2018 (6) TMI 1327 - HC - Income Tax

Revenue appeals dismissed as comparable selection disputes lack substantial legal questions under Section 260-A

Karnataka HC dismissed revenue appeals challenging tribunal's transfer pricing decisions, ruling that disputes over comparable selection and filter ... TPA - comparable selection - principles of ‘Arm’s Length Price’ (ALP) - substantial question of law or fact - Interpretation of provisions of the Income Tax Act or Overriding Effect of the Treaties over the Domestic Legislations - International Taxation on international transactions between Indian Companies and their Associate Enterprises in Foreign Countries - Comparative Analysis of Section 260-A of Income Tax Act, 1961 and Sections 100 & 103 of the Code of Civil Procedure - Held that:- A huge, cumbersome and tenacious exercise 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 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 further delay may further cause serious damage to the demand of expeditious 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 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. Issues Involved:1. Rejection of comparables by the Tribunal.2. Fixing the Related Party Transaction (RPT) filter at 15% by the Tribunal.Detailed Analysis:1. Rejection of Comparables by the Tribunal:The Tribunal's decision to reject certain comparables, namely Kals Information Systems Ltd., Tata Elxsi Ltd., Accel Information Systems Ltd., and Bodhtree Consulting, was based on its earlier orders. The Tribunal found that these companies were not functionally comparable to the assessee, M/s. Softbrands India Private Limited, which is a software development company. For instance, Kals Information Systems Ltd. was engaged in the production of ERP software products, and Bodhtree Consulting Ltd. was involved in web services integration and data management services, which are different from software development services. The Tribunal's decision was supported by the Mumbai Bench of the Tribunal in the case of Nethawk Network India Ltd. v. ITO, where similar conclusions were drawn.2. Fixing the RPT Filter at 15%:The Tribunal justified the application of the 15% RPT filter based on its previous decision in the case of 24/7 Customers.com P. Ltd. The Tribunal cited the decision of the ITAT, Delhi in the case of Sony India (P) Ltd., which held that an entity can be considered uncontrolled if its related party transactions do not exceed 10 to 15 percent of total revenue. This was deemed to be a reasonable threshold to ensure that the comparables were not significantly influenced by related party transactions.Findings of the Tribunal:The Tribunal's order detailed the reasons for excluding certain comparables and applying the 15% RPT filter. It emphasized that the selection of comparables and the application of filters are fact-intensive exercises, and the Tribunal's findings are based on a thorough analysis of the facts and data presented.Prima Facie Opinion:The High Court held that the entire exercise of making Transfer Pricing Adjustments is essentially an estimate based on relevant material and comparable cases. The Tribunal is the final fact-finding body, and its findings should not be interfered with unless there is a substantial question of law arising from its order. The Court emphasized that the key to entertaining an appeal under Section 260-A of the Income Tax Act is the existence of a substantial question of law, which is not present in this case.Comparative Analysis of Section 260-A of the Income Tax Act and Sections 100 & 103 of the Code of Civil Procedure:The Court compared Section 260-A of the Income Tax Act with Sections 100 and 103 of the Code of Civil Procedure, noting that both provisions require the existence of a substantial question of law for an appeal to be entertained. The Court reiterated that findings of fact by the Tribunal should not be disturbed unless they are perverse.Case Laws on Substantial Question of Law:The Court cited several Supreme Court and High Court decisions to explain the meaning of a substantial question of law. It concluded that the Tribunal's findings in this case do not give rise to any substantial question of law, as they are based on a thorough analysis of the facts and data.Scheme of Assessment of Transfer Pricing Cases:The Court explained the detailed process of assessment under Chapter X of the Income Tax Act, which involves multiple authorities and a thorough analysis of comparable cases to determine the Arm's Length Price. The Tribunal's role as the final fact-finding body is crucial in this process.No Substantial Question of Law Arises in These Cases:The Court held that the disputes in these cases are primarily about the selection and application of comparables, which are fact-intensive exercises. The Tribunal's findings in this regard are final and should not be interfered with unless they are perverse.Need for Giving Primacy to the Tribunal in the Area of Fact Finding:The Court emphasized the importance of the Tribunal as the final fact-finding body and cautioned against allowing appeals under Section 260-A of the Income Tax Act to flood the High Courts, which would undermine the purpose of the provision.Conclusion:The Court concluded that the appeals filed by the Revenue do not give rise to any substantial question of law and are therefore dismissed. The Court also clarified that the same parameters should apply to appeals filed by assessees, emphasizing that mere dissatisfaction with the Tribunal's findings is not sufficient to invoke Section 260-A of the Act.