2018 (7) TMI 472 - HC - Income Tax

Interpretation of Tax Act Section 10A & Related Party Transactions Upheld

Principal Commissioner Of Income Tax-4 And The Income Tax Officer Circle-11 (2) Versus M/s Lsi Research & Development Private Limited Global Technology Park.

The Court clarified the interpretation of Section 10A of the Income Tax Act, aligning the exclusion of expenditure in foreign currency from export ... TPA - exclude the expenditure in foreign currency from the export turnover and the total turnover for provision in section 10A - searching for comparable companies of the assessee under TNMM - substantial question of law - Held that:- This Court in Prl.Commissioner of Income Tax & Anr. Vs. M/s.Softbrands India Pvt. Ltd. (2018 (6) TMI 1327 - KARNATAKA HIGH COURT ) has held that in these type of findings of the learned Tribunal remained final fact findings of the learned Tribunal and are binding on the lower authorities of the Department as well as this Court and unless an established ex-facie perversity is found in the findings of the learned Tribunal, the appeal u/s.260A of the Act is not maintainable. Issues:1. Interpretation of Section 10A of the Income Tax Act regarding exclusion of expenditure in foreign currency from export turnover.2. Determining comparability of companies under TNMM for assessing arm's length price.3. Exclusion of certain companies as comparables based on related party transactions (RPT).4. Re-examination of comparability of companies by the Transfer Pricing Officer (TPO).5. Maintainability of appeal under Section 260-A of the Income Tax Act.Analysis:Issue 1:The first issue involves the interpretation of Section 10A of the Income Tax Act regarding the exclusion of expenditure in foreign currency from the export turnover. The Court referred to previous judgments, including the case of M/s. Tata Elxsi Ltd., and held that the exclusion from export turnover must also be excluded from total turnover to align with legislative intent. The judgment emphasized that such deductions should be allowed from total turnover to prevent illogical results.Issue 2:Regarding the comparability of companies under TNMM, the Tribunal directed the exclusion of certain companies with more than 15% related party transactions. The Court upheld the Tribunal's decision based on the availability of comparable companies for determining the arm's length price. It directed the TPO to exclude specific companies and re-examine the comparability of others based on previous findings.Issue 3:The Court addressed the exclusion of certain companies as comparables due to related party transactions exceeding 15% of total sales/revenue. The Tribunal's decision to exclude specific companies was supported by the Court, considering the tolerance limit of RPT at 15% for the assessee.Issue 4:The re-examination of comparability of Flextronics Software Ltd. by the TPO was discussed. The Court directed the TPO to re-examine the comparability based on previous findings and discussions by the Tribunal, emphasizing the importance of functional comparability for accurate assessment.Issue 5:The final issue focused on the maintainability of the appeal under Section 260-A of the Income Tax Act. The Court referred to a recent judgment and emphasized that appeals based on comparability of companies do not necessarily raise substantial questions of law. It highlighted the need for ex-facie perversity in the Tribunal's findings for an appeal to be maintainable. The Court dismissed the appeal filed by the Revenue, stating that no substantial question of law arose in the case.In conclusion, the judgment addressed various issues related to the interpretation of tax laws, comparability of companies, exclusion of certain companies based on related party transactions, and the maintainability of appeals under the Income Tax Act. The Court's decisions were based on previous judgments, legislative intent, and the specific circumstances of the case, ensuring a comprehensive analysis of each issue involved.