Karnataka High Court
Commissioner Of Income Tax Iii vs M/S Velankani Software Pvt Ltd on 13 July, 2018
Bench: Vineet Kothari, S.Sujatha
1/13
IN THE HIGH COURT OF KARNATAKA, BENGALURU
DATED THIS THE 13TH DAY OF JULY 2018
PRESENT
THE HON'BLE Dr.JUSTICE VINEET KOTHARI
AND
THE HON'BLE Mrs.JUSTICE S.SUJATHA
I.T.A.No.453/2014
BETWEEN:
1. COMMISSIONER OF INCOME TAX-III
C.R. BUILDINGS, QUEENS ROAD
BANGALORE.
2. THE DEPUTY COMMISSIONER OF INCOME-TAX
CIRCLE-12(5), BANGALORE.
...APPELLANTS
(By Mr. E.I. SANMATHI, ADV.)
AND:
M/S. VELANKANI SOFTWARE PVT. LTD.,
No.43, ELECTRONIC CITY
PHASE-II, HOSUR ROAD
BANGALORE-560 100
PAN: AABCV7866K.
...RESPONDENT
(By Ms. VANI H, ADV.,)
THIS I.T.A. IS FILED UNDER SECTION 260-A OF INCOME
TAX ACT 1961, PRAYING TO DECIDE THE FOREGOING
QUESTION OF LAW AND/OR SUCH OTHER QUESTIONS OF LAW
AS MAY BE FORMULATED BY THE HON'BLE COURT AS
DEEMED FIT. SET ASIDE THE APPELATE ORDER DATED
13/06/2014 PASSED BY THE ITAT, 'C' BENCH, BANGALORE, IN
APPEAL PROCEEDINGS IN INCOME TAX APPEAL
Date of Judgment 13-07-2018 I.T.A.No.453/2014
Commissioner of Income-tax & Anr.
Vs. M/s. Velankani Software Pvt. Ltd.,
2/13
No.1552/BANG/2012 FOR ASSESSMENT YEAR 2008-09
ANNEXURE-A AS SOUGHT FOR IN THIS APPEAL.
THIS I.T.A. COMING ON FOR HEARING, THIS DAY
S. SUJATHA J. DELIVERED THE FOLLOWING:-
JUDGMENT
Mr. E.I. Sanmathi, Adv. for Appellants-Revenue Ms. Vani H, Adv. for Respondent-Assessee The appellants-Revenue have filed this appeal u/s. 260A of the Income Tax Act, 1961 (for short 'Act') raising purportedly certain substantial questions of law arising from the order of the Income Tax Appellate Tribunal, Bangalore Bench 'C', Bangalore (for short 'Tribunal') dated 13.06.2014 passed in ITA No.1552/Bang/2012 for the A.Y.2008-09.
2. This appeal was ADMITTED on 06.02.2015 to consider the following substantial questions of law framed by the learned counsel for the Appellants-
Revenue:
"1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the CUP method was the Most Appropriate Method (MAM) merely Date of Judgment 13-07-2018 I.T.A.No.453/2014 Commissioner of Income-tax & Anr. Vs. M/s. Velankani Software Pvt. Ltd., 3/13 on comparison of hourly rates when the functional profile of each of the contracts were different and not comparable?.
2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in applying CUP method when the conditions laid down for application of CUP method in Rule 10B were not satisfied by the assessee; without doing FAR analysis as required by the OECD guidelines and when only estimated adjustments, not accurate adjustments can be made to the prices of the transaction?.
3. Whether, the Tribunal as a fact finding authority was justified in not considering the findings of the TPO submitted during the course of appeal before the Tribunal merely because the TPO had not examined the same during the course of TP proceedings?".
3. The learned Tribunal, after discussing the rival contentions of both the appellants-Revenue and the Respondent-assessee has returned findings as under:
Date of Judgment 13-07-2018 I.T.A.No.453/2014 Commissioner of Income-tax & Anr. Vs. M/s. Velankani Software Pvt. Ltd., 4/13 Regarding substantial question of law Nos.1 to 3:
"29. We have given a very careful consideration to the rival submissions. The first issue that needs to be adjudicated is as to which is the MAM for the purpose of determining the ALP of the international transaction carried out by the Assessee with its AE. The provisions of the Act and the Rules that are relevant for deciding the issue have to be first seen. Sec.92 of the Act provides that any income arising from an international transaction shall be computed having regard to the arm's length price. Sec.92-B of the rules provide that "international transaction" means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility Date of Judgment 13-07-2018 I.T.A.No.453/2014 Commissioner of Income-tax & Anr.
Vs. M/s. Velankani Software Pvt. Ltd., 5/13 provided or to be provided to any one or more of such enterprises. Sec.92-A defines what is an Associated Enterprise. In the present case there is no dispute that the transaction between the Assessee and its AE was an international transaction attracting the provisions of Sec.92 of the Act. Sec.92C of the Act provides the manner of computation of Arm's length price in an international transaction and it provides: xxxx
30. Rule 10B of the IT Rules, 1962 prescribes rules for Determination of arm's length price under section 92C:-
xxxx xxxx
31. Rule 10C of the Rules provides for choosing the Most Appropriate Method for determining Arm's Length Price. It provides as follows: xxxx xxxx
32. A reading of the provisions of Rule 10B(2) of the Rules shows that uncontrolled transaction has to be compared with international transaction having regard to the factors set out therein. A reading of Sec.92C(2) with Rule 10C(1) & (2) makes it clear that MAM has to be determined on Date of Judgment 13-07-2018 I.T.A.No.453/2014 Commissioner of Income-tax & Anr.
Vs. M/s. Velankani Software Pvt. Ltd., 6/13 the basis of parameters laid down therein. The most appropriate transfer pricing method will be selected taking into account the strengths and weakness of the method, the appropriateness of the method in the light of the nature of the controlled transaction (based upon a functional analysis), the availability of reliable information (especially on uncontrolled comparable) and the degree of comparability between the controlled and the uncontrolled transactions (including reliability of comparability adjustments needed). Once the taxpayer has identified the transfer pricing methods that are potentially applicable to the controlled transaction, application of the most appropriate method rule involves a careful balance in which the following factors may be taken into account to assess the relative accuracy of the identified methods:
xxxx xxxx
33. In the present case the Assessee in it's Transfer Pricing Study in support of its stand that the price charged by it to the AE was at Arm's Length adopted internal CUP as the MAM. A copy of the agreement between the Assessee and Velankani Communication Technologies Inc., the holding company and AE was also filed before Date of Judgment 13-07-2018 I.T.A.No.453/2014 Commissioner of Income-tax & Anr.
Vs. M/s. Velankani Software Pvt. Ltd., 7/13 the TPO. The TPO vide his letter dated 28.9.2011 pointed out to the Assessee that the TP document is silent about the search process conducted by the taxpayer. There was no mention of the filters applied and the accept/reject matrix for arriving at the 4 comparable chosen for justifying external CUP method adopted by the Assessee for justifying ALP. The TPO therefore proposed to reject the TP documentation of the Assessee.
34. The Assessee vide its letter dated 17.10.2011 gave the agreements and Statement of Work between the Assessee and the three companies Airvana Network (I) Pvt Ltd., Agreement and Statement of Work between the Assessee and Ordyn Technologies Pvt. Ltd. and Agreement between the Assessee and Telular Corporation Inc. The above three companies were chosen to justify the ALP with AE by adopting the internal CUP method. In a further submission dated 17.10.2011 the Assessee gave a detailed basis for adopting internal Cup method for determining ALP.
35. In the order passed by the TPO there is no discussion about the terms of the agreement in support of the internal cup method adopted by the Assessee. Even in respect of the External CUP Date of Judgment 13-07-2018 I.T.A.No.453/2014 Commissioner of Income-tax & Anr.
Vs. M/s. Velankani Software Pvt. Ltd., 8/13 method adopted by the Assessee the TPO did not call for the required information from the Assessee or from the companies which were chosen for the purpose of comparison under the External CUP method. These companies were companies incorporated in India and it was well with in the powers of the TPO to call for all information required by issue of notices u/s. 133 of the Act. The TPO has made a simple observation that the TP document is silent about the search process conducted by the taxpayer. There was no mention of the filters applied and the accept/reject matrix for arriving at the 4 comparable chosen for justifying external CUP method adopted by the assessee for justifying ALP. The TPO for the above reason rejected the TP study of the Assessee. In our view the approach adopted by the TPO is arbitrary and not in conformity with the approach that is contemplated and required to be made by the TPO under the provisions of Sec.92C of the Act, Rules 10B and 10C of the Rules.
36. When the above arbitrary approach of the TPO was pointed out by the Assessee in its objections before the DRP, the DRP has endorsed the view of the AO. In our opinion the Assessee has in its reply to the TPO dated 17.10.2011 has Date of Judgment 13-07-2018 I.T.A.No.453/2014 Commissioner of Income-tax & Anr.
Vs. M/s. Velankani Software Pvt. Ltd., 9/13 clearly brought out all the factors regarding the similarity of the nature of services rendered by the Assessee to its AE and Non-AE. The fact that the transaction between the Assessee and its non-AE is an uncontrolled transaction is writ large on the face of the record. Yet the TPO and DRP harp on the point that there is no evidence to show that an independent enterprise would render similar service in similar quantities in similar areas. This approach of the TPO and DRP is unacceptable. In the case of Serdia Pharmaceuticals (I) Pvt.Ltd. vs. ACIT 44 SOT 391 (Mum), the ITAT has taken the following view with regard to CUP method being the best method, subject to availability of reliable data.
xxxx
37. In the present case the evidence on record in the form of agreement between the Assessee with its AE and non-AE are available on record, the TPO/DRP did not choose to point out any factors set out in Rule 10B & 10C of the Rules which are not available for applying internal CUP method for determining ALP. The reasons given by the TPO and DRP in our view are without any basis and arbitrary. All the information was available but yet not looked into by the TPO/DRP. This aspect becomes clear when one sees the Date of Judgment 13-07-2018 I.T.A.No.453/2014 Commissioner of Income-tax & Anr. Vs. M/s. Velankani Software Pvt. Ltd., 10/13 notes filed by the TPO in the proceedings before the Tribunal in which an attempt has been made to compare the terms of the agreement between the Assessee and its AE on the one hand that with the Non-AE on the other hand. Why such an exercise was not done by the TPO or the DRP despite specific submissions made by the Assessee that internal Cup is the MAM for determining ALP. On this short ground we are of the view that the internal CUP adopted by the Assessee for determining ALP is MAM and in terms thereof no adjustment to the price charged in the international transaction by the Assessee with its AE is called for. We find the justification given by the Assessee for adopting internal CUP for determining ALP is acceptable. The requirements for applying the internal CUP as MAM as contemplated by the Rules in our view are satisfied. We uphold the Assessee's argument that by applying internal CUP the price charged by the Assessee in respect of transaction with its AE is held to be at Arm's length. The addition made by the TPO and sustained by the DRP is hereby deleted."
4. This Court in ITA No.536/2015 C/w ITA No.537/2015 delivered on 25.06.2018 Date of Judgment 13-07-2018 I.T.A.No.453/2014 Commissioner of Income-tax & Anr. Vs. M/s. Velankani Software Pvt. Ltd., 11/13 (Prl. Commissioner of Income Tax & Anr. Vs. M/s. Softbrands India Pvt. Ltd.,) has held that in these type of cases, unless an ex-facie perversity in the findings of the learned Income Tax Appellate Tribunal is established by the appellant, the appeal at the instance of an assessee or the Revenue under Section 260-A of the Act is not maintainable and the relevant portion of the said judgment is quoted below for ready reference:
" Conclusion:
55. A substantial quantum of international trade and transactions depends upon the fair and quick judicial dispensation in such cases. Had it been a case of substantial question of interpretation of provisions of Double Taxation Avoidance Treaties (DTAA), interpretation of provisions of the Income Tax Act or Overriding Effect of the Treaties over the Domestic Legislations or the questions like Treaty Shopping, Base Erosion and Profit Shifting (BEPS), Transfer of Shares in Tax Havens (like in the case of Vodafone etc.), if based on relevant facts, such substantial questions of law could be raised before the High Court under Section Date of Judgment 13-07-2018 I.T.A.No.453/2014 Commissioner of Income-tax & Anr.
Vs. M/s. Velankani Software Pvt. Ltd., 12/13 260-A of the Act, the Courts could have embarked upon such exercise of framing and answering such substantial question of law. On the other hand, the appeals of the present tenor as to whether the comparables have been rightly picked up or not, Filters for arriving at the correct list of comparables have been rightly applied or not, do not in our considered opinion, give rise to any substantial question of law.
56. We are therefore of the considered opinion that the present appeals filed by the Revenue do not give rise to any substantial question of law and the suggested substantial questions of law do not meet the requirements of Section 260-A of the Act and thus the appeals filed by the Revenue are found to be devoid of merit and the same are liable to be dismissed.
57. We make it clear that the same yardsticks and parameters will have to be applied, even if such appeals are filed by the Assessees, because, there 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 Date of Judgment 13-07-2018 I.T.A.No.453/2014 Commissioner of Income-tax & Anr. Vs. M/s. Velankani Software Pvt. Ltd., 13/13 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.
58. The appeals filed by the Revenue are therefore dismissed with no order as to costs."
5. In the circumstances, having heard the learned Counsel appearing for both the sides, We are of the considered opinion that no substantial question of law arises for consideration in the present case.
Hence, the Appeal filed by the Appellant-Revenue is liable to be dismissed and is accordingly dismissed.
No costs.
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