TaxTMI 
TaxTMI 
2019 (9) TMI 58
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.... 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 Resolution Panel, Ahmedabad. The Dispute Resolution Panel, Ahmedabad, vide order dated 28.11.2014....
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....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 utilized by the assessee. However, how the said benefit was utilized was not submitted. Two types of email correspondences ....
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....mation 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 entities implying thereby that his contribution is only limited to the time provided by him to the subsidiaries. Even if for assumption sake, this is taken into....
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.... 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 reproduced below: "Please provide a brief description of the various specific projects you have taken part in during FY 2010 for the benefit of our affiliates in Europe and Asia....
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....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, ultimately, held as under: "11 We find that the issue is a covered issue by coordinate bench for assessment year 2008-09 though there is a difference on facts inasmuch as expenditure to the extent of 60% was held t....
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....t 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 liability and insurance needs to be taken to cover up both these liability. Public liability, gets covered by global Insurance policy. We further observe that during the course of proceedings before the lower authorities assessee has submitted t....
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....ce" (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 both at Departmental level and in Judicial Courts so that the economic activity in such borderless trade thrives and enures to the benefit of the Indian economy at large and Software Industry in particular. While the special provisions have been made for computation of 'Ar....
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....d 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 findings arrived at by the Tribunal can be so held to be perverse within the well settled parameters for determining the same as perverse. It is not allowed to either of the parties, i.e. the Assessee or the Revenue to invoke the jurisdiction of this Court under Section 260-A of the Act merely because the Tribunal comes to reverse o....
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.... 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 such judgment thereon containing the grounds on which such decision is founded and may award such cost as it deems fit. (6) The High Court may determine any issue which - (a) has not been determined by the Appellate Tribunal; or (b) has been wrongly determined by the Appellate Tribunal, by reason of a decision on such question of law as is referred to in sub-section (1). [(7) Save as otherwise provided ....
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....e 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 therefore the tenor and color of the words "substantial question of law" in both these enactments remains the same. 22. The High Court has power to not only formulate the substantial questions of law and rather it has the duty to do so and can also frame additional substantial questions of law at a later stage, if such a substantial question of law is involved in the appeal before it under these provisions and the appeal should be heard and decided only on such substantial questions of law after allowing the parties t....
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....onths 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 all the trappings of Sections 100 and 103 of the Civil Procedure Code. Case Laws on Substantial Question of Law: 28. In the leading and the first and foremost case on the interpretation of Section 100 of the Code of Civil Procedure Code, the Constitution Bench of the Hon'ble Supreme Court in the case of Sir Chunilal V. Mehta and Sons Limited Vs. Century Spinning and Manufacturing Co. Limited AIR 1962 SC 1314, held in para.6 as under: "6. We are in general agreement with the view taken by the Madras High Court and we think that while the view taken ....
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....n 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 has chosen not to qualify the scope of "substantial question of law" by suffixing the words "of general importance" as has been done in many other provisions such as Section 109 of the Code or Article 133(1)(a) of the Constitution. The substantial question of law on which a second appeal shall be heard need not necessarily be a substantial question of law of general importance. In Guran Ditta v. T. Ram Ditta", the phrase "substantial question of law" as it was employed in the last clause of the then existing Section 110 CPC (since omitted by the Amendment Act, 1973) came up for consideration ....
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....here (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 Income Tax, Delhi, [2011] 1 SCC 673, comparing the provisions of Section 260-A of the Act with Section 100 of the Civil Procedure Code, the Hon'ble Supreme Court held that in the absence of demonstrated perversity in the findings of the Tribunal, the Court cannot interfere and a finding of fact may give rise to a substantial question of law, only if it is perverse. Paragraphs 23 and 25 of the said judgment is quoted below for ready reference:- "23. A finding of fact may give rise to a substantial question of law, inter alia, in the event the findings are based on no evidence and/or while arriving at the said finding, relevant admissible eviden....
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....d (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 comparable Companies are considered by the Authorities and applied to the cases of the Assessees to determined the 'Arm's Length Price' and make Transfer Pricing Adjustments. Rules 10-A, 10-AB, 10-B, 10-C & 10-CA of the Income Tax Rules, 1962 prescribe the manner for working out 'Arms Length Price' under aforesaid prescribed Methods. 37. Section 92-CA of the Act envisages that the Assessing Authority, if he considers necessary or expedient so to do, he can with the previous approval of the Principal Commissioner, refer the computation of 'Arm's Length Price' to Transfer Pricing Officer (TPO), another Departmental Authority only, who is supposed to have special knowledge and training for computing ....
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....s 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 comparables or even though comparable Entities were functionally different entities from the Entities in the list of Departmental comparables, as against the comparables sought to be provided by the assessees but the Revenue Department generally insists on their inclusion to get high profit ratio leading to higher Transfer Pricing adjustments, whereas the assessee would like to keep the comparables in a narrower range to justify its Transfer Pricing Analysis and profits declared. 42. In sum and substance, we find that such an exercise having been undertaken by the Authorities below may have resulted not only in high pitched Transfer Pricing Adjustments in the declared profits of the Assessee, but a flood of such appeals go before the Tribunal itself where finally the inclusion or....
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....versity 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 determination of 'Arm's Length Price' as is sought to be raised before us." 17. The Court, thereafter, expressed its concern for giving primacy to the Tribunal in the area of fact finding. "46. Undoubtedly, the Income Tax Tribunal is the final and highest fact finding body under the Act. It is manned by Expert Members (Judicial Members are selected from District Judges or Advocates and Accountant Members selected from practicing Chartered Accountants or persons of CIT level in the Department). Therefore this quasi-judicial forum is expected and as some of the nicely articulated Judgments and Orders from the Tribunal would indicate, the Orders passed by the Tribunal should normally put an end and quietus to the findings of facts and factual aspects of assessment. The lower Revenue Authorities ....
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....ch 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. Conclusion: 55. A substantial quantum of internatio....
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....ed 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 of the five methods, which is found to be the most appropriate method, and goes on to lay down the manner of determination of the ALP under each method. The five methods recognized by the rule are (i) comparable uncontrolled price method (CUP), (ii) re-sale price method, (iii) cost plus method, (iv) profit split method and (v) transactional net marginal method (TNMM). The manner by which the ALP in relation to an international transaction is determined under CUP is prescribed in clause (a) of the sub-rule (1) of Rule 10B. The following three steps have been prescribed: - "(a) comparable uncontrolled price method, by which, (i) the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified; (ii) such price is adjusted to account for differences, if any, bet....
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....e 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 structure adopted by a taxpayer in entering into a controlled transaction. The first circumstance arises where the economic substance of a transaction differs from its form. In such a case the tax administration may disregard the parties' characterization of the transaction and re-characterise it in accordance with its substance. An example of this circumstance would be an investment in an associated enterprise in the form of interest-bearing debt when, at arm's length, having regard to the economic circumstances of the borrowing company, the investment would not be expected to be structured in this way. In this case it might be appropriate for a tax administration to characterize the investment in accordance with its economic substance with the result that the loan may be treated as a subscription of capital. The second circumstance arises where, while the form and substance of the transaction ar....
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....ansactions. 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 structured. Two exceptions have been allowed to the aforesaid principle and they are (i) where the economic substance of a transaction differs from its form and (ii) where the form and substance of the transaction are the same but arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner. There is no reason why the OECD guidelines should not be taken as a valid input in the present case in judging the action of the TPO. In fact, the CIT (Appeals) has referred to and applied them and his decision has been affirmed by the Tribunal. These guidelines, in a different form, have been recognized in the tax jurisprudence of our country earlier. It has been held by our courts that it is not for the revenue authorities to dictate to the assessee as to how he should conduct his business....
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.... 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 makes the position stronger. In the case of Sassoon J. David & Co. Pvt. Ltd. v. CIT, (1979) 118 ITR 261 (SC), the Supreme Court referred to the legislative history and noted that when the Income Tax Bill of 1961 was introduced, Section 37(1) required that the expenditure should have been incurred "wholly, necessarily and exclusively" for the purposes of business in order to merit deduction. Pursuant to public protest, the word "necessarily" was omitted from the section. The position emerging from the above decisions is that it is not necessary for the assessee to show that any legitimate expenditure incurred by him was also incurred out of necessity. It is also not necessary for the assessee to show that any expenditure incurred by him for the purpose of business carried on by him has actually resulted in profit or income either in the same year or in any of the subsequent years. The only condition is that the expenditure should have ....
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....ve 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 tabular statements furnished by the assessee before the CIT (Appeals) in support of the reasons for the continuous losses. There is no material brought by the revenue either before the CIT (Appeals) or before the Tribunal or even before us to show that these are incorrect figures or that even on merits the reasons for the losses are not genuine. We are, therefore, unable to hold that the Tribunal committed any error in confirming the order of the CIT (Appeals) for both the years deleting the disallowance of the brand fee/ royalty payment while determining the ALP. Accordingly, the substantial questions of law are answered in the affirmative and in favour of the assessee and against the Revenue. The appeals are accordingly dismissed with no order as to costs." 20. We are of the view that the findings of fact recorded by the Tribunal in its impugned order cannot be termed as perverse or contrary to the evidence on record. The very same issue was duly considered by th....