2018 (7) TMI 1415 - HC - Income Tax

Deduction under Section 10-A - Held that - Tribunal in ignorance of the aforesaid Proviso to Sub-section (4) of 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. 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. 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 aforesaid judgment extracted above and therefore there is no merit in the present appeal of the Revenue. - Decided against revenue

Summary

Issues Involved:
1. Applicability of transfer pricing provisions when Section 10A benefits are availed.
2. Requirement for the Transfer Pricing Officer (TPO) to communicate under Section 92C(3).
3. Use of earlier year data in comparability analysis.
4. Standard deduction of 5% under the proviso to Section 92C(2).
5. Comparability adjustments for working capital and risk.
6. Selection of comparables with related party transactions.
7. Determination of arm's length price.
8. Parameters for selection of comparables and method adopted.
9. Alleged perversity in the Tribunal’s order.

Detailed Analysis:

1. Applicability of Transfer Pricing Provisions:
The Tribunal held that transfer pricing provisions should not be applied to an assessee claiming benefits under Section 10A of the Act. This conclusion was based on the intention behind introducing transfer pricing provisions, which is to prevent profit shifting outside India. The Revenue argued that this observation contradicts the second proviso to Section 92C(4), which states that no deduction under Section 10A should be allowed in respect of the amount of income by which the total income is enhanced after computation under this subsection. However, the Court found this argument misplaced as the Assessing Authority did not grant any Section 10A benefit concerning the transfer pricing adjustments made.

2. Requirement for Communication under Section 92C(3):
The Tribunal emphasized that the TPO or the Assessing Officer must satisfy and communicate to the taxpayer the relevant clause under Section 92C(3) before proceeding further. The Tribunal found that this requirement was not met in the present case, rendering the transfer pricing order void.

3. Use of Earlier Year Data:
The Tribunal upheld the taxpayer's use of earlier year data in the comparability analysis, despite the mandatory requirement under Rule 10B(4) to use current year data. The Tribunal also noted that data available in public databases by the specified date should be used, and the TPO cannot use data becoming available subsequently.

4. Standard Deduction of 5%:
The Tribunal held that the proviso to Section 92C(2) provides a standard deduction of 5% in all transfer pricing cases, subject to the taxpayer's option. This interpretation was challenged by the Revenue but upheld by the Tribunal.

5. Comparability Adjustments:
The Tribunal allowed a flat comparability adjustment of 11.72% (6.46% for working capital and 5.25% for risk), despite the Revenue's argument that the quality, purpose, and reliability of the adjustment data were not adequately considered. The Tribunal found that adjustments need to be made to the margins of comparables to eliminate differences due to different functions, assets, and risks.

6. Selection of Comparables:
The Tribunal held that companies with even a single rupee worth of related party transactions should not be selected as comparables. However, the Tribunal accepted the taxpayer's comparables, which had significant related party transactions, based on the absence of any deficiency or insufficiency in the taxpayer's transfer pricing study.

7. Determination of Arm's Length Price:
The Tribunal upheld the arm's length price determined by the taxpayer and rejected the TPO's determination, which was based on a fresh study not conforming to the provisions of Rule 10B(4) and 10D(4). The Tribunal found no infirmity in the taxpayer's transfer pricing study.

8. Parameters for Selection of Comparables:
The Tribunal's order was criticized for not laying down the parameters for selecting comparables, specifying the comparables finally accepted, or the method adopted. However, the Tribunal's findings were based on the absence of any deficiency in the taxpayer's transfer pricing study.

9. Alleged Perversity in the Tribunal’s Order:
The Revenue argued that the Tribunal's order was perverse. However, the Court found that the Tribunal's findings were based on facts and did not exhibit any ex-facie perversity. The Court reiterated that mere dissatisfaction with the Tribunal's findings is insufficient to invoke Section 260-A of the Act.

Conclusion:
The Court dismissed the Revenue's appeal, concluding that none of the questions raised constituted substantial questions of law under Section 260-A of the Act. The Court emphasized that findings of facts by the Tribunal, unless showing ex-facie perversity, do not warrant consideration under Section 260-A. The appeal was dismissed with no order as to costs.