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1/12 IN THE HIGH COURT OF KARNATAKA, BENGALURU
DATED THIS THE 09TH DAY OF JULY 2018
PRESENT
THE HON'BLE Dr.JUSTICE VINEET KOTHARI
AND
THE HON’BLE Mrs.JUSTICE S.SUJATHA
I.T.A.No.17/2012
BETWEEN:
THE COMMISSIONER OF INCOME TAX C.R. BUILDING, QUEENS ROAD BANGALORE.
THE DY. COMMISSIONER OF INCOME-TAX CIRCLE 11(3), C.R. BUILDING QUEENS ROAD, BANGALORE.
…APPELLANTS (By Mr. K.V. ARAVIND, ADV.)
AND:
M/S. GENISYS INTEGRATING SYSTEMS (INDIA) PVT., LTD., No.43-46 & 33-36 EXPORT PROMOTIONAL INDUSTRIAL PARK WHITEFIELD ROAD, BANGALORE-560066.
…RESPONDENT (By Mr. TATA KRISHNA, ADV. FOR Mr. K.K. CHYTHANYA, ADV.,)
THIS I.T.A .IS FILED UNDER SECTION 260-A OF I.T. ACT, 1961, PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN. ALLOW THE APPEAL AND SET
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ASIDE THE ORDER DATED 05/08/2011 PASSED BY THE ITAT, BANGALORE IN ITA No.1231/Bang/2010 ANNEXURE-D AND CONFIRM THE ORDER OF THE APPELLATE COMMISSIONER CONFIRMING THE ORDER PASSED BY THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-11(3), BANGALORE, IN THE INTEREST OF JUSTICE AND EQUITY.
THIS I.T.A. COMING ON FOR FINAL HEARING, THIS DAY S. SUJATHA J. DELIVERED THE FOLLOWING:-
JUDGMENT
Mr. K.V. Aravind, Adv. for Appellants- Revenue Mr. Tata Krishna, Adv. for Mr. K.K. Chythanya, Adv. 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 ‘A’, Bangalore, dated 05.08.2011 passed in ITA No.1231/Bang/2010 (M/s.Genisys Integrating Systems (India) Pvt. Ltd., vs. The Deputy Commissioner of Income Tax) for A.Y.2006-07.
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The proposed substantial questions of law framed in the Memorandum of appeal by the Appellants-Revenue are quoted below for ready reference:- “1. Whether the Tribunal was correct in holding that transfer pricing adjustments should be restricted to transactions of Associate Enterprises only by adopting operating revenue and operating cost of these transactions when there is no segmental analysis in the audited annual report submitted by the assessee by rejecting the profit margin at enterprise level adopted by Transfer Pricing Officer?
Whether the Tribunal was correct in holding that the turnover filter of comparable companies between the range of 1 crore to 200 crores should be adopted for the assessee when there was no prohibition under any law for the method adopted by the Transfer Pricing Officer including the taxpayers own case for the earlier years and in software industry profits related to fixed costs and not the turnover?
Whether the Tribunal was correct in holding that the assessee should be given an opportunity to cross examine all those parties
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whose comparables have been selected by the Transfer Pricing Officer for determination of Arms’ Length Price in the case of the assessee?
Whether the Tribunal was correct in holding that 5% standard deduction should be extended to the assessee after quantification of the Arms’ Length Price when the proviso to Sub section 2 to Section 92C of the Act did not provide for such a deduction?”.
The learned Tribunal, after discussing the rival contentions of both the Appellants-Revenue and the 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 portion of the order of Tribunal, which runs as hereunder:- “6.1 Having heard both the parties and having considered their rival contentions, we find that Sec.92B of the IT Act gives the meaning of
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‘international transactions’ to mean “a transaction between two or more associated enterprises either or both of whom are non- resident……………………..”. Chapter-X of IT Act relates to special provisions relating to avoidance of tax and sec.92 therein relates to computation of income from international transactions having regard to ALP. Thus, it can be seen that only international transactions between the associated enterprises either or both of whom are non-resident are to be computed having regard to ALP. This issue is also covered by the decisions relied upon by the learned counsel for the assessee. Accordingly, the AO is directed to make the transfer pricing adjustments by restricting the adjustments to the transactions of the AE only by adopting the operating revenue and operating costs of these transactions only. 9. Having heard both the parties and having considered the rival contentions and also the judicial precedents on the issue, we find that the TPO himself has rejected the companies which are making losses as comparables. This shows that there is a limit for the lower end for identifying the comparables. In such a situation, we are unable to understand as to why there
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should not be an upper limit also. What should be upper limit is another factor to be considered. We agree with the contention of the learned counsel for the assessee that the size matters in business. A big company would be in a position to bargain the price and also attract more customers. It would also have a broad base of skilled employees who are able to give better output. A small company may not have these benefits and therefore, the turnover also would come down reducing profit margin. Thus, as held by the various benches of the Tribunal, when companies which are loss making are excluded from comparables, then the super profit making companies should also be excluded. For the purpose of classification of companies on the basis of net sales or turnover, we find that a reasonable classification has to be made. Dun & Bradstreet and NASSCOM have given different ranges. Taking the Indian scenario into consideration, we feel that the classification made by Dun & Bradstreet is more suitable and reasonable. In view of the same, we hold that the turnover filter is very important and the companies having a turnover of Rs.1.00 core to 200 crores have to be taken as a particular range and the assessee being in that range having
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turnover of 8.15 crores, the companies which also have turnover of 1.00 to 200.00 crores only should be taken into consideration for the purpose of making TP study.
We have already held that if any information is sought to be used against the assessee, the same has to be furnished to the assessee and thereafter, taking into consideration the assessee’s objections, if any, only then can the TPO proceed to take a decision. If the assessee seeks an opportunity to cross examine the party, the assessee shall be provided such an opportunity. It is only during a cross examination that the assessee can rebut the stand of that particular company. The assessee has also brought out various defects in the additional comparables selected by the TPO and has brought out the glaring differences between the functions of those comparables as compared to assessee and also as to how the entire revenue of the assessee has been taken into consideration inspite of there being income from unrelated party transactions also. All these objections have been given in detail in the written submissions. We find that the TPO has not considered these objections, while determining the ALP. Further, the learned
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counsel for the assessee has also submitted that the assessee should be given a standard deduction of 5% as provided under the proviso to sec.92C(2) before making adjustments for the transfer price. In support of his contention, he placed reliance on the following decisions: 1.M/s Sap Labs India Pvt.Ltd., Vs ACIT 2010-TII-44 ITAT-BANG-TP 2.Philips Software Centre Pvt.Ltd., 26 SOT 226 3. MSS India Pvt.Ltd., 32 SOT 132 4. Customer Services India Pvt.Ltd., Vs ACIT 30 SOT 486 5. Skoda Auto India Pvt.Ltd., Vs ACIT 2009-TIOL-214- ITAT-PUNE 6. Development Consultants Pvt.Ltd., Vs DCIT 23 SOT 455 7. Sony India Pvt.Ltd., 315 ITR 150 8. Cumins India Ltd., Vs DCIT ITA NO.277 & 1412/PN/07 9. TNT India Pvt.Ltd., Vs ACIT 10 Taxman.com 161 10. Abhishek Auto Industries Ltd Vs DCIT 2010-TII- 54-ITAT-DEL-TP
13.1 The learned DR however, relied on the orders of the authorities and submitted that 5% is not the standard deduction, but it is the range within which if the ALP falls then the ALP of the assessee has to be accepted.
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13.2 Having heard both the parties and having considered their rival contention, we find that this issue is already covered by the decision relied upon by the assessee”.
However, this Court in a recent judgment in I.T.A.No.536/2015 c/w. I.T.A.No.537/2015 (Pr. Commissioner of Income Tax, Bangalore and Another Vs. M/s. Softbrands India P.Ltd.,) rendered on 25-06-2018, 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 and 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
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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 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.
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