Karnataka High Court
The Commissioner Of Income Tax vs Philips Software Centre Pvt Ltd on 10 July, 2018
Bench: Vineet Kothari, S.Sujatha
1/20
IN THE HIGH COURT OF KARNATAKA, BENGALURU
DATED THIS THE 10th DAY OF JULY 2018
PRESENT
THE HON'BLE Dr.JUSTICE VINEET KOTHARI
AND
THE HON'BLE Mrs. JUSTICE S.SUJATHA
I.T.A.No.49/2009
Between:
1. The Commissioner of Income- Tax,
C.R. Building, Queens Road,
Bangalore.
2. The Assistant Commissioner of Income-Tax,
Circle - 12(1),
C.R. Building, Queens Road,
Bangalore.
...Appellants
(By Mr. K.V.Aravind, Advocate)
And:
Philips Software Centre Pvt. Ltd.,
(Since merged with Philips Electronics
India Ltd.,)
Philips Innovation Campus,
No.1, Murphy Road,
Ulsoor,
Bangalore-560 008.
...Respondent
(By Mr. Farrokh Irani for
Mr. T. Suryanarayana, Advocate)
Date of Judgment 10-07-2018 I.T.A.No.49/2009
The Commissioner of Income Tax & Anr.
Vs. Philips Software Centre Pvt. Ltd.,
2/20
This I.T.A. is filed under Section 260-A of Income Tax
Act 1961, praying to (a) Formulate the substantial questions
of law stated therein, (b) allow the appeal and set aside the
Order passed by the ITAT Bangalore in ITA No.
218/BNG/2008, dated 26-09-2008 Annexure A; confirm the
orders of the Appellate Commissioner and Assistant
Commissioner of Income Tax, Circle -12(1), Bangalore.
This I.T.A. coming on for Admission, this day
Dr. Vineet Kothari J. delivered the following:-
JUDGMENT
Mr. K.V. Aravind. Adv. for Appellants - Revenue Mr.Farrokh Irani for Mr.T.Suryanarayana . Adv. for Respondent-Assessee
1. The Appellants - Revenue have filed this appeal raising purported substantial questions of law arising from the Order of the learned Income Tax Appellate Tribunal Bangalore Bench "B", Annexure A dated 26/09/2008 in ITA.No.218(BNG)/2008 for AY 2003- 04 (Philips Software Centre Private Ltd., Vs. Asst.
Commissioner of Income Tax).
2. The appellants - Revenue have suggested nine substantial questions of law which are quoted below for ready reference: -
Date of Judgment 10-07-2018 I.T.A.No.49/2009 The Commissioner of Income Tax & Anr. Vs. Philips Software Centre Pvt. Ltd., 3/20 "(1) Whether the Tribunal was correct in holding that the transfer pricing provisions cannot be invoked and applied in the case where the provisions of Section 10A of the Act, is availed of by the assessee, particularly when the language of the statue is plain and unambiguous?
(2) Whether the Tribunal was correct in holding that the Transfer Pricing Officer/ Assessing Officer needs to satisfy and communicate to the tax payer the Clause under section 92C(3) of the Act before proceeding further in the matter?
(3) Whether the Tribunal was correct in holding that the tax payer was justified in using earlier year data in comparability analysis though it is mandatory as per Rule 10B(4) to use the current year's data, and also that the data available in the public databases latest by the specified data should be alone be used and the TOP cannot use data becoming available subsequent to the specified date?
(4) Whether the Tribunal was correct in holding that the proviso to Section 92C(2) of Date of Judgment 10-07-2018 I.T.A.No.49/2009 The Commissioner of Income Tax & Anr.
Vs. Philips Software Centre Pvt. Ltd., 4/20 the Act provides for a standard deduction of 5% in all the TP cases?
(5) Whether the Tribunal was correct in allowing a flat comparability adjustment of 11.72% (6.46% working capital adjustment + 5.25% risk adjustment) ignoring all important issues like the quality of adjustment data, purpose and reliability of the adjustment performed to be considered before making adjustment on account of capital and risk, which was contrary to Rule 10B(3) (ii) which provides for only reasonably accurate adjustment?
(6) Whether the Tribunal was correct in holding that the companies with even a single rupee worth related party transactions should not be selected as a comparables and still proceeded to accept the tax payer's comparables which had significant related party transactions?
(7) Whether the Tribunal was correct in upholding the arms length price determined by the tax payer which suffered from various defects and rejecting the arms length price determined by the TPO which was based on Date of Judgment 10-07-2018 I.T.A.No.49/2009 The Commissioner of Income Tax & Anr. Vs. Philips Software Centre Pvt. Ltd., 5/20 cogent evidence and correct analysis of the data?
(8) Whether the Tribunal's order suffers from perversity because it neither lays down the parameters for selection of comparables nor specifies the comparables finally accepted and their margins nor does it specify the method finally adopted by the Tribunal and also because of inherent contradictions?
(9) Whether the Tribunal's order is perverse in the sense that no reasonable person properly instructed in law could have reached such a conclusion in the facts and circumstances of the case?"
3. The appeal was admitted by the Co-ordinate Bench of this Court on 16/02/2009 with the following substantial questions of law for consideration of this Court:-
"34. Whether the Tribunal was correct in holding that the transfer pricing provisions cannot be invoked and applied in the case where the provisions of Section 10A of the Date of Judgment 10-07-2018 I.T.A.No.49/2009 The Commissioner of Income Tax & Anr. Vs. Philips Software Centre Pvt. Ltd., 6/20 Act, is availed of by the assessee, particularly when the language of the statue is plain and unambiguous?
35. Whether the Tribunal was correct in holding that the tax payer was justified in using earlier year data in comparability analysis though it is mandatory as per Rule 10B(4) to use the current year's data and also that the data available in the public databases latest by the specified data should alone be used and the TOP cannot use data becoming available subsequent to the specified date?
36. Whether the Tribunal was correct in holding that the proviso to section 92C(2) of the Act provides for a standard deduction of 5% in all the TP cases?
37. Whether the Tribunal was correct in allowing a flat comparability adjustment of 11.72% (6.46% working capital adjustment + 5.25% risk adjustment) ignoring all important issues like the quality of adjustment data, purpose and reliability of the adjustment Date of Judgment 10-07-2018 I.T.A.No.49/2009 The Commissioner of Income Tax & Anr. Vs. Philips Software Centre Pvt. Ltd., 7/20 performed to be considered before making adjustment on account of capital and risk, which was contrary to Rule 10B(3) (ii) which provides for only reasonably accurate adjustment?
38. Whether the Tribunal was correct in holding that the companies with even a single rupee worth related party transactions should not be selected as a comparables and still proceeded to accept the tax payer's comparables which had significant related party transactions?
39 Whether the Tribunal was correct in upholding the arms length price determined by the tax payer which suffered from various defects and rejecting the arms length price determined by the TPO which was based on cogent evidence and correct analysis of the data?"
4. The summary of the findings/observations of the learned Income Tax Appellate Tribunal in its Order Date of Judgment 10-07-2018 I.T.A.No.49/2009 The Commissioner of Income Tax & Anr. Vs. Philips Software Centre Pvt. Ltd., 8/20 dated 26/09/2008 as given in para 5.71 is quoted below for ready reference:-
" 5.71. We, therefore, summarise our conclusion as follows:-
i) Since the basic intention behind introducing the transfer pricing provisions in the Act is to prevent shifting of profits outside India, and the assessee claiming benefit under section 10A of the Act, the transfer pricing provisions ought not to be applied to the assessee.
ii) Circular No.14/2001 issued by the CBDT is binding upon the TPO.
iii) There was no infirmity in the TP Study conducted by the assessee, and the TPO erred in disregarding the same for the purpose of computing framing the assessment and making the transfer pricing adjustment.
iv) The TPO or the A.O. needs to satisfy and communicate to the taxpayer the relevant clause under section 92C(3) which has been triggered by the assessee, which has necessitated the application of provisions of Date of Judgment 10-07-2018 I.T.A.No.49/2009 The Commissioner of Income Tax & Anr.
Vs. Philips Software Centre Pvt. Ltd., 9/20 the transfer pricing provisions. In the instance case, since this was not demonstrated to the assessee, the transfer pricing order is void.
v) The TPO erred in conducting a fresh study for the purpose of passing his order. The study conducted by the TPO is not in conformity with the provisions of Rule 10B(4) and 10D(4).
vi) The TPO erred in disregarding the most appropriate method adopted by the assessee in the TP Study, and also in using the Prowess data base. The TPO did not provide any reason for deviating from the TP Study in respect of these matters.
vii) The TP Study cannot be ignored by the TPO, in the absence of any deficiency or insufficiency. Further, the order passed with the intention of making a higher transfer pricing adjustment.
viii) For the purpose of comparability, companies with even a single rupee of transactions with associated enterprises cannot be considered as comparables.
Date of Judgment 10-07-2018 I.T.A.No.49/2009 The Commissioner of Income Tax & Anr. Vs. Philips Software Centre Pvt. Ltd., 10/20
ix) Adjustment needs to be made to the margins of the comparables to eliminate differences on account of different functions, assets and risks. More specifically, adjustment needs to be made for:
a) Differences in risk profile.
b) Difference in working capital position.
c) Differences in accounting policies.
x) The TPO has grossly erred in 'normalising' the profits of super profit
companies. Such companies should have been excluded from the list of comparables.
xi) The proviso to section 92C(2) of the Act provides a standard deduction of 5% to the taxpayers. The only condition for availing this benefit is that is subject to the option of the taxpayer.
xii) The decision of the Tribunal in the case of Mentor Graphics (supra) and E-gain Communication (supra) are squarely applicable to the assessee's case. Some of the relevant common facts relating to the Date of Judgment 10-07-2018 I.T.A.No.49/2009 The Commissioner of Income Tax & Anr.
Vs. Philips Software Centre Pvt. Ltd., 11/20 assessee before us and the assessees in both the decisions mentioned above have been summarized below:
Sl.No. Mentor Graphics Philips Software (Assessee)
1. Engaged in rendering captive Engaged in rendering Contract software development captive Services to its associated Contract software enterprises. development (Para 2.1 on page 116 ITD) Services to its associated enterprises.
2. The Software developed The software developed by By Mentor Graphics India was Philips Software is used in used in house by the associated House by the associated enterprises. enterprises.
(Para 2.1 on page 116 ITD)
3. The Software developed by The software developed by Mentor Graphics was integrated Philips Software is By the associated enterprises integrated In the software components and By the associated Hardware manufactured outside enterprises India, In the software components (Para 2.1 on page 116 ITD) and hardware manufactured Outside.
4. The complete package of the The complete package of the Hardware and software - Hardware and software manufactured was sold in open manufactured is sold in the Market by the associated Open market by the Enterprises. Associated enterprises. (Para 2.1 on page 116 ITD)
5. Mentor Graphics was insulated Philips Software bears From all business and operation nominal business and Al risks. (Para 33 and 46.1 on Operational risks.
Date of Judgment 10-07-2018 I.T.A.No.49/2009 The Commissioner of Income Tax & Anr. Vs. Philips Software Centre Pvt. Ltd., 12/20 Page 133 and 143, respectively ITD)
6. Mentor Graphics used to Philips Software is Develop software as instructed Continuously provided By its parent company. (Para 2.1 Services to its associated On page 116 ITD) Enterprises.
7. Net profit margin of Mentor Net profit margin of Philips Graphics was 6.99% (Para 6 on Software is 5.91% Page 118 ITD) Sl.No. E-gain Communication Philips Software (Assessee)
1. E-gain Communication is a captive Engaged in rendering Company rendering software captive Development services to its Contract software Associated enterprises. (Para 31 development On page 23 of the order) Services to its associated Enterprises.
2. E-gain was insulated from all Philips Software bears Business and operational risks Nominal business and (Para18 on page 10 of the order) Operational risk.
3. Net profit margin of E-gain Net profit margin of Philips Communication was 5.16% (Para 4 Software is 5.91%. on page 2 of the order)
xiii) Based on the issues raised and discussed, it should be concluded that the transactions of the assessee with its associated enterprises satisfy the arm's length test, and that the order of the TPO is bad in law and on facts.
xiv) Without prejudice to the submission of the assessee that the comparables selected Date of Judgment 10-07-2018 I.T.A.No.49/2009 The Commissioner of Income Tax & Anr. Vs. Philips Software Centre Pvt. Ltd., 13/20 by the TPO should not be considered for the purpose of comparability analysis, the assessee has prepared a working carrying out an accept/reject test on the comparables of the TP Study as well as the companies selected by the TPO as comparables. Even on the basis of this statement, the transactions of the assessee with its associated enterprises satisfy the arm's length test.
In the result, the appeal is allowed."
5. We are of the opinion that the issue involved in this appeal is no longer res integra as we have already held in I.T.A.No.536/2015 c/w. I.T.A.No.537/2015 (Pr. Commissioner of Income Tax, Bangalore and Another Vs. M/s. Softbrands India P.Ltd.,) rendered on 25-06-2018, that in these type of cases, such findings are findings of facts and 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, as Date of Judgment 10-07-2018 I.T.A.No.49/2009 The Commissioner of Income Tax & Anr. Vs. Philips Software Centre Pvt. Ltd., 14/20 no substantial question of law requiring our consideration would arise in this appeal under Section 260-A of the Act.
The relevant portion of the said judgment dated 25/06/2018 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 10-07-2018 I.T.A.No.49/2009 The Commissioner of Income Tax & Anr.
Vs. Philips Software Centre Pvt. Ltd., 15/20 260-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 Date of Judgment 10-07-2018 I.T.A.No.49/2009 The Commissioner of Income Tax & Anr. Vs. Philips Software Centre Pvt. Ltd., 16/20 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.
58. The appeals filed by the Revenue are therefore dismissed with no order as to costs."
6. The point pressed by the learned counsel for the Revenue, Mr. Aravind K.V. before us today is that the learned Tribunal in the afore-quoted para.5.71(i) has made an observation that where the assessee claiming the benefit under Section 10-A of the Act, being a newly established Undertaking in Free Trade Zone is claiming deduction under that provision then, Date of Judgment 10-07-2018 I.T.A.No.49/2009 The Commissioner of Income Tax & Anr. Vs. Philips Software Centre Pvt. Ltd., 17/20 the provisions of Chapter X regarding Transfer Pricing ought not to have been applied to the Assessee. He submits that these observations are contrary to the second Proviso to Section 92C(4) of the Act. The Sub-
section (4) and its First Proviso are quoted below for ready reference:-
"92C(4): Where an arm's length price is determined by the Assessing Officer under sub-section (3), the Assessing Officer may compute the total income of the assessee having regard to the arm's length price so determined:
Provided that no deduction under section 10A [or section 10AA] or section 10B or under Chapter VI-A shall be allowed in respect of the amount of income by which the total income of the assessee is enhanced after computation of income under this sub- section."
Date of Judgment 10-07-2018 I.T.A.No.49/2009 The Commissioner of Income Tax & Anr. Vs. Philips Software Centre Pvt. Ltd., 18/20
7. The learned counsel for the Respondent -
Assessee, Mr. Farrokh Irani drew our attention to the Assessment Order passed by the Assessing Authority in the present case vide Annexure C on 31/03/2006 in which the Transfer Pricing Adjustments under Chapter X of the Act to the extent of `22,10,80,792/-
were made by the Assessing Authority, but no deduction under Section 10-A is given to the Assessee with respect to the said Transfer Pricing Adjustment made by the Assessing Authority in the present case.
8. The submission made by the learned counsel for the Revenue is, therefore, misplaced and bereft of factual foundation in the assessment of the present assessee. The afore-quoted para 5.71(i) of the Tribunal cannot be even described as a finding of fact, but it is merely an obiter. Though such an obiter or observation appears to be made by the learned Tribunal in ignorance of the aforesaid Proviso to Sub-section (4) of Date of Judgment 10-07-2018 I.T.A.No.49/2009 The Commissioner of Income Tax & Anr. Vs. Philips Software Centre Pvt. Ltd., 19/20 Section 92C of the Income Tax Act, but we do not find any binding character of such findings or observations because as far as the computation of income of the assessee is concerned, the Assessing Authority has not given any benefit of Section 10-A of the Act to the assessee with respect to Transfer Pricing Adjustments made in the Assessment Order.
9. There is no reversal of such findings of the Assessing Authority by the Tribunal in the present case.
Therefore, this observation cannot be said to be causing any prejudice to the Revenue in the present case.
Therefore, no substantial question of law arises on the said submission of the learned counsel for the Revenue.
10. As far as the other questions are concerned, we have already observed above that none of the questions actually gives rise to any substantial questions of law in the present appeal in view of our Date of Judgment 10-07-2018 I.T.A.No.49/2009 The Commissioner of Income Tax & Anr. Vs. Philips Software Centre Pvt. Ltd., 20/20 aforesaid judgment extracted above and therefore there is no merit in the present appeal of the Revenue.
11. The appeal of the Revenue is liable to be dismissed and is accordingly dismissed.
No costs.
Sd/-
JUDGE Sd/-
JUDGE BMV*