loss were not having any nexus to the operations of the assessee. Coordinate bench in the case of Triology E- Business Software India P. Ltd v. DCIT [[(2013) 140 ITD 540] had held as under at para 79 of its order:
“xxxxx”
Date of Judgment 30-07-2018, ITA No.322/2016 The Pr. Commissioner of Income-tax & Another Vs. M/s. Indigra Exports P. Ltd.,
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Accordingly we are of the opinion that DRP was justified in directing the AO / TPO to consider foreign exchange gain / loss as operational in nature. Grounds 5 and 6 of the Revenue stand dismissed.”
Regarding Substantial Question of Law No.2: “08. We have perused the orders and heard the rival contentions. Revenue has not disputed the averment of the assessee that it was carrying no debtors and its supplies to the AEs were always funded by them through advances. Effectively what it would mean was that assessee did not need any working capital loan at all and was relying on its own resources. This definitely gave an advantage to the assessee. Rule 10B(3) of the Act is reproduced here under :
“xxxxx”
Hence to bring the uncontrolled transaction comparable to the transactions of an assessee, it is required to eliminate the material differences which are likely to affect the price or cost or profits arising from the transactions. Assessee had given a detailed working capital study of the twelve comparables selected by it and worked- out the average working capital and the ratio of
Date of Judgment 30-07-2018, ITA No.322/2016 The Pr. Commissioner of Income-tax & Another Vs. M/s. Indigra Exports P. Ltd.,
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the average working capital to sales of such comparables. There is no case for the Revenue that the comparables considered were not carrying debtors, inventories and creditors. When assessee was not having any debtors and was entirely funded by advance received from AE abroad against supplies, then in order to bring parity between the results of the selected comparables and that of the assessee it is essential that adjustment for the working capital is made on the results of such comparables. Only then can the uncontrolled transaction become comparable to the international transactions of the assessee. In such a situation we are of the view that DRP was correct in giving the direction to the AO to carry out the necessary working capital adjustment in working out the average PLI of the comparables. We do not find any reason to interfere with the order of the DRP. Grounds 2 to 4 of the Revenue stand dismissed.”
The controversy involved herein is no more res integra in view of the decision of this Court in I.T.A. Nos.536/2015 c/w 537/2015 dated 25.06.2018 [Prl. Commissioner of Income Tax & Anr. V/s. M/s.Softbrands India Pvt. Ltd.,] wherein it has been
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observed that unless the finding of the Tribunal is found ex facie perverse, the Appeal u/s. 260-A of the Act, is not maintainable. The relevant portion of the 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 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
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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 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
Date of Judgment 30-07-2018, ITA No.322/2016 The Pr. Commissioner of Income-tax & Another Vs. M/s. Indigra Exports P. Ltd.,
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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.”
In the circumstances, having heard the learned Counsel appearing for both the sides, we are of the considered opinion that no substantial question of law arises for consideration in the present case.
Hence, the Appeal filed by the Appellants- Revenue is liable to be dismissed and is accordingly dismissed. No costs.
Sd/- JUDGE
Sd/- JUDGE
NC.