2018 (7) TMI 2129 - HC - Income Tax

Transfer Pricing Case: Exclusion of Comparables & Foreign Exchange Gains Upheld

The Tribunal upheld the exclusion of certain companies from the list of comparables based on turnover criteria, favored the Assessee in transfer pricing ... Maintainability of Appeal against ITAT order - substantial question of law or not - Tribunal applying turnover filter and excluding 6 comparable chosen by the Transfer Pricing Officer - Tribunal holding that Foreign Exchange Fluctuation gains are required to be added to operating revenue - Tribunal confirming the order of DRP with regard to holding that working capital adjustment has not been provided as it is negative impact and as such DRP’s direction to grant risk adjustment - ITAT directing the TPO to examine the financials of some companies and adopt a threshold limit of 15% of RPT as the basis for rejecting comparable companies - HELD THAT:- Controversy involved herein is no more res integra in view of the decision of this Court in M/s.Softbrands India Pvt. Ltd. [2018 (6) TMI 1327 - KARNATAKA HIGH COURT]wherein it has been 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. 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 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. The present appeals filed by the Revenue do not give rise to any substantial question of law Issues:1. Application of turnover filter in choosing comparable companies.2. Treatment of foreign exchange fluctuation gains in operating revenue.3. Working capital adjustment and risk adjustment.4. Threshold limit for related party transactions in choosing comparable companies.5. Exclusion of specific companies as comparables.Analysis:1. The Tribunal upheld the exclusion of 6 companies from the list of comparables based on turnover and size criteria, following the principle favoring the Assessee as per the decision of the Bombay High Court. The Tribunal emphasized the relevance of turnover in selecting comparable companies for determining the Arm's Length Price (ALP) in transfer pricing cases.2. The Tribunal dismissed the Revenue's appeal regarding the treatment of foreign exchange fluctuation gains as part of operating revenue, citing a previous decision in the case of Trilogy e-business Software India Pvt. Ltd. The Tribunal found no merit in the Revenue's argument and hence rejected the appeal on this ground.3. Regarding working capital adjustment and risk adjustment, the Tribunal clarified that the directions given by the Dispute Resolution Panel (DRP) provided sufficient guidelines for the Transfer Pricing Officer (TPO) to consider risk adjustment. The Tribunal highlighted that the TPO could also consider additional circumstances brought by the Assessee during the proceedings.4. The Tribunal directed the TPO to examine the financials of a specific company with related party transactions exceeding 15% and adopt a threshold limit of 15% of total revenue attributable to related party transactions for rejecting comparable companies. This decision was based on previous rulings and the Tribunal's assessment of the Assessee's grievance.5. The Tribunal considered the exclusion of a particular company as a comparable based on the ITAT Hyderabad Bench's decision in a similar case. The Tribunal analyzed the specific circumstances and rulings related to the selection of comparables in the software development segment, ultimately supporting the exclusion of the mentioned company.In conclusion, the High Court dismissed the Revenue's appeal as it did not raise any substantial questions of law, emphasizing the importance of fair and quick judicial decisions in international trade matters. The Court clarified the criteria for invoking Section 260-A of the Act, stating that mere dissatisfaction with Tribunal findings is not sufficient. The judgment highlighted the need for consistency in applying legal parameters to appeals filed by both Revenue and Assessees.