2018 (6) TMI 1592 - HC - Income Tax

Substantial question of law - perversity in order of Tribunal - Transfer Pricing adjustment - exclusion of depreciation & interest for determination of operating profit - HELD THAT - This court in Pr. CIT v. Softbrands India P. Ltd. 2018 (6) TMI 1327 - KARNATAKA HIGH COURT decided on June 25, 2018, 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 u/s 260A of the Act is not maintainable. Relevant portion of the said judgment is quoted below This court cannot be expected to undertake the exercise of comparison of the comparables itself which is essentially a fact finding exercise. Neither the sufficient data nor factual informations and any technical expertise is available with this court to undertake any such fact finding exercise in the said appeals under section 260A of the Act. This court is only concerned with the question of law and that too a substantial one, which has a well-defined connotations as explained above and findings of facts arrived at by the Tribunal in these type of assessments like any other type of assessments in other regular assessment provisions of the Act, viz., sections 143, 147 etc. are final and are binding on this court. While dealing with these appeals under section 260A of the Act, we cannot disturb those findings of fact under section 260A of the Act, unless such findings are ex facie per verse and unsustainable and exhibit a total non-application of mind by the Tribunal to the relevant facts of the case and evidence before the Tribunal. Otherwise if the High Court takes the path of making such a comparative analysis and pronounces upon the questions as to which filter is good and which comparable is really a comparable case or not, it will drag the High Courts into a whirlpool of such data analysis defeating the very purpose and purport of the provisions of section 260A of the Act. Therefore what we observed above appears to us to be the sustainable view that the key to the lock for entering into the jurisdiction of the High Court under section 260A of the Act is the existence of a substantial question of law involved in the matter. The key of ex facie perversity of the findings of the Tribunal is duly established with relevant evidence and facts. Unless it is so, no other key or for that matter, even the inconsistent 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. This court is satisfied that no substantial question of law would arise in the present case and the appeal filed by the Revenue is therefore, liable to be dismissed

Summary

Issues Involved:
1. Calculation of operating profit excluding depreciation.
2. Exclusion of depreciation, interest, etc., for calculating operating profit and adopting gross profit analysis.
3. Adequacy of time provided by the Transfer Pricing Officer for filing a reply to the show-cause notice.

Issue-wise Detailed Analysis:

1. Calculation of Operating Profit Excluding Depreciation:
The Tribunal directed the Transfer Pricing Officer (TPO) to calculate operating profit by disallowing depreciation, asserting that depreciation is part of business operations and should be considered operating in nature. The Tribunal agreed with the assessee's contention that using gross profit over sales eliminates differences in depreciation claims due to factors like machinery age and depreciation methods. This approach was deemed appropriate to analyze the profitability of auto components and the impact of raw material imports from associated enterprises on profitability under transfer pricing provisions.

2. Exclusion of Depreciation, Interest, etc., for Calculating Operating Profit and Adopting Gross Profit Analysis:
The Tribunal instructed the Assessing Officer (AO)/TPO to exclude depreciation, interest, and other costs when calculating operating profit, suggesting that gross profit analysis should be based on sales less the cost of raw materials. This method was preferred to better analyze the profitability of auto components and assess the impact of raw material imports from associated enterprises. The Tribunal set aside the Revenue authorities' orders on this issue and remanded the matter to the AO/TPO for re-evaluation, ensuring that any necessary adjustments are restricted as directed by the Dispute Resolution Panel (DRP).

3. Adequacy of Time Provided by the Transfer Pricing Officer for Filing a Reply to the Show-Cause Notice:
The Tribunal found that the TPO had provided sufficient time for the assessee to respond to the show-cause notice dated November 13, 2013. The Tribunal's decision to set aside the TPO's order was based on the need for a more accurate analysis of profitability ratios and not on the adequacy of the time provided for response.

Conclusion:
The High Court concluded that no substantial question of law arises in this case. It referenced a previous judgment (Pr. CIT v. Softbrands India P. Ltd.) which emphasized that appeals under section 260A of the Income-tax Act are not maintainable unless there is an ex facie perversity in the Tribunal's findings. The court highlighted that the Tribunal is the final fact-finding body, and its decisions on factual matters, such as the selection of comparables and application of filters, should not be disturbed unless they are perverse or irrational. The Revenue's appeal was dismissed as it did not meet the criteria for a substantial question of law under section 260A of the Act. The court reiterated the importance of giving primacy to the Tribunal's findings in matters of fact and emphasized the need for quick judicial dispensation in international taxation cases to avoid prolonged litigation.