TMI Blog2018 (6) TMI 1327X X X X Extracts X X X X X X X X Extracts X X X X ..... es have been rightly applied or not, do not in our considered opinion, give rise to any substantial question of law. 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. The same yardsticks and parameters will have to be applied, even if such appeals are filed by the Assessee, 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 assessee with which the assessee 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. Appeals filed by the Revenue dismissed. - I.T.A.No.536/2015,C/W I.T.A.No.537/2015 - - - Dated:- 25-6-2018 - Dr. Vineet kothari and Mrs. S. Sujatha, J.J. Mr. E ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such borderless trade thrives and enures to the benefit of the Indian economy at large and Software Industry in particular. 6. While the special provisions have been made for computation of Arm s Length Price to arrive at a fair assessment of income taxable in the hands of the Indian Resident Companies and these special provisions also provide for an elaborate and in-depth analysis of huge data of the comparable cases of other similarly situated Companies to arrive at a fair Arm s Length Price and for that, Special Cells and designated Authorities have been created under the Income Tax Act, 1961, but still retaining the normal provisions for assessments of appeals in the Indian Income Tax Act about the remedial Forums or the appeal mechanisms and the Income Tax Appellate Tribunal constituted under Section 253 of the Act continues to be the final fact finding body under the Act even with regard to the assessments of the international transactions under the Special Chapter X as aforesaid and the appeal to the Constitutional Courts as provided in Section 260-A to High Court and Section 261 to the Hon ble Supreme Court are applicable to these special assessments unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... end to first decide whether these type of questions at all can be entertained and whether the High Court should enter into these appeals to go into the merits and factual aspects of the case for answering the alleged substantial questions of law which if necessary, the Court has the power to reframe also under Section 260-A(4) of the Act. Aspects to be considered: 11. Before we advert to the arguments raised by the learned counsels on both the sides and the relevant case laws, we would dilate upon the following relevant aspects of the matter. [I] The analysis of the provisions relating to the Transfer Pricing/ determination of the Arm s Length Price ; [II] The Scheme of procedure of assessment and appeals to the Tribunal and High Court/Supreme Court. [III] The scope of interference by High Court under Section 260-A of the Act in these type of cases. Findings of the Tribunal: 12. We find it appropriate to quote some portions of the Order passed by the learned Tribunal to indicate how in the present case the Income Tax Appellate Tribunal has dealt with the issues of comparables raised before it in this regard. 11. We have perused t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is regard, Ld DR relied on the note no.3, relating to the relating to the revenue recommendation in Schedule 12, note no.5 relating to the segmental information etc . to mention that the company is engaged in the software development only. However, the assessee argued vehemently stating that this company is engaged in the software based products. Further, Ld Counsel mentioned that the said company was already examined and was held as productbased company by the TPO in the TP study of other case and the TPO cannot take different stand in this case . In this regard, we have perused the para 29 of the order of the Tribunal in the case of M/s. Wills Processing Services (I) P Ltd (supra) wherein it was mentioned that the TPO described this company is engaged in the business of software products, not the software development services. Relevant portions from the said para 29 of the order of the Tribunal is reproduced here under. 29.1 The ld Sr. Counsel for the assessee has submitted that this company is engaged in the software products. He has referred the TPO order and submitted that in the profile of the comparables selected by the TPO itself has mentioned the business of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... S.No.1 regarding acceptance of comparable companies having related party transactions as proposed by the TPO, the learned counsel for the assessee argued that the transfer pricing regulations do not stipulate any minimum limit of related party transactions which form the threshold for exclusion as a comparable. In this regard, the learned counsel for the assessee objected to the TPO s setting a limit of 25 percent on related party transactions. He objected to the inclusion of comparable being related party transactions in excess of 15 percent of sales/revenue . In support of this proposition, the learned counsel for the assessee placed reliance on the decision of the Hon ble Bench of the ITAT, Delhi in the case of Sony India (P) Ltd. reported in 2008-TIOL-439-ITAT- Delhi dt. 23.12.2008. The learned counsel for the assessee drew our attention to para 115.3 of the order wherein the Tribunal has held that We are further of the view that an entity can be taken as uncontrolled if its related party transactions do not exceed 10 to 15 percent of total revenue . Within the above limit, transactions cannot be held to be significant to influence the profitability of the com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 decision in the case of Agile Software Enterprises P Ltd., (supra), it was held as under: (e) Accel Transmatic Ltd. . . . 14. Thus according to us M/s. R Systems International Ltd., R.S. Software India Ltd., Lanco Global Solutions Ltd and Synphosys Business Solutions are proper comparables that could be considered. Directions to the ld. Assessing Officer/TPO with regard to the comparable companies that are to be considered is given at para 22 hereunder, after considering the Revenue s appeal. 15. In the result, grounds raised by assessee on the transfer pricing issues are decided partly in its favour. 16. Since we are deciding on the comparables that are to-be considered other aspects with regard to the transfer pricing raised by assessee are left open with freedom to the assessee to raise such issues in a proceeding where these are relevant. Analysis of the Tribunal s Order: 13. What we find from the aforesaid detailed reproduction from the or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 a broad and fair guess-work of the Authorities based on relevant material brought before the Authorities including the Appellate Tribunal, but nonetheless the Tribunal being the final fact finding body remains so for this Special Chapter X also and therefore, unless this Court is satisfied that a substantial question of law is arising from the order of the Tribunal, the appeal under Section 260-A cannot be entertained at the instance by either the Revenue or the Assessee and the exercise of fact finding or Arm s Length Price determination or Transfer Pricing Adjustments should be allowed to become final with a quietus at the hands of the final fact finding body, i.e. the Tribunal. Comparative Analysis of Section 260-A of Income Tax Act, 1961 and Sections 100 103 of the Code of Civil Procedure: 16. We would analyze the provisions of Section 260-A of the Act in a little more detail but we are of the firm opinion that the entry into th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l 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 this sub-section shall be-] (a) filed within one hundred and twenty days from the date on which the order appealed against is [received by the assessee or the [Principal Chief Commissioner or] Chief Commissioner or [Principal Commissioner or] Commissioner]; (b) [*******] (c) in the form of a memorandum or appeal precisely stating therein the substantial question of law involved. [(2A) The High Court may admit an appeal after the expiry of the period of one hundred and twenty days referred to in Clause (a) of sub-section (2), if it is satisfied that there was sufficient cause for not filing the same within that period.] (3) Where the High Court is satisfied that a substantial question of law is involved in any case, it shall formulate that question. (4) The appeal shall be heard only on the question so formulated, and the respondents shall, at the hearing of the appeal, be allowed to arg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct 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 reason of a decision on such question of law as is referred to in section 100. What is a Substantial Question of Law? 20. From a bare comparison of the provisions quoted above and as discussed in various judgments of the Constitutional Courts, which we will refer in brief herein below, it is clear that the Scheme of both Section 260-A in Income Tax Act, 1961 and Section 100 r/w. Section 103 of the Code of Civil Procedure are in pari materia and in same terms. 21. The existence of a substantial question of law is sine qua non for maintaining an appeal before the High Court. While the appeal to High Court under Section 260-A of the Act may be a First appeal in the sense from the order of final fact finding by the Tribunal under the Income Tax Act, whereas the Second Appeal on substantial questio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the High Court to such a substantial question of law raised before it and determined by it in terms of Clause (b) thereof. 25. Sub-section (6) of Section 260-A of the Act, therefore, does not give any extended power, beyond the parameters of the substantial question of law to the High Court to disturb the findings of fact given by the Tribunal below. 26. Sub-section (7) inserted in Section 260-A of the Act by the Finance Act of 1999 with effect from 01/06/1999 after a period of about 8 months of substituting the new provisions of Section 260-A to the Act as they now stand by Finance Act of 1998 , with effect from 01/10/1998 was only to clarify and support that the parameters of Sections 100 103 of the Civil Procedure Code and other provisions of Civil Pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 that the right of second appeal should be confined to cases where a question of law is involved and such question of law is a substantial one. (See Statement of Objects and Reasons.) The Select Committee to which the Amendment Bill was referred felt that the scope of second appeals should be restricted so that litigations may not drag on for a long period. Reasons, of course, are not required to be stated for formulating any question of law under sub-section (4) of Section 100 of the Code; though such reasons are to be recorded under proviso to sub-section (5) while exercising power to hear on any other substantial question of law, other than the one formulated under sub-section (4). 12. The phrase substantial question of law , as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring 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 express provisions of law or binding precedents, but the Court below has decided the matter, either ignoring or acting contrary to such legal principle. In the second type of cases, the substantial question of law arises not because the law is still debatable, but because the decision rendered on a material question, violates the settled position of law. (iii) The general rule is that High Court will not interfere with the concurrent findings of the courts below. But it is not an absolute rule. Some of the well-recognised exceptions are where (i) the courts below have ignored material evidence or acted on no evidence; (ii) the courts have drawn wrong inferences from proved facts by applying the law erroneously; or (iii) the courts have wrongly cast ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rprise 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 relation to the international transactions shall be determined by following any of these methods enumerated in Section 92-C of the Act which is considered to be the Most Appropriate Method by the Authorities under the Act. The methods provided are: Clause (a): Comparable Uncontrolled Principles Method (CUP); Clause (b): Resale Price Method (RP) Clause (c): Cost Plus Method (CP) Clause (d): Profit Split Method (PS) Clause (e): Transactional Net Margin Method (TNMM); and Clause (f): such other Method as may be prescribed by the Board. 36. It appears from the true facts of the various cases before us and the arguments of the learned counsels that the TNNM Method appears ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... legium 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 Substantial Question of Law Arises in these Cases: 40. The dispute essentially before us is the pairing and matching such comparables with the Transfer Pricing Analysis of the profit margins given by the Assessee himself during the course of determination of such Arm s Length Price . 41. The shades of arguments raised by both the sides before us in these appeals and most of which have been filed by the Revenue are that either the wrong Filters have been applied or Filters have been wrongly applied, particularly qua Turnover Filter giving a far too wide or narrower range of comparables or even though comparable Entities were functionally different entities from the Entitie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evant 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 jurisdiction of High Court under Section 260-A of the Act is the existence of a substantial question of law involved in the matter. The key of ex-facie perversity of the findings of the Tribunal duly established with the relevant evidence and facts. Unless it is so, no other key or for that matter, even the in-consistent view taken by the Tribunal in different cases depending upon the relevant facts available before it cannot lead to the formation of a substantial question of law in any particular case to determine the aspects of determination of Arm s Length Price as is sought to be raised before us. Need for giving Primacy to the Tribunal in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. The Court held that whether the case of M/s. HMT Limited was comparable case with the case of assessee before it or not was the factual issue, it held that the learned Tribunal has factually assessed the similarities between M/s. HMT Limited and the Respondent Assessee and the same does not warrant any interference under Section 260-A of the Act. The relevant factual background of the case and law pronounced by the Courts are quoted below. 9. The respondent assessee adopted Transactional Net Margin Method (TNMM) as the appropriate method to determine the ALP of its international transactions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 26. In the instant case, whether M/s. HMT Limited can be a comparable or not is a factual issue . The learned Tribunal has factually assessed the similarities between M/s. HMT Limited and the respondent assessee and the same, in our considered opinion, does not warrant interference of this Court under Section 260-A of the Income Tax Act, 1961. B. Similarly, the Division Bench of Delhi High Court in the case of Principal, Commissioner of Income Tax-9 Vs. WSP Consultants India (P) Limited in the judgment dated 03/11/2017, [2017] 253Taxman 58 (Del ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, the TPO had found that KALS Ltd. and Helios Matheson Ltd. were functionally not comparable with the respondent assessee. In the subject assessment year also, on the basis of Annual Report, it was noted that the KALS was engaged in selling of software products which is different from the activity undertaken by the respondent assessee, namely, rendering of software service to its holding company. Further, the impugned order also records that no attempt was even made by the Revenue before it to bring on record any change in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us 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 in the form of time, man-hours and money, besides giving an adverse picture of the sluggish Dispute Resolution process through these channels. If appeals under Section 260-A of the Act were to be lightly entertained by High Court against the findings of the Tribunal, without putting it to a strict scrutiny of the existence of the substantial questions of law, it is likely to open the flood-gates for this litigation to spill over on the dockets of the High Courts and up to the Supreme Court, where such ..... X X X X Extracts X X X X X X X X Extracts X X X X
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