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TMI Blog2018 (6) TMI 1327X X X X Extracts X X X X X X X X Extracts X X X X ..... filed mostly by Income Tax Department and some of them even by the Assessees are essentially in the realm of International Taxation on such international transactions between Indian Companies and their Associate Enterprises in Foreign Countries. Preamble: 3. The Indian Income Tax Act, 1961 contains Special Provisions relating to Avoidance of Tax in Chapter X of the Act comprising of Sections 92 to 94-B with regard to assessment to be done for computation of income from international transactions on the principles of 'Arm's Length Price' (ALP) and the relevant Rules for computation of such income under the aforesaid provisions of Chapter X are enacted in the form of Rule 10-A to 10-E in the Income Tax Rules, 1962. Perspective of International Trade and Transactions: 4. With the ever increasing international Trade and transactions, particularly, in the Software Industries and Bangalore, being the Silicon Valley of India where many big, small and medium size Software Industries have their Offices and Units in this Software Industry, and Bengaluru is a hub of this Service Industry and essentially the Indian Companies have business linkages with large Companies spread worldwide part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ether the Tribunal was justified in fixing the RPT at 15% of total revenue and deleting Geomatric Software Ltd (Seg) and Megasoft Ltd as comparables without going into specific facts in the case of taxpayer and without adducing the basis for arriving 15% cut off RPT Filter, the case of taxpayer"? Rival Contentions: 9. The learned counsels appearing for the Respondent Assessee even though they were appearing in the other similar appeals and the learned standing counsels on the side of the Revenue have addressed the arguments, firstly on the question whether the questions as suggested and quoted above really come up to the level of definition of 'substantial questions of law' as elaborately discussed by a series of judgments from the Apex Court in the light of the provisions of Section 260-A providing for an appeal to the High Court are in pari- materia with Sections 100 and 103 of the Code of Civil Procedure, 1908 which provides for Second Appeal to the High Court on substantial questions of law against the Decrees passed by the Subordinate Courts. 10. The learned counsels addressed their arguments on the said preliminary question as to whether these questions as raised are at al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... software development is 2.05 Crs and there is no breakup for the same to know the revenue's for software services and the software products. Ld DR brought our attention to the details under the head - inventories and mentioned that Work in Progress is NIL for the period ending March, 2008; but the fact is that there are no segment details relating to software products out of the segmental information under the head "application in software". Considering all the information available in public domain, we are of the opinion that this case cannot be considered as a good comparable. As such, the fact that the company is producing the ERP software products called Shine, the internationally proven ERP software and other software products called Docuflo (Document Management Software) etc are brought revenue to the assessee in the year under consideration. Therefore, considering the absence of data as well as the unfavourable FAR analysis to the TPO, this case cannot be considered as comparable. We direct the AO to exclude the same from the list of comparables. Bodhtree Consulting Limited 21. On this comparable, case of the assessee is that the company is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .3 .... ...... 30. We have considered the rival submissions as well as the relevant material on record. The details filed by the ld DR before us has been obtained by the TPO at Hyderabad and not by the TPO of the assessee in the present case. It is stated in the letter dated 5.2.2010 written by the Chartered Accountant of Bodhtree Consulting Ltd to the TPO Hyderabad that the company is providing data cleaning services to clients for whom it had developed the software application...... 23. Considering the above, we are of the opinion that Bodhtree Consulting Limited is not engaged in the software development services and there is no segmental data comparable. Therefore, the FAR analysis goes against the TPO/AO. Hon'ble Mumbai Bench of the Tribunal had held that Bodhtree Consulting Ltd., was engaged in web services integration, data client services, data management services and e-paper solutions, which were completely different from software development services. M/s. Kals Info Systems was held to be into production of ERP software products. We are, therefore, of the opinion that KALS Info Systems and Bodhtree Consulting Ltd., have to be excluded from the comparables. 13. Wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India) Ltd 9 Accel Transmatics Ltd (seg) 10 Lanco Global Solutions Ltd 11 Flextronics Software Systems Ltd As can be seen from the table reproduced at para 4 above, each of these companies had RPT of less than 15%. However, out of these, iGate Global Solutions Ltd., (seg), Infosys Ltd., Mindtree Consulting Ltd., Persistent Systems Ltd., Sasken Communication Ltd., (seg) and Flextronics Software Systems Ltd., had turnover in excess of Rs. 200 crores as mentioned by CIT(A) in his order itself. It is pertinent to note that Revenue in its appeals has not taken any grievance against application of turnover filter of Rs. 200 crores. This being the case, what are left out of the comparables which are coming back to the list of comparables due to application of 15% RPT filter, are only R Systems International Ltd., Tata Elxsi Ltd., Accel Transmatics Ltd, R.S. Software (India) Ltd and Lanco Global Solutions Ltd. Out of these, Tata Elxsi and Accel Transmatics Ltd., (seg) have been held to be functionally different to a soft-ware development company in the decision in the case of Yahoo Software Development (India) P. Ltd., (supra), wherein relying on the coordinate bench decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Company with such other comparables whose Operating Margins are higher or even much higher than the one declared by the Assessee Company so as to make Transfer Pricing Adjustments in the declared income of the Assessee Company, to determine and fetch more revenue or tax from such Assessee Companies. 14. From the quoted portion of the Tribunal's order, it is apparent that individual cases of such comparables have been considered, analyzed and discussed by the Tribunal and while some comparables are found to be appropriate and really comparable to the facts of the Assessee, some were not. The dispute may also be between the two parties as to whether the correct Filters have been properly applied or not or whether the most appropriate method of determination of 'Arm's Length Price' as prescribed under the Rules has been adopted or not and several other such factors for arriving at the 'Arm's Length Price' to make fair and reasonable Transfer Pricing Adjustments in the hands of the Assessee. Prima Facie Opinion: 15. We are of the considered opinion that this entire exercise of making Transfer Pricing Adjustments on the basis of the comparables is nothing but a matter of estimate of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the instance of either of the parties and the present cases before us, we find that the Tribunal has given cogent reasons and detailed findings upon discussing each case of comparable corporate properly and therefore, we find ourselves unable to call such findings of the Tribunal perverse in any manner so as to require our interference under Section 260-A of the Act. 18. We now take up the analysis of Section 260- A of the Act which we have already said is in pari materia with Sections 100 and 103 of the Civil Procedure Code. 19. The said provisions are quoted below for ready reference and comparison. Section 260-A of the Income Tax Act, 1961 reads as under: "260A - Appeal to High Court: (1) An appeal shall lie to the High Court from every order passed in appeal by the Appellate Tribunal [before the date of establishment of the National Tax Tribunal], if the High Court is satisfied that the case involves a substantial question of law. (2) [The [Principal Chief Commissioner or] Chief Commissioner or the [Principal Commissioner or] Commissioner or an assessee aggrieved by any order passed by the Appellate Tribunal may file an appeal to the High Court and such appeal under t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... late decree passed ex- parte. (3) In an appeal under this section, the memorandum of appeal shall precisely state the substantial question of law involved in the appeal. (4) Where the High Court is satisfied that a substantial question of law is involved in any case, it shall formulate the question. (5) The appeal shall be heard on the question so formulated and the respondent shall, at the hearing of the appeal, be allowed to argue that the case does not involve such question: Provided that nothing in this sub- section shall be deemed to take away or abridge the power of the Court to hear, for reasons to be recorded, the appeal on any other substantial question of law, not formulated by it, if it is satisfied that the case involves such question." Section 103 - Power of High Court to determine issues of fact - In any second appeal, the High Court may, if the evidence on the record is sufficient, determine any issue necessary for the disposal of the appeal, - (a) which has not been determined by the lower Appellate Court or both by the Court of first instance and the lower Appellate Court, or (b) which has been wrongly determined by such Court or Courts by rea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bstantial question of law arising and formulated by it. 23. The argument raised by the learned counsel for the Respondent Assessee before us by making a disjuncted reading of Clause (a) and Clause (b) of Sub- Section (6) of Section 260-A of the Income Tax Act, 1961 to submit that the High Court can touch upon the issues of facts also in an appeal under this provision bereft of substantial question of law, is a misconceived argument. 24. In our opinion, both the Clause (a) and Clause (b) of Sub-Section (6) of Section 260-A of the Act are circumscribed by the words 'by reason of the decision on such question of law as is referred to in Sub- section (1)'. Therefore, even if an issue which has not been determined by the Tribunal, which was required to be so determined in terms of the answer to the substantial question of law given by the High Court, such an issue not determined by the Tribunal could also be decided by the High Court with reference to Clause (a) and more so, if such an issue has been wrongly decided according to the answer given by the High Court to such a substantial question of law, then also the High Court can set it right to fall in line with the answer given by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is a mere question of applying those principles or that the plearaised is palpably absurd the question would not be a substantial question of law." 29. In the case of Santosh Hazari Vs. Purushottam Tiwari (Deceased) by LRs., [2001] 3 SCC 179, another Three Judges' Bench of the Honble Supreme Court explained the meaning of the substantial questions of law in paras.11 and 12 in the following manner. "11. Even under the old Section 100 of the Code (pre-1976 amendment), a pure finding of fact was not open to challenge before the High Court in second appeal. However the Law Commission noticed a plethora of conflicting judgments. It noted that in dealing with second appeals, the courts were devising and successfully adopting several concepts such as, a mixed question of fact and law, a legal inference to be drawn from facts proved, and even the point that the case has not been properly approached by the courts below. This was creating confusion in the minds of the public as to the legitimate scope of second appeal under Section 100 and had burdened the High courts with an unnecessarily large number of second appeals. Section 100 was, therefore, suggested to be amended so as to provide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bsp;judgment at para.24 is quoted below for ready reference: "24. The principles relating to Section 100 CPC relevant for this case may be summarized thus: (i) An inference of fact from the recitals or contents of a document is a question of fact. But the legal effect of the terms of a document is a question of law. Construction of a document involving the application of any principle of law, is also a question of law. Therefore, when there is misconstruction of a document or wrong application of a principles of law in construing a document, it gives rise to a question of law. (ii) The High Court should be satisfied that the case involves a substantial question of law, and not a mere question of law. A question of law having a material bearing on the decision of the case (that is, a question, answer to which affects the rights of parties to the suit) will be a substantial question of law, if it is not covered by any specific provisions of law or settled legal principle emerging from binding precedents, and involves a debatable legal issue. A substantial question of law will also arise in a contrary situation; where the legal position is clear, either on account of expr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a substantial question of law. The Tribunal being a final fact-finding authority, in the absence of demonstrated perversity in its finding, interference therewith by this Court is not warranted." Scheme of Assessment of the Transfer Pricing Cases: 32. Let us briefly now discuss the Scheme of assessment under Chapter X relating to Transfer Pricing cases of International Taxation under these provisions in income arising from international transactions which shall be computed having regard to the 'Arm's Length Price' (Sec.92). 33. Section 92-A defines an 'Associate Enterprise' viz., the Company which participates directly or indirectly, or through one or more intermediaries, in its Management or control or Capital of the other Enterprise by holding more than 26% of the share holding in such other Enterprises and satisfy the other criterias as stated in Section 92-A of the Act. 34. The word 'International Transaction' is defined in Section 92-B of the Act. 35. The most important provision concerning us in this batch of cases is Section 92-C of the Act which provides for 'Computation of Arm's Length Price' and nthe said provision stipulates that the 'Arm's Length Price' in relatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessees. The order passed by the Assessing Authority in pursuance of the directions of the Dispute Resolution Panel (DRP) is directly appealable to the Income Tax Tribunal under Section 253 (1) (d) of the Act. Section 254 of the Act empowers the Appellate Tribunal to pass such orders on the appeals 'as it thinks fit' after giving an opportunity of hearing to both the parties. 38. From the aforesaid Scheme of assessment with regard to international transactions, it is clear that the process of determination of 'Arm's Length Price' has to be undertaken by the Expert Wing of the Income Tax Department which is manned by Transfer Pricing Officer (TPO) and at the higher level by a Collegium of three Commissioners in the form of Dispute Resolution Panel (DRP) whose orders on questions of facts are appealable before the highest fact finding body, viz., the Appellate Tribunal. 39. The process of determination of 'Arm's Length Price' as observed above, necessarily takes into account the comparable cases of other similarly situated or nearly similarly situated Corporate Entities whose data are in public domain or on the Data Bases like Prowess and Capital Line Data Base etc. No Substantia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act. This Court is only concerned with the question of law and that too a substantial one, which has a well defined connotations as explained above and findings of facts arrived at by the Tribunal in these type of assessments like any other type of assessments in other regular assessment provisions of the Act, viz. Sections 143, 147 etc. are final and are binding on this Court. While dealing with these appeals under Section 260-A of the Act, we cannot disturb those findings of fact under Section 260-A of the Act, unless such findings are ex-facie perverse and unsustainable and exhibit a total non- application of mind by the Tribunal to the relevant facts of the case and evidence before the Tribunal. 45. Otherwise if the High Court takes the path of making such a comparative analysis and pronounces upon the questions as to which Filter is good and which comparable is really comparable case or not, it will drag the High Courts into a whirlpool of such Data analysis defeating the very purpose and purport of the provisions of Section 260-A of the Act. Therefore what we observed above appears to us to be the sustainable view that the key to the lock for entering into the jurisd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in a homogeneous Group. They should not be wildly dissimilar or unlike or poles apart. Such wild comparisons may result in the best judgment assessment going haywire and directionless wild, which may land up the findings of the Tribunal in the realm of perversity attracting interference under Section 260-A of the Act. Some Precedents from the High Courts holding Similar View: 50. Here, we would like to refer to some of the judgments of the different High Courts where the High Courts have refused to entertain such appeals under Section 260-A of the Act in these type of cases. A. The Division Bench of Madras High Court in the case of Commissioner of Income Tax, Chennai Vs. Same Deutz-Fahr India (P) Ltd. [2018] 253 Taxman 32 (Madras) decided on 05/12/2017, after discussing the Supreme Court decisions laying down the parameters of Section 260-A of the Act and Section 100 of Civil Procedure Code held that right of appeal under Section 260-A of the Act is not automatic and it is limited right of appeal restricted only to cases which involve substantial questions of law and it is not open to the High Court to sit in appeal over the factual findings arrived at by the Tribunal. 51. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e turnover was only two times of Appellant, we are of the considered opinion that the TPO should include M/s. HMT Ltd., as comparable. The case laws relied upon by the assessee also supports arguments of the assessee. Bo the assessee and TPO adopted TNMM as most appropriate method which would neutralize the differences such as turnover, etc. Therefore, we direct the TPO to include M/s. HMT Ltd., as comparable and re-work the comparable margin. This ground of appeal is allowed". 14. The appeal is to the limited extent that the TPO has been directed to include M/s. HMT Limited as a comparable and re-work the comparable margin. 15 to 23...... 24. In M. Janardhana Rao v. Jt. CIT [2005] 273 ITR 50/142 Taxman 722 (SC), the Hon'ble Supreme Court held that the principles contemplated under Section 100 of the Code of Civil Procedure would apply to Section 260-A of the IT Act too. 25. Right of appeal is not automatic. Right of appeal is conferred by statute. When statute confers a limited right of appeal restricted only to cases which involve substantial questions of law, it is not open to this Court to sit in appeal over the factual findings arrived at by the Appellate Tribunal. 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the comparables, M/s. KALS Information Solutions Limited whose case was in the appeals before us as well, held that that if there is a functionality difference between the two comparables and the Tribunal was justified in excluding the same on the challenge being raised by the assessee and such findings of Tribunal are findings of fact which do not give rise to any substantial question of law. The relevant portion of the aforesaid judgment is quoted below for ready reference. "Re-Question (ii) (a) M/s. KALS Information Solutions Ltd. (KALS Ltd.) and Helios & Matheson Information Technology Ltd. (Helios & Matheson Ltd.) were included by the TPO in his comparability analysis. The grievance of the respondent assessee before the Tribunal was that both are functionally different from the respondent assessee and, therefore, could not be used as comparables. The respondent assessee pointed out that KALS Ltd and Helios & Matheson Ltd. are engaged in the business of selling of software products while the respondent assessee renders software services to its holding company. (b) The Tribunal in the impugned order records that for the preceding assessment year i.e. A.Y. 2006-07, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Transfer Pricing Analysis has to be undertaken by the Corporate Entities who have to comply with the various provisions of the Act and Rules with a huge Data Bank and in the first instance they have to satisfy that the profits or the income from transactions declared by them is at 'Arm's length' which analysis is invariably put to test and inquiry by the Authorities of the Department and through the process of Transfer Pricing Officer (TPO) and Dispute Resolution Panel (DRP) and the Tribunal at various stages, the assessee has a cumbersome task of compliance and it has to satisfy the Authorities that what has been declared by them is true and fair disclosure and much of the Transfer Pricing Adjustments is not required but the Tax Authorities have their own view on the other side and the effort on the part of the Tax Revenue Authorities is always to extract more and more revenue. This process of making huge Transfer Pricing Adjustments results in multi- layer litigation at multiple Fora. After the lengthy process of the same, the matter reaches the Tribunal which also takes its own time to decide such appeals. In the course of this dispute resolution, much has already been lost ..... X X X X Extracts X X X X X X X X Extracts X X X X
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