TaxTMI 
TaxTMI 
2019 (9) TMI 58
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....Appellate Tribunal has erred in law and on facts in deleting the upward adjustment amounting to Rs. 2,46,527/- made by Transfer Pricing Officer on account of Insurance Payment?" 3. It appears from the materials on record that the assessee filed its return of income on 29.10.2010, declaring the total income at Rs. NIL and showed the book profit of Rs. 2,64,64,686/- under Section 115JB of the Act. The case was selected for scrutiny and, accordingly, notice under Section 143(2) of the Act was issued. The case was referred to the Transfer Pricing Officer as per Section 92CA of the Act. The Transfer Pricing Officer made the upward adjustment of Rs. 3,50,13,068/- for the payment of management and allocation for both the AE's and insurance allocation, i.e. Rs. 3,47,66,541/- plus Rs. 2,46,527/-. The assessee was intimated regarding the order passed by the Transfer Pricing Officer and the proposed additions. The draft order was passed on 10.02.2014 considering the upward adjustment made by the Transfer Pricing Officer and the same was communicated to the assessee. 4. The assessee, being dissatisfied with the order passed by the Transfer Pricing Offiicer, approached the Dispute Res....
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....uplication, the assessee submitted that this payment does not cover any product liability which gets covered from the Master Policy taken by the parent. The assessee has not produced any evidence to substantiate this claim. The assessee neither submitted the actual policy document nor its copy to show that the AE had taken out the insurance covering the assessee's risk and not only AEs risk though arising through the assessee. The assessee has not clarified as to whether insurance against public liability covers claims arising from defective or malfunctioning of products. Therefore the TPO had considered the payment to the AE as not required by the assessee's business and duplicate in nature. Therefore the insurance payment to the AE is considered by AO as NIL is justified. The tax effect involved in this case is Rs. 1,03,93,261/- which exceeds the limit as prescribed by the Board vide Circular No.03/2018 dated 11.07.2018" 8. The relevant observations made by the Dispute Resolution Panel, in its order dated 28.11.2014 is as follows; "It is contended by the assessee that Mr. Lu was a very competent, experienced and highly knowledgeable person whose benefit was u....
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....er this estimation of time is to be made by Mr. Lu himself. In respect of this allocation also no documentary evidence was submitted to justify the estimation of time spent by Mr. Lu on the activities of all the subsidiaries. As per the terms of agreement, it is this expenditure which is then shared by the reporting entities. Its further allocation at 11.72% was also could not be substantiated. It was accepted by the assessee that no reconciliation was made subsequently to align the arbitrary figure of 11.72% with the actual time spent by Mr Lu. Even though there was no requirement for such reconciliation, as per the agreement, for the purposes of finding the arms length price for such payment, it is necessarily required. The figure was sought to be justified on the basis of proportion of Indian entity sales to the total sales of Asia pacific entities. By taking such a factor into account, the assessee is trying to imply that the entire sales of the Asia Pacific region is on account of the efforts of Mr Lu, which is contrary to the stand taken by them that the allocation was to be made on the basis of estimated time spent by him for supervising the administration of the en....
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....arious entities, rather than it is distributed among them on a fixed ratio, irrespective of whether any services are rendered for them or not or whether any time is spent for them or not. It is also amazing to know that how it is possible for any entity to spend exactly equal amount of time and render equal amount of different services for different countries located in a vast part of the globe i.e. Asia Pacific. viii. It is also mentioned here that the assessee has not submitted the working of actual time spent on the basis of alleged cost sharing ratio (for Tudor India 11.72%) is arrived. The documents submitted by the assessee as various annexure to its submission dated 08.10.2013 are mere two agreements. The assessee enclosed some other documents annexed with it called as "Transfer Pricing Questionnaire in support of the service cost method." for various cost centers. Even on perusal of these questionnaires, it is found that the name/nature of the services is only mentioned, what benefits were obtained by the entities/assessee are not depicted despite the fact that in the heading para, it is requested to describe the procedure and benefits; a sample of the same is repr....
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.... noted that the date of signing the agreement is 17.03.2010 while the agreement is stated to be effective on April 1, 2009 (Clause 3.3 of the agreement). This means that the cement is not made prior to rendering any service rather it shows that it is an arrangement after the alleged services have been rendered just to siphon the revenue in the form of cost baring from the assessee to its AEs at the end of the year. On perusal of above clause of the agreement; it is also clear that the expenses shall be located on the basis of time spent the assessee has not given any documentary evidences for computation of this time spent apart from the questionnaire for transfer pricing which just mentioned the percentage for various countries but is not supported with the evidences that how these percentages have been arrived by various cost centres." 9. The Appellate Tribunal, while allowing the appeal preferred by the assessee took into consideration the fact that the issue stood broadly covered by an order dated 28.12.2017 in the assessee's own case for the A.Y. 2008-09. The Appellate Tribunal incorporated the entire order passed by the Coordinate Bench for the A.Y.2008-09 and....
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....llowing the co-ordinate bench decision in assessee's own case for the assessment year 2008-09, we are unable to see any legally sustainable merits in the impugned arm's length price adjustments in respect of management fees. As regards the arm's length price adjustment in respect of insurance premium share, we find that this issue is also covered by the co-ordinate bench decision in assessee's own case for the assessment year 2008-09 wherein the co-ordinate bench has, inter alia. observed as follows: "11. Ground No. 2 & 3 of Revenue's appeal challenges the order of Ld. CIT(A) deleting the upward adjustment of Rs. 5,04, 702/- in relation to payment of allocation of insurance expenditure. 12. Ld. D.R. supported the order of Ld. A.0. and Ld. counsel for the assessee relied on the fining of Ld. CIT as well as the submissions made before the First Appellate Authority. We have heard the rival contentions and perused the record placed before us. We find that the assessee which is also dealing in sale of batteries manufactured by other companies needs to take insurance policy. There are two types of liability namely public liability and product li....
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....der the special provisions relating to the Avoidance of Tax in Chapter-X of the Act comprising of Sections 92 to 94-B with regard to the assessment to be done for the 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 in the form of Rule 10-A to 10-E in the Income Tax Rules, 1962. We may quote the relevant portion of the judgment; "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 have business linkages with large Companies spread worldwide particularly in the Western Hemisphere of the Globe. 5. The implementation of the Tax laws in this field in a smooth, clear and quick manner is of utmost importance to build an image of an efficient Tax Administration....
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.... 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." 14. The Court, thereafter, undertook a comparative analysis of Section 260-A of the Act, 1961, Section 100 and Section 103 of the CPC and proceeded to observe as under: "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 the High Court under Section 260-A of the Act is locked with the words "Substantial questions of law" and the key to open that lock to maintain such appeal can only be the perversity of the findings of the Tribunal in these type of cases and the perversity in the findings not only averred by the appellant before this Court but, established on the basis of cogent material which was available before the Authorities below including the Tribunal and the finding....
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....cipal 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 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 other substantial question of law not formulated by it, if it is satisfied that the case involves such question. (5) The High Court shall decide the question of law so formulated and deliver s....
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....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 question of law before High Court under Section 100 would lie against the Judgment and Decree of the first Appellate Court disposing of an appeal against the Judgment and Decree of a Trial Court, but nonetheless it is the third round of consideration at the level of the High Court, where the facts and law both have been screened, discussed and analyzed by the Authorities or the Courts below and t....
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.... 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 Procedure Code relating to appeals of High Court shall apply to the appeals under Section 260-A of the Income Tax Act also. 27. The insertion of Sub-section (7) in Section 260-A of the Act does not give any new or extended powers to the High Court and the pre-existing provisions from Subsection (1) to Sub-section (6) in Section 260-A of the Act already had ....
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....th 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 occurring in the amended substantial, as qualifying "question of law", means - of having substance, essential, real, of sound worth, important or considerable. It is to be understood as something in contradistinction with - technical, of no substance or consequence, or academic merely. However, it is clear that the legislature....
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.... 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 the burden of proof. When we refer to "decision based on no evidence", it not only refers to cases where there is a total dearth of evidence, but also refers to any case, where the evidence, taken as a whole, is not reasonably capable of supporting the finding." 31. In the case of Vijay Kumar Talwar Vs. Commissioner of Inco....
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....ational 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 the 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 to be the most popular and widely adopted Method for determining the 'Arm's length price' in which the Operating Profit Margin of co....
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....ders 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." 16. The Court, thereafter, proceeded to discuss whether any substantial question of law could be said to be involved in the matter. "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 compara....
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....ngs are exfacie perverse and unsustainable and exhibit a total nonapplication of mind by the Tribunal to the relevant 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 determina....
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....nal 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 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 o....
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....re 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 assessees with which the assessees 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. " 19. The Delhi High Court, in the case of CIT vs. EKL Appliances Ltd., reported in (2012) 345 ITR 241 (Delhi), in context with Section 92CA of the Act, had observed as under: "It seems to us that the decision taken by the Tribunal is the right decision. The TPO applied the CUP method while examining the payment of brand fee/ royalty. The CUP method which in its expanded form is known as "comparable uncontrolled price" method is provided for in Rule 10B(1)(a) of the Income Tax Rules, 1962. It is one of the methods recognised for determining the ALP in relation to an international transaction. Rule 10B(1) says that for the purposes of Section 92C(2), the ALP shall be determined by any one....
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....and stating the arm‟s length principle, the guidelines provide for "recognition of the actual transactions undertaken" in paragraphs 1.36 to 1.41. Paragraphs 1.36 to 1.38 are important and are relevant to our purpose. These paragraphs are reproduced below: - "1.36 A tax administration's examination of a controlled transaction ordinarily should be based on the transaction actually undertaken by the associated enterprises as it has been structured by them, using the methods applied by the taxpayer insofar as these are consistent with the methods described in Chapters II and III. In other than exceptional cases, the tax administration should not disregard the actual transactions or substitute other transactions for them. Restructuring of legitimate business transactions would be a wholly arbitrary exercise the inequity of which could be compounded by double taxation created where the other tax administration does not share the same views as to how the transaction should be structured. 1.37 However, there are two particular circumstances in which it may, exceptionally, be both appropriate and legitimate for a tax administration to consider disregarding the s....
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....imize tax. In such cases, the totality of its terms would be the result of a condition that would not have been made if the parties had been engaged in arm's length dealings. Article 9 would thus allow an adjustment of conditions to reflect those which the parties would have attained had the transaction been structured in accordance with the economic and commercial reality of parties dealing at arm's length." The significance of the aforesaid guidelines lies in the fact that they recognise that barring exceptional cases, the tax administration should not disregard the actual transaction or substitute other transactions for them and the examination of a controlled transaction should ordinarily be based on the transaction as it has been actually undertaken and structured by the associated enterprises. It is of further significance that the guidelines discourage re-structuring of legitimate business transactions. The reason for characterisation of such restructuring as an arbitrary exercise, as given in the guidelines, is that it has the potential to create double taxation if the other tax administration does not share the same view as to how the transaction should be....
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....t on the credit side to justify the deduction of an expense". The question whether an expenditure can be allowed as a deduction only if it has resulted in any income or profits came to be considered by the Supreme Court again in CIT v. Rajendra Prasad Moody, (1978) 115 ITR 519, and it was observed as under: - "We fail to appreciate how expenditure which is otherwise a proper expenditure can cease to be such merely because there is no receipt of income. Whatever is a proper outgoing by way of expenditure must be debited irrespective of whether there is receipt of income or not. That is the plain requirement of proper accounting and the interpretation of Section 57(iii) cannot be different. The deduction of the expenditure cannot, in the circumstances, be held to be conditional upon the making or earning of the income." It is noteworthy that the above observations were made in the context of Section 57(iii) of the Act where the language is somewhat narrower than the language employed in Section 37(1) of the Act. This fact is recognised in the judgment itself. The fact that the language employed in Section 37(1) of the Act is broader than Section 57(iii) of the Act m....
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....id out for the purposes of business, it is no concern of the TPO to disallow the same on any extraneous reasoning. As provided in the OECD guidelines, he is expected to examine the international transaction as he actually finds the same and then make suitable adjustment but a wholesale disallowance of the expenditure, particularly on the grounds which have been given by the TPO is not contemplated or authorised. Apart from the legal position stated above, even on merits the disallowance of the entire brand fee/ royalty payment was not warranted. The assessee has furnished copious material and valid reasons as to why it was suffering losses continuously and these have been referred to by us earlier. Full justification supported by facts and figures have been given to demonstrate that the increase in the employees cost, finance charges, administrative expenses, depreciation cost and capacity increase have contributed to the continuous losses. The comparative position over a period of 5 years from 1998 to 2003 with relevant figures have been given before the CIT (Appeals) and they are referred to in a tabular form in his order in paragraph 5.5.1. In fact there are four tabula....