7

Introduction:

An economy to be an investor friendly place has to have a robust litigation resolution mechanism. Transfer

pricing litigation has been one of the infamous challenges that India has been facing to bring back the investor

confidence on India. An average tax litigation in India may consume approximately 5 years to arrive at some

certainty. Moreover, the tax authorities are also known to be notorious for making several high pitched

assessments or considering appeal against the favourable orders received by the assessee before higher

authorities.

Transfer pricing litigation broadly revolves around the following major aspects:

a. Selection of most appropriate method;

b. Selection of the comparable companies;

c. Expenses or incomes to be considered as operating or non-operating in nature;

d. Availability of data in public domain.

The tax authorities have also been harassing the assessees by not only making unprecedented adjustments

but also lodging frivolous appeals. The Central Board of Direct Taxes (“CBDT”) to prevent the case of frivolous

appeals has issued directions to the Commissioners and Income Tax Officers with regards to the criteria to be

fullfiled for lodging an appeal.

One such aspect was recently dealt with before the Hon'ble Karnataka High Court in the case of Pr. CIT Vs.

Softbrands India Private Limited (I.T.A.No.536/2015; I.T.A.No.537/2015). A summary of the said decision

is discussed as under:

Facts:

Assessee, an Indian subsidiary company was engaged

in providing software services to its Associated Enterprise

(“AE”).

Assessee selected Comparable Uncontrolled Price (“CUP”)

as the most appropriate method to determine the arm's length

price.

The Transfer Pricing Officer (“TPO”) rejected the same and

considered Transaction Net Margin Method (“TNMM”)

to arrive at the arm's length price.

Accordingly, TPO arrived at a mark-up of 20.68% as against

Assessee's mark-up of 8.33%.

Aggrieved, the Assessee filed an appeal with the Commissioner of

Income Tax (Appeals) [“CIT(A)”]. CIT(A) upheld the benchmarking

approach of the TPO while applying turnover and related party

transactions' ('RPT') filter. This reduced the number of comparable to three (3).

Aggrieved, the Revenue and the Assessee filed an appeal with the Hon'ble Income Tax Appellate Tribunal

(“ITAT”). The ITAT maintained the RPT filter at 15% while upholding the turnover filter of the CIT(A). However,

it modified the list of comparables wherein some comparables selected by the TPO were added while certain

comparables selected by CIT(A) were deleted.

Aggrieved, an appeal before the High Court was duly filed with the substantial question of law being

whether ITAT was right in applying the related party filter and whether ITAT's act of rejecting the comparables

CA VIRAV DEDHIA

LANDMARK RELIEF IN LANDMARK RELIEF IN INDIAN TRANSFER PRICING PRACTICE INDIAN TRANSFER PRICING PRACTICE

Foreign Parent

Company

Indian Subsidiary

Company

VOL. 22 - NO. 1- JULY 2018

C.V.O. CA'S NEWS & VIEWS

ca.viravdedhia@gmail.com

8

and addition of comparables right in law.

Proceedings before High Court

During the course of hearing, the Hon'ble High Court (“HC”) summarised the scope of appeal to relate

to –

(a) Whether right method selected;

(b) Whether correct filters have been applied;

(c) Whether ITAT has rightly included / excluded comparables after analysing each of them;

(d) Other related factors.

During the course of the hearing, the HC observed that the entire exercise of making transfer pricing

adjustments on the basis of comparables is nothing but a matter of estimate of broad and fair guess work of

authorities based on records and materials available with them including the ITAT. The HC also observed that

the ITAT being the last fact finding authority, also remains so, for disputes under Chapter X and therefore,

unless the HC is satisfied that a substantial question of law arises from the order of the ITAT, an appeal under

Section 260-A cannot be entertained. The HC analysed the ITAT's order and observed that the ITAT had given

adequate attention to the task and had discussed each comparable and filter criteria with cogent reasons,

before accepting or rejecting any comparable.

The HC held that every appeal filed before the High Court has to pass the test of “substantial question of

law”. Section 260A(6) specifically provides for the issues that can be appealed before the HC. A brief extract of

the same is reiterated as under:

“260A. ……

(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).

…….”

It can be noted from the above that though Section 260A(6) provides for the issues that can be appealed

before the HC, it does not give any extended power to disturb the findings of the fact given by the ITAT under the

broad rubric of “substantial question of law”. The HC also compared the provisions of Section 260A with those

of Section 100 and Section 103 of the Code of Civil Procedure (“CPC”). The HC has thus concluded that what

could be substantial question of law could be interpreted from settled jurisprudence on the issue covered by

various Supreme Court decisions.

Moreover during the course of hearing, the HC held that if it were to take the path of undertaking

comparative analysis and work on the filters then it would be as good as the HC dragging itself into data

analysis work. This would definitely defeat the purpose of Section 260A. Further, considering the number of

pending cases before the HC, it would be a tedious task to do justice to each of such cases and it would be even

more time consuming to the already delayed process of justice. Thus, an appeal in such cases can be made to

the HC only if the appellant finds any perversity in the findings of the ITAT.

The HC while deciding on this matter stressed on the need for giving primacy to the ITAT, comprising of

the expert members, as the final fact finding authority. Thus, a judgement by such quasi-judicial forum should

put an end to the factual aspects. The HC also harped that neither of the parties have the right to invoke an

appeal before the HC merely because the ITAT reverses or modifies the findings given by lower authorities if it

does not involve an interpretation of the law of the land.

The HC while dismissing the appeal noted that in the present case, the appellant has not appealed against

the perversity of the ITAT order as no such perversity was found in the same.

Critical observations:

The HC held that in a transfer pricing case, aspects related to choice of comparable companies, choice of

filters used, correctness of application of filters, choice of method, etc. are factual exercises and the HC will not

VOL. 22 - NO. 1- JULY 2018

C.V.O. CA'S NEWS & VIEWS

9

admit any question arising from these, unless perversity is demonstrated based on the parameters laid out in

the judicial precedents referred to -

(a) it is of general public importance; OR

(b) if it directly and substantially affects the rights of parties;

and in either case (a) or (b), it is either an open question that is not finally settled by the Supreme Court OR

is not free from difficulty OR calls for discussion of alternate views.

(c) where the legal position is clear, but lower Court has decided the case either ignoring or acting contrary

to such legal principle;

(d) HC could interfere with concurrent findings of lower Courts if -

(i) Lower Courts have ignored material evidence or acted on no evidence ('no evidence' includes cases,

where the evidence taken as a whole, is not reasonably capable of supporting the finding);

(ii) While arriving at a finding, lower Court has not taken into consideration relevant admissible evidence

OR inadmissible evidence has been taken into consideration OR legal principles have not been

applied in appreciating the evidence OR when the evidence is misread;

(iii) Wrong inferences drawn from proved facts by applying law erroneously; or'

(iv) Burden of proof' wrongly cast.

The Karnataka HC is likely to follow this ruling for already previously admitted cases, when it comes for

'final hearing', on the basis that absence of 'substantial question of law' can be decided by the HC even during

the final hearing stage.

Another important case relating to the applicability of transfer pricing provisions to the specified

domestic transactions undertaken by entities covered under section 40A(2)(b) was recently decided upon by

the Bengaluru bench of the Income Tax Appellate Tribunal (“ITAT”) in the case of Texport Overseas Private

Limited [IT(TP)A No.: 1722/Bang/2017].

Facts of the case:

In the case under discussion, the assessee, Texport Overseass Private Limited, had undertaken a

specified domestic transaction as per section 92BA(i) read with section 40A(2)(b) wherein it had paid

remuneration to its directors. The TPO adjudged the same to be excess and undertook an addition to the total

income of the company. Consequently, the Dispute Resolution Panel (“DRP”) also upheld the addition.

The assessee was prima facie aggrieved on the following grounds:

- Limitation of director's remuneration payable under the provisions of Companies Act 1956 is

applicable only in respect of public limited companies;

- Shareholders of the company are the sole persons to decide the extent of remuneration payable;

Proceedings before ITAT:

During the course of hearing before the ITAT, the assessee representative raised an additional ground of

appeal which targeted the root of the case i.e. the applicability of Section 92BA(i) which has been deleted w.e.f.

01 April 2017 by the Finance Act 2017. The assessee contended that on account of omission of the said clause

from Section 92BA, the impugned transaction would not fall within the definition of specified domestic

transaction. The assessee further contended this omission of the statute by virtue of the amendment shall be

deemed not to be on statute since the beginning. The assessee placed its due reliance on judgement of the Apex

Court in the case of Kolhapur Canesugar Works Ltd Vs. Union of India (2132 of 1994 – Civil) dated 01

February 2000 wherein the constitution bench has held that section 6 of the General Clauses Act applies only

in the case of repeals and not to omission. It was also clarified by the Apex Court that in such a case the court

has to look into the provisions that has been introduced post the omission of the previous rule to determine

whether a pending proceeding will continue or lapse.

VOL. 22 - NO. 1- JULY 2018

C.V.O. CA'S NEWS & VIEWS

10

In case there is a pari-materia provision in the statute that the pending proceedings will continue as per

the old provisions then the old rule be followed. A reliance was also placed on General Finance Co. Vs. ACIT

257 ITR 338 (SC) wherein it was held by the Apex Court that the principle underlying the Section 6 (of General

Clauses Act) as saving the right to initiate the proceedings for liabilities incurred during the currency of the Act

will not apply to omission of a provision but only to repeal.

Further, reliance was also placed on the case of CIT Vs. GE Thermometrics India Private Limited (876 /

Bang / 2008) wherein it has been held that once the section is omitted from the statute book, the result is it

had never been passed and be considered as a law that never exists.

After giving ear to the assessee and the Revenue, the Members agreed that the primary question that arises

is whether on account of omission of clause (i) from the statute, the proceedings already initiated or action

taken becomes redundant or otiose. The Members noted that in the case of Kolhapur Canesugar Works Ltd

(Supra), the impact of omission of old Rule 10 and 10A was examined and the jurisdictional High Court in the

case of GE Thermometrics India Private Limited (Supra) considered the impact of deletion of sub-section (9)

of section 10B. It was duly acknowledged that from the aforesaid decisions it has become abundantly clear

that once a provision of section is omitted from statute, it shall be deemed to be omitted from its inception

unless and until there is some saving clause or provision to make it clear that the actions or proceedings

initiated under the said provision would be continued and not left on account of omission. However, the

Assessing Officer ought to have required to frame the assessment in normal course after making necessary

enquiries of particular claim of expenditure in accordance with the Law but not under clause (i) of Section

92BA.

Critical observations:

The ITAT in this judgement placed its reliance on two Supreme Court and a jurisdictional High Court

decision before arriving at a conclusion that the effect of omission of a provision / clause has to be read in

accordance with the Section 6 of the General Clauses Act. In case there is no saving clause or provision to

support the pending proceedings under the omitted provision / clause then all such pending proceedings

would be null and void and bad in the eyes of the law.

This is a landmark judgement as it throws light on the intent of the law while deleting or omitting a

provision / clause from the Act. One would now have to wait and look into the willingness of the tax officials in

acceptance of this decision or whether they would consider challenging this before the High Court being a

substantial question of law. On the practical front, one has to wait for a couple of months to see if the field

officers accept this decision or continue to refer the cases selected for regular assessment to TPOs under

Section 92BA(i) on the back-drop that Revenue is considering an appeal to the High Court.

Conclusion:

The above stated two judgements have been recent landmark decisions as the justice did not limit

themselves to the provisions of the Income-tax Act 1961 but it also considered a broader view by duly

deliberating on other statutes like Code of Civil Procedures and General Clauses Act before handing over its

judgement. This has reposed confidence in the Indian judicial system for the foreign investors but a major

concern that needs to be looked upon is its practical implications during the regular assessments.

Thus, it is critical now to see how the field officers, not only in Karnataka but also in rest of India, accept to

these landmark judgements, help in reducing the frivolous litigation in the transfer pricing practice and

provide peace of mind to the assessees.

P.S.: The views expressed in the above article are based on personal interpretation. The readers are

requested to consult their tax expert for their case.

                                         

VOL. 22 - NO. 1- JULY 2018

C.V.O. CA'S NEWS & VIEWS