2018 (7) TMI 2062 - HC - Income Tax

Deduction u/s 10A - deduction of expenditure incurred for Export Turn Over - HELD THAT - What is excluded from export turnover must also be excluded from total turnover , since one of the components of total turnover is export turnover. Any other interpretation would run counter to the legislativeintent and would be impermissible. As decided in HCL Technologies Ltd 2018 (5) TMI 357 - SUPREME COURT when the object of the formula is to arrive at the profit from export business, expe makes the formula unworkable and absurd. Hence, we are satisfied that such deduction shall be allowed from the total turnover in same proportion as well TP Adjustment - working capital adjustment - As per tribunal DRP correctly directed the A.O./TPO to work out the working capital adjustment as per the actual figure without putting any upper cap - HELD THAT - The controversy involved herein is no more res integra in view of the decision of M/s.Softbrands India Pvt. Ltd. 2018 (6) TMI 1327 - KARNATAKA HIGH COURT wherein it has been observed that unless the finding of the Tribunal is found ex facie perverse, the Appeal u/s. 260-A of the Act, is not maintainable. 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. 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 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.

Summary

Issues involved:
1. Interpretation of Section 10A of the Income Tax Act regarding deduction of expenses from export turnover and total turnover.
2. Exclusion of comparables for transfer pricing adjustments based on functional dissimilarity.
3. Working capital adjustment for Arm's Length Price determination.

Detailed Analysis:
1. Interpretation of Section 10A:
The appeal raised substantial questions of law regarding the deduction allowable to the assessee under Section 10A of the Income Tax Act. The primary issue was whether the expenses incurred for technical services rendered outside India should be deducted from both export turnover and total turnover. The court referred to a previous decision involving Tata Elxsi Ltd. and HCL Technologies Ltd., where it was held that expenses excluded from export turnover must also be excluded from total turnover to align with legislative intent. The court emphasized that any other interpretation would be impermissible and lead to illogical results. Consequently, the court dismissed the appellant's argument and upheld the deduction from total turnover as well.

2. Exclusion of Comparables:
The Tribunal excluded certain comparables for transfer pricing adjustments based on functional dissimilarity. The Revenue raised concerns about the exclusion and argued that the comparables satisfied qualitative and quantitative filters applied by the Transfer Pricing Officer (TPO). However, the Tribunal upheld the exclusion citing a previous order and the need to assess comparability based on specific facts presented. The court found that the issue was no longer res integra based on previous decisions and dismissed the appellant's contention, stating that the Tribunal's decision was valid.

3. Working Capital Adjustment:
Regarding the working capital adjustment for determining the Arm's Length Price, the Tribunal had directed the Assessing Officer to calculate the adjustment without imposing an upper cap. The Revenue relied on the TPO's order, while the Assessee cited a previous Tribunal decision in a similar case. The court noted that a co-ordinate bench had previously addressed a similar issue and found no error in the Tribunal's direction. Additionally, the court referred to a judgment in another case emphasizing the need for substantial questions of law to be raised for appeal under Section 260-A of the Act. As no such questions were identified, the court concluded that the appeal lacked merit and dismissed it.

In conclusion, the High Court of Karnataka upheld the Tribunal's decisions on all three issues, emphasizing the importance of aligning interpretations with legislative intent and the need for substantial questions of law to be raised for appeal.