TaxTMI 
TaxTMI 
2018 (6) TMI 1327
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..... 2. These two appeals from the host of such appeals 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 h....
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....has chosen the same after application of mind and materials on record"? (2) "Whether 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 thei....
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....nd software products and no segmental details are available. 27. On the other hand, the case of the Revenue is that the revenues on account of 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 A....
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....t as per this information, this company has revenue from ITES activity to the extent of Rs. 2,94,85,528/-. Therefore, this company is a good comparable having functional similarity. 29.3 .... ...... 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.....
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....be considered: SI. No Company name 1 iGate Global Solutions Ltd (Seg) 2 Infosys Ltd 3 Mindtree Consulting ltd 4 Persistent Systems Ltd 5 R Systems International Ltd 6 Sasken Communication Ltd (seg) 7 Tata Elxsi Ltd (Seg) 8 R.S. Software (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 (Indi....
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....re would be a tug of war between the Assessee and the Revenue in this arena. While the Assessee Company would choose the comparables, whose operating profit margins are less or only little more than the assessee, but the Revenue would bring in the comparables with higher profit margins. The Transfer Pricing Officer may want to compare the case of the Assessee 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 adopte....
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....findings by the Tribunal resulting in leaving out of certain comparables or adding on of certain comparables for determining the 'Arm's Length Price' in the hands of the Assessee Company. 17. Unless such perversity in the findings of the Tribunal is established we are of the opinion that the appeals under Section 260-A of the Act cannot and should not be entertained at 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 [befo....
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....ction.] Sections 100 and 103 of the Code of Civil Procedure, 1908 read thus: "Section 100 - Second Appeal. (1) Save as otherwise expressly provided in the body of this Code or by any other law for the time being in force, an appeal shall lie to the High Court from every decree passed in appeal by any Court subordinate to the High Court, if the High Court is satisfied that the case involves a substantial question of law. (2) An appeal may lie under this section from an appellate 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 ....
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....ssue under Sub- section (6) of Section 260-A of the Income Tax Act, which is in pari materia with Section 103 of the Civil Procedure Code and which says that the High Courts may determine any issue which (a)has not been determined by the Tribunal or (b) has been wrongly determined by the Tribunal, can be so determined by the High Court, only if the High Court comes to the conclusion that 'by reason of the decision on substantial question of law rendered by it', such a determination of issue of fact also would be necessary and incidental to the answer given by it to the substantial 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 qu....
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....roper test for determining whether a question of law raised in the case is substantial would, in our opinion, be whether it is of general public importance or whether if directly and substantially affects the rights of the parties and if so whether it is either an open question in the sense that it is not finally settled by this Court or by the Privy Council, or by the Federal Court or is not free from difficulty or calls for discussion of alternative views. If the question is settled by the highest Court or the general principles to be applied in determining the question are well settled and there 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 Commis....
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....ial question of general importance but a substantial question of law which was involved in the case as between the parties. In Sir Chunilal V. Mehta & Sons Ltd. v. Century Spg. And Mfg. Co. Ltd. the Constitution Bench expressed agreement with the following view taken by a Full Bench of the Madras High Court in Rimmalapudi Subba Rao v. Noony Veeraju." 30. In the case of Hero Vinoth (Minor) Vs. Seshammal [2006]5 SCC 545, the Two Judges' Bench of the Hon'ble Supreme Court following the earlier precedents, summarises the principles in the following manner. The relevant portion of the said 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....
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...., relevant admissible evidence has not been taken into consideration or inadmissible evidence has been taken into consideration or legal principles have not been applied in appreciating the evidence, or when the evidence has been misread. (See Madan Lal v. Gopi Narendra Gopal Vidyarthi V. Rajat Vidyarthi, Commr. of Customs v. Vijay Dasharath Patel, Metroark Ltd. v. CCE and W.B. Electricity Regulatory Commission v. CESC Ltd.). 25. We are of the opinion that on a conspectus of the factual scenario, noted above, the conclusion of the Tribunal to the effect that the assessee has failed to prove the source of the cash credits cannot be said to be perverse, giving rise to 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'....
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....ng Officer is binding on the Assessing Authority as per Section 92-CA (4) of the Act, but where the Assessee raises an objection against the Draft Assessment Order of the Assessing Authority based on such Report of the Transfer Pricing Officer, the Assessee Company within 30 days can either accept the said Draft Order or file its objections before the Dispute Resolution Panel (DRP) and the Assessing Officer as per Section 144-C of the Act. The said Dispute Resolution Panel comprises of a Collegium of three Principal Commissioners or Commissioners of Income Tax constituted by the Board as defined in Section 144-C (15) of the Act and it has to comply with the principles of natural justice by giving an opportunity of hearing to the Assessees. 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 tran....
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.... the Act deserve to be entertained and admitted by this Court for laying down certain Guidelines about the Filters or Most Appropriate Method to be adopted for determination of the 'Arm's length price', does not, in our considered opinion falls within the parameters of the substantial question of law. None of the sides was able to point out any perversity in the Orders of the Appellate Tribunal in this regard. 44. This Court cannot be expected to undertake the exercise of comparison of the comparables itself which is essentially a fact finding exercise. Neither the sufficient Data nor factual informations nor any technical expertise is available with this Court to undertake any such fact finding exercise in the said appeals under Section 260-A 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....
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.... short-listing of them, applying of filters, etc., are all fact finding exercises and therefore the final Orders passed by the Tribunal are binding on the lower Authorities of the Department as well as High Court. 48. The Tribunal of course is expected to act fairly, reasonably and rationally and should scrupulously avoid perversity in their Orders. It should reflect due application of mind when they assign reasons for returning the particular findings. 49. For instance, while dealing with comparables or Filters, if un-equals like Software Giant Infosys or Wipro are compared to a newly established small size Company engaged in Software service, it would obviously be wrong and perverse. The very word "comparable" means that the Group of Entities should be 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 ....
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....and power tillers. The functionality of the M/s. HMT Ltd., and the assessee are more or less in similar. The Ld. AR of the assessee submitted that all the functions of M/s. HMT Ltd., and M/s. VST Tillers are one and the same. The TPO has rejected M/s. HMT Ltd., as comparable merely because of the turnover. The turnover of the M/s. HMT Ltd., for the AY 2005-06 was Rs.248.00 Cr. As against the assessee's company turnover of Rs. 120.00 Cr. It is impossible to find out comparable with all similarities inclusive of turnover. Even M/s. VST Tiller selected by TPO was with Rs. 130.00 Cr. The turnover filter with turnover 3-5 times is acceptable for selecting the comparable as per the decisions of the tribunals. In the Appellant's case, the TPO has adopted the turnover filter and the M/s. HMT Ltd., being functionally similar and the 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 t....
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....ewise M/s. Kitco Ltd. deriving income from government entity and Mitcon Consultancy & Engineering Services Ltd, is deriving less than 75% revenue from consultancy services, is a reasonable basis for their exclusion. 10. Any inclusion or exclusion of comparables per se cannot be treated as a question of law unless it is demonstrated to the Court that the Tribunal or any other lower authority took into account irrelevant consideration or excluded relevant factors in the ALP determination that impact significantly. 11. In the present case, we find no such error. Consequently, the appeal is without merits and is, therefore, dismissed." C. The Division Bench of Bombay High Court in the case of Commissioner of Income Tax-II, Pune Vs. PTC Software (I)(P) Ltd. [2017] 395 ITR 176 (Bombay) again reiterated similar position with reference to various comparables with regard to one of 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 a....
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.... here, as in essence the ratio of all these judgments is similar with the view which we have taken above, viz. that unless a perversity in the findings of fact in this regard is established before the High Court, no substantial question of law arises for consideration under Section 260-A of the Act. Need to give an early quietus and to the findings of fact by the Tribunal in the realm of International Taxation. 53. The huge quantum of borderless Trade and International Transactions earning lot of Foreign Exchange and revenues for India through international Corporates and Trade with them has a big interface with the Dispute Resolution of such cases in the Tax Administration Department as well as the Judiciary. 54. The procedure of assessment under Chapter X relating to international transactions as indicated above is already a lengthy one and involves multiple Authorities of the Department. 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 f....