Chapter X and Section 260A – International transactions – Determination of arm’s length price – Appeal to High Court – Power of High Court to interfere with such determination – Interference only if finding of Appellate Tribunal is perverse – Selection of comparables, short-listing them, applying of filters, fact finding exercises and final orders passed by the Tribunal binding on Department and High Court

16. Principal CIT vs.
Softbrands India P. Ltd.; 406 ITR 513 (Karn):

Date of order: 25^th
June, 2018

A. Y. 2006-07

Chapter X and Section 260A – International transactions –
Determination of arm’s length price – Appeal to High Court – Power of High
Court to interfere with such determination – Interference only if finding of
Appellate Tribunal is perverse – Selection of comparables, short-listing them,
applying of filters, fact finding exercises and final orders passed by the
Tribunal binding on Department and High Court

In the appeal filed by the Revenue
before the High Court against the order of the Tribunal the following questions
were raised:

“i)    Whether
on the facts and in the circumstances of the case the Tribunal is right in law
in rejecting the comparables, namely, Kals Information Systems Ltd., Tata Elxsi
Ltd., M/s. Accel Information Systems Ltd., M/s. Bodhtree Consulting by
following its earlier order and without appreciating that the reasonings of the
Transfer Pricing Officer (TPO)/Assessing Officer (AO) for adopting the said
comparables which have been brought out in the TPO’s order and without
appreciating that TPO has chosen the same after application of mind and
materials on record?

ii)    Whether
the Tribunal was justified in fixing the related party transaction (RPT) at 15
percent 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 at 15 percent cut off RPT
filter, in the case of taxpayer?”

The Karnataka High Court dismissed
the appeal filed by the Revenue and held as under:

“i)    Income-tax
Act, 1961 contains special provisions relating to avoidance of tax in Chapter X
of the Act comprising sections 92 to 94B with regard to assessment to be done
for computation of income from international transactions on the principle of
“arm’s length price” and the relevant Rules for computation of such income
under the provisions of Chapter X are enacted in the form of rules 10A to 10E
in the Income-tax Rules 1962. The procedure for assessment under Chapter X
relating to international transactions is 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 corporate entities who have
to comply with the various provisions of the Act and Rules with huge data bank
and in the first instance they have to satisfy that the profits or the income
from transactions declared by them are at “arm’s length” which analysis is
invariably put to test and inquiry by the authorities of the Department through
the process of Transfer Pricing Officer and Dispute Resolution Penal 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 it is a
true and fair disclosure.

ii)    The
pick of comparables, 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 the High
Court.

iii)    The scheme of both section 260A in the Income-tax Act, 1961 and
section 100 read with section 103 of the Code of Civil Procedure, 1908 are in
pari materia and in the same terms. The existence of a substantial question of
law is a sine qua non for maintaining an appeal before the High Court. The High
Court may determine any issue which (a) has not been determined by the Tribunal
or (b) has been wrongly determined by the Tribunal, 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 an 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.

iv)   Sub-section
(6) of section 260A 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. The insertion of sub-section (7) of section
260A does not give any new or extended powers to the High Court and the
pre-existing provisions from sub-section (1) to sub-section (6) in section 260A
of the Act already had all the trappings of section 100 and 103 of the Civil
Procedure Code.

v)    The
Tribunal is expected to act fairly, reasonably and rationally and should
scrupulously avoid perversity in its orders. It should reflect due application
of mind when it assigns reasons for returning particular findings. 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.

ii)    From the perusal of the Tribunal’s order, it
was apparent that individual cases of such comparables had been considered,
analysed and discussed by the Tribunal and while some comparables were found to
be appropriate and really comparable to the facts of the assessee, some were
not. The Tribunal had given cogent reasons and detailed findings upon
discussing each case of comparable corporate properly. Whether or not the
comparables had been rightly picked up or filters for arriving at the correct
list of comparables had been rightly applied, did not give rise to any
substantial question of law.”