Dismissed

Principal Commissioner of Income Tax Gandhinagar v. Tudor India Private Limited

Gujarat HC27 Aug 2019TAXAP/106/2019

Case brief

AI extract

What is this about?

Revenue appeal under Section 260-A against the ITAT's deletion of transfer pricing adjustments on management fee allocation and insurance cost allocation. Applying the law on the High Court's limited scope of interference, the Court held that the Tribunal's findings of fact were not perverse and that no substantial question of law arose; the appeal was dismissed.

What the court decided

AI extract

Principal Commissioner of Income Tax Gandhinagar Vs Tudor India… — Income Tax | Gujarat HC (2019)

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C/TAXAP/106/2019 ORDER

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IN THE HIGH COURT OF GUJARAT AT AHMEDABAD

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R/TAX APPEAL NO. 106 of 2019

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==========================================================

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PRINCIPAL COMMISSIONER OF INCOME TAX GANDHINAGAR

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Versus

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TUDOR INDIA PRIVATE LIMITED

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========================================================== Appearance:

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MRS MAUNA M BHATT(174) for the Appellant(s) No. 1 MR MANISH J SHAH(1320) for the Opponent(s) No. 1

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==========================================================

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CORAM: HONOURABLE MR.JUSTICE J.B.PARDIWALA and HONOURABLE MR.JUSTICE A.C. RAO

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Date : 27/08/2019

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ORAL ORDER (PER : HONOURABLE MR.JUSTICE J.B.PARDIWALA)

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This tax appeal under Section 260-A of the Income Tax Act, 1961 (for short “the Act, 1961”) is at the instance of the revenue and is directed against the order passed by the Income Tax Appellate Tribunal, Ahmedabad 'D' Bench, Ahmedabad dated 07.09.2018 in the ITA No.381/Ahd/2015 for the A.Y. 2010-11.

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The Revenue has proposed the following two questions of law for the consideration of this Court;

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“ (A) Whether the Appellate Tribunal has erred in law and on facts o the case in deleting the upward adjustment amounting to Rs.3,47,66,541/- made by Transfer Pricing Officer on account of Management fees?

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(B) Whether the Appellate Tribunal has erred in law and on facts in deleting the upward adjustment

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amounting to Rs.2,46,527/- made by Transfer Pricing Officer on account of Insurance Payment?”

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It appears from the materials on record that the assessee filed its return of income on 29.10.2010, declaring the total income at Rs. NIL and showed the book profit of Rs.2,64,64,686/- under Section 115JB of the Act. The case was selected for scrutiny and, accordingly, notice under Section 143(2) of the Act was issued. The case was referred to the Transfer Pricing Officer as per Section 92CA of the Act. The Transfer Pricing Officer made the upward adjustment of Rs.3,50,13,068/- for the payment of management and allocation for both the AE's and insurance allocation, i.e. Rs.3,47,66,541/- plus Rs.2,46,527/-. The assessee was intimated regarding the order passed by the Transfer Pricing Officer and the proposed additions. The draft order was passed on 10.02.2014 considering the upward adjustment made by the Transfer Pricing Officer and the same was communicated to the assessee.

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The assessee, being dissatisfied with the order passed by the Transfer Pricing Offiicer, approached the Dispute Resolution Panel, Ahmedabad. The Dispute Resolution Panel, Ahmedabad, vide order dated 28.11.2014, upheld the upward adjustment of Rs.3,50,13,068/- for the payment of management allocation for both the AEs and insurance allocation (i.e. Rs.3,47,66,541/- plus Rs.2,46,527/-) as proposed by the Transfer Pricing Officer. In view of Section 44(C)(10) of the Act, the upward adjustment was added to the total income of the assessee.

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The assessee, being dissatisfied with the order of the Dispute Resolution Panel, preferred an appeal before the Appellate Tribunal. The Appellate Tribunal deleted the addition on account of the upward adjustment made by the Transfer Pricing Officer to the tune of Rs.3,50,13,068/- for the payment of management allocation as referred to above.

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Being dissatisfied with the order passed by the Appellate Tribunal,the Revenue is here before this Court with the present appeal.

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The substantial ground of challenge to the order passed by the Appellate Tribunal, as pleaded in the memo of the tax appeal, is as under:

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“ The decision of the Appellate Tribunal is erroneous. With respect to payment of management fee, the assessee failed to produce evidence in support for allocation of expenditure at 11.7% and also failed to provide the basis of the estimation of time spent by the President Asia Pacific for supervising the operations of the group entities. The assessee failed to demonstrate the claim of ALP of the management fee. No details were submitted to support of the estimation of time spent by the president-Asia Pacific and no basis was submitted for taking the figure of 11.72%. The assessee also failed to submit that how the experience of Mr.Lu was utilized for the benefit of the assessee company. In absence of any documentary evidences and concrete reply of the assessee to justify the receipt of benefit by the assessee from the payment of such management fees (through non submission of evidence to show that President -Asia Pacific had indeed devoted time for supervising the Operations) and in absence of any documentary evidence to justify the arm’s length nature of this payment, the management fee was considered at NIL by the A0 is justified.

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Regarding payment towards allocation of insurance cost,

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the assessee paid an amount of Rs.2,46,527/ on account of insurance premium on public liability. Since there was duplication, the assessee submitted that this payment does not cover any product liability which gets covered from the Master Policy taken by the parent. The assessee has not produced any evidence to substantiate this claim. The assessee neither submitted the actual policy document nor its copy to show that the AE had taken out the insurance covering the assessee’s risk and not only AEs risk though arising through the assessee. The assessee has not clarified as to whether insurance against public liability covers claims arising from defective or malfunctioning of products. Therefore the TPO had considered the payment to the AE as not required by the assessee’s business and duplicate in nature. Therefore the insurance payment to the AE is considered by AO as NIL is justified.

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The tax effect involved in this case is Rs.1,03,93,261/which exceeds the limit as prescribed by the Board vide Circular No.03/2018 dated 11.07.2018”

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The relevant observations made by the Dispute Resolution Panel, in its order dated 28.11.2014 is as follows;

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“It is contended by the assessee that Mr. Lu was a very competent, experienced and highly knowledgeable person whose benefit was utilized by the assessee. However, how the said benefit was utilized was not submitted. Two types of email correspondences were submitted-one showing his involvement in the decision making about the expansion of project related to increase in capacity utilization and the other showing the supervision carried out by him in respect of procurement of lead plates and control of receivables. The fact that he was appointed by the group to oversee the working of the entities in Asia Pacific indicates towards the fact that he is making supervision on account of the parent and thus the activities are in nature of share holding activities. In the emails provided, almost all of them pertain to his approval for placing purchase orders or show the control he exercises in respect of smallest decision making. The fact that even purchase orders are being sent to him for approval signifies the control that

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the parent group is exercising over the subsidiaries. Therefore these activities are more in the nature of supervising activities being undertaken on behalf of the parent rather than any activity which could benefit the assessee. Therefore, it can be seen that the activities being undertaken by Mr. Lu are more in the nature of shareholding activities for the parent group and thus no charge for the same needs to be levied.

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iv. Further the assessee could not justify if such services were indeed required by it or called for by it from the Asia Pacific headquarters or they were simply piled upon it since it was a group entity.

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v. As per para 4.2 of the agreement, as reproduced below, all the expenses incurred by the office of Mr Lu are first required to be allocated to the “beneficiary” entities on the basis of time spent.

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“4.2 The APBA expenses referred to in clause 4.1 above shall be allocated to the Reporting entities on the basis of time spent, which is best estimated and determined by the PAP, on each of the reporting entities in accordance with the business volumes and complexity of operations. The APBA expenses so allocated among the reporting entities as provided in this clause 4.2 shall be shared in accordance with the following ratio (Cost sharing ratio”):-

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GNB-H:2.42%, Exide-China:13.86%, ExideSingapoer:10.29%, GNB-Japan:2.40%, Exide Australia: 44.91%, Exide-New Zealand:10.46%, GNB-India-3.94%, Tudor-Indiazl 1.72%”

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However this estimation of time is to be made by Mr. Lu himself. In respect of this allocation also no documentary evidence was submitted to justify the estimation of time spent by Mr. Lu on the activities of all the subsidiaries. As per the terms of agreement, it is this expenditure which is then shared by the reporting entities. Its further allocation at 11.72% was also could not be substantiated. It was accepted by the assessee that no reconciliation was made subsequently to align the arbitrary figure of 11.72% with the actual time spent by Mr Lu. Even though there was no requirement for such reconciliation, as per the agreement, for the purposes of finding the arms length price for such payment, it is necessarily required.

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The figure was sought to be justified on the basis of proportion of Indian entity sales to the total sales of Asia pacific entities. By taking such a factor into account, the assessee is trying to imply that the entire sales of the Asia Pacific region is on account of the efforts of Mr Lu, which is contrary to the stand taken by them that the allocation was to be made on the basis of estimated time spent by him for supervising the administration of the entities implying thereby that his contribution is only limited to the time provided by him to the subsidiaries. Even if for assumption sake, this is taken into account, the assessee could not substantiate the difference which so remained. The above discussion clearly implies that there is no basis on which such management fees was sought to be allocated by the assessee.

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vi. The assessee has submitted transfer pricing report of Exide Technologies (Shanghai) Co. Ltd., China in Annexure-I to its second reply dated 08.01.2014 to showcause notice stating that “it documents the related party Management service transactions for services provided by Exide China to group entities for F.Y. 2008 to 2013”. The said report does not substantiate the genuineness of the ‘Management Services’, since it is not clear whether the Transfer Pricing authorities of China had accepted this report or not. Even if it is assumed that the TP authorities of China accepted this report, this has no relevance in TP proceedings in India, since the requirement of Indian Income tax law nowhere provides any reliance of transfer pricing report of AE as an evidence for the determination of ALP of any transaction of Indian entity. The Indian entity has to prove the ALP of its transaction analyzing in detail in its own transfer pricing report; while the assessee has failed to analyze in detail the Management services in its report. Again this report only enumerates the nature of the services but doesn't provide any proof of actual services received by the various entities including the assessee.

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On perusal of above, it is clear that the cost sharing is not being made on the basis of time spent, it has been fixed alleged expenses occurred. It is to be noted that the date of signing the agreement is 3.12.2009 while the agreement is stated to be effective on April 1, 2009 (Clause 3.3 of the agreement). This means that the

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agreement is not made prior to rendering any service rather it shows that it is an arrangement after the alleged services have been rendered just to siphon the revenue in the form of cost sharing from the assessee to its AEs. It is interesting to note that in both the agreements, the cost allocation ratio between various countries did not change even by a fraction. It clearly reveals that, cost sharing is not happening on the basis of actual services availed by various entities, rather than it is distributed among them on a fixed ratio, irrespective of whether any services are rendered for them or not or whether any time is spent for them or not. It is also amazing to know that how it is possible for any entity to spend exactly equal amount of time and render equal amount of different services for different countries located in a vast part of the globe i.e. Asia Pacific.

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viii. It is also mentioned here that the assessee has not submitted the working of actual time spent on the basis of alleged cost sharing ratio (for Tudor India 11.72%) is arrived. The documents submitted by the assessee as various annexure to its submission dated 08.10.2013 are mere two agreements. The assessee enclosed some other documents annexed with it called as “Transfer Pricing Questionnaire in support of the service cost method.” for various cost centers. Even on perusal of these questionnaires, it is found that the name/nature of the services is only mentioned, what benefits were obtained by the entities/assessee are not depicted despite the fact that in the heading para, it is requested to describe the procedure and benefits; a sample of the same is reproduced below:

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“Please provide a brief description of the various specific projects you have taken part in during FY 2010 for the benefit of our affiliates in Europe and Asia-Pacific. Please describe the nature, target and benefits from such specific projects. Please also describe how the services provided in general directly benefit Europe and Asia Pacific.”

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In some of the questionnaire, it is also found that for a particular country no services provided are listed despised that it is awarded a share in expenses of management services. For example, for cost centre Finance of APAC, in the tabulated services, the services

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for China, India, Japan, Australasia (Australia & New Zealand) are mentioned but no services of any type for Singapore and Hong Kong are mentioned yet the percentage of time spent for providing management services to Singapore and Hong Kong are mentioned as 10.29% and 2.42% respectively, this further raises doubt on the genuineness of the services rendered and allocation of expenses.

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Therefore, on the basis of the facts mentioned above, it is clear that since there was no requirement for such payment and the assessee somehow wanted to make such payment, it was made on an ad-hoc basis. Further, the assessee submitted Transfer Pricing Report of Exide Technologies (Shanghai) Co. Ltd., China. This document just gives a theoretical analysis of cost digestion which is not substantiated by ample documentary proofs supporting the methodology adopted in this report, in absence of detailed computations and other supporting documentation this report cannot be accepted as a justification of management fee to be at APL. Thus, the asessee fails on both the counts i.e. substantiation of the requirement for such payment with direct and substantial benefit arising out of the same and substantiation of the basis of payment. As a result of the above, the Arms length Price of the management fees paid by the assessee is taken as NIL.

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Similarly, Management fee charged by Exide Technologies Inc, USA is also not justifiable on the basis of reply of the show cause.

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i. During T.P. proceedings for this A.Y. 2010-11, the assessee had submitted ‘Expense Sharing Agreement’ made on 17^th March 2010. In clause 4 of this agreement the terms & Payments were mentioned. The relevant portion is reproduced as below:

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It is to be noted that the date of signing the agreement is 17.03.2010 while the agreement is stated to be effective on April 1, 2009 (Clause 3.3 of the agreement). This means that the cement is not made prior to rendering any service rather it shows that it is an arrangement after the alleged services have been rendered just to siphon the revenue in the form of cost baring from the assessee to its AEs at the end of the year.

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On perusal of above clause of the agreement; it is also clear that the expenses shall be located on the basis of time spent the assessee has not given any documentary evidences for computation of this time spent apart from the questionnaire for transfer pricing which just mentioned the percentage for various countries but is not supported with the evidences that how these percentages have been arrived by various cost centres.”

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The Appellate Tribunal, while allowing the appeal preferred by the assessee took into consideration the fact that the issue stood broadly covered by an order dated 28.12.2017 in the assessee's own case for the A.Y. 2008-09. The Appellate Tribunal incorporated the entire order passed by the Coordinate Bench for the A.Y.2008-09 and, ultimately, held as under:

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“11 We find that the issue is a covered issue by coordinate bench for assessment year 2008-09 though there is a difference on facts inasmuch as expenditure to the extent of 60% was held to be capitalized on the ground that during that year the expenses of Asia Pacific headquarters were also aimed at increasing the installed capacity from 6 lakhs units p.a. to 10 lakhs units p.a. That aspect of the matter, however, is no longer relevant, and that is not even revenue’s case before us. We have also noted that there is no dispute about the rendition of services, but, as in the last year, the dispute is about the services being in the nature of shareholder services. That plea, in our considered view, is wholly unsustainable in law. A core management support service, under a cost contribution arrangement, is inherently outside the limited scope of shareholder services. These services are required for effective administration and management of the assesses company on day to-day basis. Whether assesses needs these services or not or whether assesses derives "substantial benefit" from these services or not is not really relevant. That should be best left to the commercial wisdom of the assesses. What is material is whether the services were rendered or not. and whether or not the cost allocation was on a fair and

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reasonable, even if not wholly precise and accurate, basis and both of these tests are clearly satisfied on the facts of this case. it is also not a case in which benefits are so trivial or illusory that it can be said that the assesses did not derive any benefit from these services at all. The emails, correspondence and other corroborative details clearly show rendition of services, and the allocation being on approximate time basis show reasonableness in allocation of costs. As for the fact that the date of agreement is a date subsequent to commencement of work under the agreement, nothing really turns on it inasmuch as the existence of a formal agreement is not even a sine qua non for a cost contribution arrangement. it is not the case of the revenue that the agreement is not a sham agreement. The agreement may have been formally entered into on a later date but it covers the entire period and there is no dispute about rendition of services. In our considered view, in the light of these discussions and respectfully following the co-ordinate bench decision in assessee's own case for the assessment year 2008-09, we are unable to see any legally sustainable merits in the impugned arm's length price adjustments in respect of management fees. As regards the arm's length price adjustment in respect of insurance premium share, we find that this issue is also covered by the co-ordinate bench decision in assessee’s own case for the assessment year 2008-09 wherein the co-ordinate bench has, inter alia. observed as follows:

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"11. Ground No. 2 & 3 of Revenue's appeal challenges the order of Ld. CIT(A) deleting the upward adjustment of Rs. 5,04, 702/- in relation to payment of allocation of insurance expenditure.

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12. Ld. D.R. supported the order of Ld. A.0. and Ld. counsel for the assessee relied on the fining of Ld. CIT as well as the submissions made before the First Appellate Authority.

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We have heard the rival contentions and perused the record placed before us. We find that the assessee which is also dealing in sale of batteries manufactured by other companies needs to take insurance policy. There are two types of liability namely public liability and product liability and insurance needs to be taken to cover up both

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these liability. Public liability, gets covered by global Insurance policy. We further observe that during the course of proceedings before the lower authorities assessee has submitted the copy of sample insurance and also provided the basis of allocation which is the turnover of the respective subsidiaries. .

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14. We further appreciate the finding of Ld. CIT(A) accepting the basis of turnover as a proper allocation key to proportionately allocate the insurance charges in relation to master insurance policy taken by Exide Technology which takes care of the product liability claim.

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15. We therefore in the given facts and circumstance of the case are of the view that there was no error on the part of assessee claim the allocation of Insurance cost and further there was no duplication of insurance expenditure because they were meant to cover up two types of insurances namely public liability insurance and product liability insurance. We therefore uphold the finding of Ld. CIT (A) and dismiss ground No.2 & 3 raised by the Revenue.”

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12. We see no reason to take any other view of the matter than the view so taken by the co-ordinate bench. Respectfully following the same, we are unable to see any legally sustainable merits in the impugned arm's length price adjustments in respect of insurance premium share as well.”

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Mr. J.P. Shah, the learned senior counsel is on a caveat. Mr. Shah has vehemently opposed this tax appeal. He submitted that having regard to the findings of fact recorded by the Appellate Tribunal, the Revenue should not have preferred the present appeal, more particularly, having regard to the scope of Section 260-A of the Act. Mr. Shah laid much emphasis on the fact that there is no dispute about the rendition of services. According to Mr. Shah, if there is no dispute at the end of the Revenue as regards the rendition of services, then the other issues which were considered by the

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Dispute Resolution Panel would pale into insignificance. He submitted that none of the two questions proposed by the Revenue could be termed as questions of law much less substantial questions of law.

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The Karnataka High Court, in the case of Pr. Commissioner of Income Tax, Bangalore & Ors. vs. Softbrands India P. Ltd ., reported in (2018) 406 ITR 513 had the occasion to consider the special provisions relating to the Avoidance of Tax in Chapter-X of the Act comprising of Sections 92 to 94-B with regard to the assessment to be done for the computation of income from international transactions on the principles of “Arm's Length Price” (ALP) and the relevant Rules for computation of such income under the aforesaid provisions of Chapter-X in the form of Rule 10-A to 10-E in the Income Tax Rules, 1962. We may quote the relevant portion of the judgment;

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“Perspective of International Trade and Transactions:

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4. With the ever increasing international Trade and transactions, particularly, in the Software Industries and Bangalore, being the Silicon Valley of India where many big, small and medium size Software Industries have their Offices and Units in this Software Industry, and Bengaluru is a hub of this Service Industry and essentially the Indian Companies have business linkages with large Companies spread worldwide particularly in the Western Hemisphere of the Globe.

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5. The implementation of the Tax laws in this field in a smooth, clear and quick manner is of utmost importance to build an image of an efficient Tax Administration both at Departmental level and in Judicial Courts so that the economic activity in such borderless trade thrives and enures to the benefit of the Indian economy at large and Software Industry in particular.

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While the special provisions have been made for computation of 'Arm's Length Price' to arrive at a fair assessment of income taxable in the hands of the Indian Resident Companies and these special provisions also provide for an elaborate and in-depth analysis of huge data of the comparable cases of other similarly situated Companies to arrive at a fair 'Arm's Length Price' and for that, Special Cells and designated Authorities have been created under the Income Tax Act, 1961, but still retaining the normal provisions for assessments of appeals in the Indian Income Tax Act about the remedial Forums or the appeal mechanisms and the Income Tax Appellate Tribunal constituted under Section 253 of the Act continues to be the final fact finding body under the Act even with regard to the assessments of the international transactions under the Special Chapter X as aforesaid and the appeal to the Constitutional Courts as provided in Section 260-A to High Court and Section 261 to the Hon'ble Supreme Court are applicable to these special assessments under Chapter X as well. “

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12. In para-11 of the judgment, the Hon'ble Court diluted upon the following three questions;

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“[I] The analysis of the provisions relating to the Transfer Pricing/ determination of the 'Arm's Length Price';

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[II] The Scheme of procedure of assessment and appeals to the Tribunal and High Court/Supreme Court.

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[III] The scope of interference by High Court under Section 260-A of the Act in these type of cases. “

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13. The Court, thereafter, expressed its prima facie opinion as regards the transfer pricing adjustments.

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“Prima Facie Opinion:

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We are of the considered opinion that this entire exercise of making Transfer Pricing Adjustments on the basis of the comparables is nothing but a matter of estimate of a broad and fair guess-work of the Authorities based on relevant material brought before the Authorities including the Appellate Tribunal, but nonetheless the Tribunal being the final fact finding body remains so for this Special Chapter X also and therefore,

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unless this Court is satisfied that a substantial question of law is arising from the order of the Tribunal, the appeal under Section 260-A cannot be entertained at the instance by either the Revenue or the Assessee and the exercise of fact finding or 'Arm's Length Price' determination or 'Transfer Pricing Adjustments' should be allowed to become final with a quietus at the hands of the final fact finding body, i.e. the Tribunal.”

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14. The Court, thereafter, undertook a comparative analysis of Section 260-A of the Act, 1961, Section 100 and Section 103 of the CPC and proceeded to observe as under:

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“16. We would analyze the provisions of Section 260-A of the Act in a little more detail but we are of the firm opinion that the entry into the High Court under Section 260-A of the Act is locked with the words "Substantial questions of law" and the key to open that lock to maintain such appeal can only be the perversity of the findings of the Tribunal in these type of cases and the perversity in the findings not only averred by the appellant before this Court but, established on the basis of cogent material which was available before the Authorities below including the Tribunal and the findings arrived at by the Tribunal can be so held to be perverse within the well settled parameters for determining the same as perverse. It is not allowed to either of the parties, i.e. the Assessee or the Revenue to invoke the jurisdiction of this Court under Section 260-A of the Act merely because the Tribunal comes to reverse or modify the findings given by the lower Authority, viz. Transfer Pricing Officer (TPO) or Dispute Resolution Panel (DRP) which comprises of three Commissioners and the Revenue or the assessee may feel dissatisfied, because of the reversal or modification of such findings by the Tribunal resulting in leaving out of certain comparables or adding on of certain comparables for determining the 'Arm's Length Price' in the hands of the Assessee Company.

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Unless such perversity in the findings of the Tribunal is established we are of the opinion that the appeals under Section 260-A of the Act cannot and should not be

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entertained at the instance of either of the parties and the present cases before us, we find that the Tribunal has given cogent reasons and detailed findings upon discussing each case of comparable corporate properly and therefore, we find ourselves unable to call such findings of the Tribunal perverse in any manner so as to require our interference under Section 260-A of the Act.

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We now take up the analysis of Section 260A of the Act which we have already said is in pari materia with Sections 100 and 103 of the Civil Procedure Code.

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The said provisions are quoted below for ready reference and comparison.

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Section 260-A of the Income Tax Act, 1961 reads as under:

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"260A - Appeal to High Court:

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(1) An appeal shall lie to the High Court from every order passed in appeal by the Appellate Tribunal [before the date of establishment of the National Tax Tribunal], if the High Court is satisfied that the case involves a substantial question of law.

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(2) [The [Principal Chief Commissioner or] Chief Commissioner or the [Principal Commissioner or] Commissioner or an assessee aggrieved by any order passed by the Appellate Tribunal may file an appeal to the High Court and such appeal under this sub-section shall be-]

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(a) filed within one hundred and twenty days from the date on which the order appealed against is [received by the assessee or the [Principal Chief Commissioner or] Chief Commissioner or [Principal Commissioner or] Commissioner];

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(b) [*******]

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[(2A) The High Court may admit an appeal after the expiry of the period of one hundred and twenty days referred to in Clause (a) of sub-section (2), if it is satisfied

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that there was sufficient cause for not filing the same within that period.]

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(3) Where the High Court is satisfied that a substantial question of law is involved in any case, it shall formulate that question.

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(4) The appeal shall be heard only on the question so formulated, and the respondents shall, at the hearing of the appeal, be allowed to argue that the case does not involve such question:

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Provided that nothing in this sub- section shall be deemed to take away or abridge the power of the Court to hear, for reasons to be recorded, the appeal on any other substantial question of law not formulated by it, if it is satisfied that the case involves such question.

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(5) The High Court shall decide the question of law so formulated and deliver such judgment thereon containing the grounds on which such decision is founded and may award such cost as it deems fit.

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(6) The High Court may determine any issue which - (a) has not been determined by the Appellate Tribunal; or

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(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).

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[(7) Save as otherwise provided in this Act, the provisions of the Code of Civil Procedure, 1908 (5 of 1908), relating to appeals to the High Court shall, as far as may be, apply in the case of appeals under this Section.]

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Sections 100 and 103 of the Code of Civil Procedure, 1908 read thus:

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"Section 100 - Second Appeal.

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(1) Save as otherwise expressly provided in the body of this Code or by any other law for the time being in force, an appeal shall lie to the High Court from every decree passed in appeal by any Court subordinate to the High Court, if the High Court is satisfied that the case involves a substantial question of law.

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(2) An appeal may lie under this section from an appellate decree passed ex- parte.

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(3) In an appeal under this section, the memorandum of appeal shall precisely state the substantial question of law involved in the appeal.

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(4) Where the High Court is satisfied that a substantial question of law is involved in any case, it shall formulate the question.

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(5) The appeal shall be heard on the question so formulated and the respondent shall, at the hearing of the appeal, be allowed to argue that the case does not involve such question:

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Provided that nothing in this sub- section shall be deemed to take away or abridge the power of the Court to hear, for reasons to be recorded, the appeal on any other substantial question of law, not formulated by it, if it is satisfied that the case involves such question."

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Section 103 - Power of High Court to determine issues of fact -

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In any second appeal, the High Court may, if the evidence on the record is sufficient, determine any issue necessary for the disposal of the appeal, -

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(a) which has not been determined by the lower Appellate Court or both by the Court of first instance and the lower Appellate Court, or

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(b) which has been wrongly determined by such Court or Courts by reason of a decision on such question of law as is referred to in section 100."

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What is a Substantial Question of Law?

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From a bare comparison of the provisions quoted above and as discussed in various judgments of the Constitutional Courts, which we will refer in brief herein below, it is clear that the Scheme of both Section 260-A in Income Tax Act, 1961 and Section 100 r/w. Section 103 of the Code of Civil Procedure are in pari materia and in same terms.

¶142

The existence of a substantial question of law is sine qua non for maintaining an appeal before the High Court. While the appeal to High Court under Section 260-A of the Act may be a First appeal in the sense from the order of final fact finding by the Tribunal under the Income Tax Act, whereas the Second Appeal on substantial question

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of law before High Court under Section 100 would lie against the Judgment and Decree of the first Appellate Court disposing of an appeal against the Judgment and Decree of a Trial Court, but nonetheless it is the third round of consideration at the level of the High Court, where the facts and law both have been screened, discussed and analyzed by the Authorities or the Courts below and therefore the tenor and color of the words "substantial question of law" in both these enactments remains the same.

¶146

The High Court has power to not only formulate the substantial questions of law and rather it has the duty to do so and can also frame additional substantial questions of law at a later stage, if such a substantial question of law is involved in the appeal before it under these provisions and the appeal should be heard and decided only on such substantial questions of law after allowing the parties to address their arguments on the same. The extended power given to the High Courts to decide even an issue under Sub- section (6) of Section 260-A of the Income Tax Act, which is in pari materia with Section 103 of the Civil Procedure Code and which says that the High Courts may determine any issue which (a)has not been determined by the Tribunal or (b) has been wrongly determined by the Tribunal, can be so determined by the High Court, only if the High Court comes to the conclusion that 'by reason of the decision on substantial question of law rendered by it', such a determination of issue of fact also would be necessary and incidental to the answer given by it to the substantial question of law arising and formulated by it.

¶147

The argument raised by the learned counsel for the Respondent Assessee before us by making a disjuncted reading of Clause (a) and Clause (b) of Sub- Section (6) of Section 260-A of the Income Tax Act, 1961 to submit that the High Court can touch upon the issues of facts also in an appeal under this provision bereft of substantial question of law, is a misconceived argument.

¶148

In our opinion, both the Clause (a) and Clause

¶149

(b) of Sub-Section (6) of Section 260-A of the Act are circumscribed by the words 'by reason of the decision on such question of law as is referred to in Sub- section (1)'. Therefore, even if an issue which has not been determined by the Tribunal, which was required to be so

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determined in terms of the answer to the substantial question of law given by the High Court, such an issue not determined by the Tribunal could also be decided by the High Court with reference to Clause (a) and more so, if such an issue has been wrongly decided according to the answer given by the High Court to such a substantial question of law, then also the High Court can set it right to fall in line with the answer given by the High Court to such a substantial question of law raised before it and determined by it in terms of Clause (b) thereof.

¶153

Sub-section (6) of Section 260-A of the Act, therefore, does not give any extended power, beyond the parameters of the substantial question of law to the High Court to disturb the findings of fact given by the Tribunal below.

¶154

Sub-section (7) inserted in Section 260-A of the Act by the Finance Act of 1999 with effect from 01/06/1999 after a period of about 8 months of substituting the new provisions of Section 260-A to the Act as they now stand by Finance Act of 1998, with effect from 01/10/1998 was only to clarify and support that the parameters of Sections 100 & 103 of the Civil Procedure Code and other provisions of Civil Procedure Code relating to appeals of High Court shall apply to the appeals under Section 260-A of the Income Tax Act also.

¶155

The insertion of Sub-section (7) in Section 260-A of the Act does not give any new or extended powers to the High Court and the pre-existing provisions from Subsection (1) to Sub-section (6) in Section 260-A of the Act already had all the trappings of Sections 100 and 103 of the Civil Procedure Code.

¶156

Case Laws on Substantial Question of Law:

¶157

In the leading and the first and foremost case on the interpretation of Section 100 of the Code of Civil Procedure Code, the Constitution Bench of the Hon'ble Supreme Court in the case of Sir Chunilal V. Mehta and Sons Limited Vs. Century Spinning and Manufacturing Co. Limited AIR 1962 SC 1314, held in para.6 as under:

¶158

"6. We are in general agreement with the view taken by the Madras High Court and we think that while the view taken by the Bombay High Court is rather narrow the one taken by the former High Court of Nagpur is too wide. The proper test for determining whether a question of law

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raised in the case is substantial would, in our opinion, be whether it is of general public importance or whether if directly and substantially affects the rights of the parties and if so whether it is either an open question in the sense that it is not finally settled by this Court or by the Privy Council, or by the Federal Court or is not free from difficulty or calls for discussion of alternative views. If the question is settled by the highest Court or the general principles to be applied in determining the question are well settled and there is a mere question of applying those principles or that the plea raised is palpably absurd the question would not be a substantial question of law."

¶162

In the case of Santosh Hazari Vs. Purushottam Tiwari (Deceased) by LRs., [2001] 3 SCC 179, another Three Judges' Bench of the Honble Supreme Court explained the meaning of the substantial questions of law in paras.11 and 12 in the following manner.

¶163

"11. Even under the old Section 100 of the Code (pre-1976 amendment), a pure finding of fact was not open to challenge before the High Court in second appeal. However the Law Commission noticed a plethora of conflicting judgments. It noted that in dealing with second appeals, the courts were devising and successfully adopting several concepts such as, a mixed question of fact and law, a legal inference to be drawn from facts proved, and even the point that the case has not been properly approached by the courts below. This was creating confusion in the minds of the public as to the legitimate scope of second appeal under Section 100 and had burdened the High courts with an unnecessarily large number of second appeals. Section 100 was, therefore, suggested to be amended so as to provide that the right of second appeal should be confined to cases where a question of law is involved and such question of law is a substantial one. (See Statement of Objects and Reasons.) The Select Committee to which the Amendment Bill was referred felt that the scope of second appeals should be restricted so that litigations may not drag on for a long period. Reasons, of course, are not required to be stated for formulating any question of law under sub-section (4) of Section 100 of the Code; though such reasons are to be recorded under proviso to sub-section (5) while exercising power to hear on any other substantial question of law, other than the one formulated under sub-section (4).

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The phrase "substantial question of law", as occurring in the amended substantial, as qualifying "question of law", means - of having substance, essential, real, of sound worth, important or considerable. It is to be understood as something in contradistinction with - technical, of no substance or consequence, or academic merely. However, it is clear that the legislature has chosen not to qualify the scope of "substantial question of law" by suffixing the words "of general importance" as has been done in many other provisions such as Section 109 of the Code or Article 133(1)(a) of the Constitution. The substantial question of law on which a second appeal shall be heard need not necessarily be a substantial question of law of general importance. In Guran Ditta v. T. Ram Ditta", the phrase "substantial question of law" as it was employed in the last clause of the then existing Section 110 CPC (since omitted by the Amendment Act, 1973) came up for consideration and their Lordships held that it did not mean a substantial question of general importance but a substantial question of law which was involved in the case as between the parties. In Sir Chunilal V. Mehta & Sons Ltd. v. Century Spg. And Mfg. Co. Ltd. the Constitution Bench expressed agreement with the following view taken by a Full Bench of the Madras High Court in Rimmalapudi Subba Rao v. Noony Veeraju."

¶167

In the case of Hero Vinoth (Minor) Vs. Seshammal [2006]5 SCC 545, the Two Judges' Bench of the Hon'ble Supreme Court following the earlier precedents, summarises the principles in the following manner.

¶168

The relevant portion of the said judgment at para.24 is quoted below for ready reference:

¶169

"24. The principles relating to Section 100 CPC relevant for this case may be summarized thus:

¶170

(i) An inference of fact from the recitals or contents of a document is a question of fact.

¶171

But the legal effect of the terms of a document is a question of law. Construction of a document involving the application of any principle of law, is also a question of law. Therefore, when there is misconstruction of a document or wrong application of a principles of law in construing a document, it gives rise to a question of law.

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(ii) The High Court should be satisfied that the case involves a substantial question of law, and not a mere question of law. A question of law having a material bearing on the decision of the case (that is, a question, answer to which affects the rights of parties to the suit) will be a substantial question of law, if it is not covered by any specific provisions of law or settled legal principle emerging from binding precedents, and involves a debatable legal issue. A substantial question of law will also arise in a contrary situation; where the legal position is clear, either on account of express provisions of law or binding precedents, but the Court below has decided the matter, either ignoring or acting contrary to such legal principle. In the second type of cases, the substantial question of law arises not because the law is still debatable, but because the decision rendered on a material question, violates the settled position of law.

¶175

(iii) The general rule is that High Court will not interfere with the concurrent findings of the courts below. But it is not an absolute rule. Some of the well-recognised exceptions are where (i) the courts below have ignored material evidence or acted on no evidence; (ii) the courts have drawn wrong inferences from proved facts by applying the law erroneously; or (iii) the courts have wrongly cast the burden of proof. When we refer to "decision based on no evidence", it not only refers to cases where there is a total dearth of evidence, but also refers to any case, where the evidence, taken as a whole, is not reasonably capable of supporting the finding."

¶176

In the case of Vijay Kumar Talwar Vs. Commissioner of Income Tax, Delhi, [2011] 1 SCC 673, comparing the provisions of Section 260-A of the Act with Section 100 of the Civil Procedure Code, the Hon'ble Supreme Court held that in the absence of demonstrated perversity in the findings of the Tribunal, the Court cannot interfere and a finding of fact may give rise to a substantial question of law, only if it is perverse.

¶177

Paragraphs 23 and 25 of the said judgment is quoted below for ready reference:-

¶178

"23. A finding of fact may give rise to a substantial question of law, inter alia, in the event the findings are based on no evidence and/or while arriving at the said finding, relevant admissible evidence has not been taken into consideration or inadmissible evidence has been

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taken into consideration or legal principles have not been applied in appreciating the evidence, or when the evidence has been misread. (See Madan Lal v. Gopi Narendra Gopal Vidyarthi V. Rajat Vidyarthi, Commr. of Customs v. Vijay Dasharath Patel, Metroark Ltd. v. CCE and W.B. Electricity Regulatory Commission v. CESC Ltd.).

¶182

We are of the opinion that on a conspectus of the factual scenario, noted above, the conclusion of the Tribunal to the effect that the assessee has failed to prove the source of the cash credits cannot be said to be perverse, giving rise to a substantial question of law. The Tribunal being a final fact-finding authority, in the absence of demonstrated perversity in its finding, interference therewith by this Court is not warranted."

¶183

The Court, thereafter, proceeded to explain the scheme of assessment of the Transfer Pricing Cases.

¶184

“Scheme of Assessment of the Transfer Pricing Cases:

¶185

32. Let us briefly now discuss the Scheme of assessment under Chapter X relating to Transfer Pricing cases of International Taxation under these provisions in income arising from international transactions which shall be computed having regard to the 'Arm's Length Price' (Sec.92).

¶186

33. Section 92-A defines an 'Associate Enterprise' viz., the Company which participates directly or indirectly, or through one or more intermediaries, in its Management or control or Capital of the other Enterprise by holding more than 26% of the share holding in such other Enterprises and satisfy the other criterias as stated in Section 92-A of the Act.

¶187

34. The word 'International Transaction' is defined in Section 92-B of the Act.

¶188

35. The most important provision concerning us in this batch of cases is Section 92-C of the Act which provides for 'Computation of Arm's Length Price' and the said provision stipulates that the 'Arm's Length Price' in relation to the international transactions shall be determined by following any of these methods enumerated in Section 92-C of the Act which is considered to be the 'Most Appropriate Method' by the

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Authorities under the Act. The methods provided are: Clause (a): Comparable Uncontrolled Principles Method (CUP);

¶192

Clause (b): Resale Price Method (RP)

¶193

Clause (c): Cost Plus Method (CP)

¶194

Clause (d): Profit Split Method (PS)

¶195

Clause (e): Transactional Net Margin Method (TNMM); and Clause (f): such other Method as may be prescribed by the Board.

¶196

36. It appears from the true facts of the various cases before us and the arguments of the learned counsels that the TNNM Method appears to be the most popular and widely adopted Method for determining the 'Arm's length price' in which the Operating Profit Margin of comparable Companies are considered by the Authorities and applied to the cases of the Assessees to determined the 'Arm's Length Price' and make Transfer Pricing Adjustments.

¶197

Rules 10-A, 10-AB, 10-B, 10-C & 10-CA of the Income Tax Rules, 1962 prescribe the manner for working out 'Arms Length Price' under aforesaid prescribed Methods.

¶198

37. Section 92-CA of the Act envisages that the Assessing Authority, if he considers necessary or expedient so to do, he can with the previous approval of the Principal Commissioner, refer the computation of 'Arm's Length Price' to Transfer Pricing Officer (TPO), another Departmental Authority only, who is supposed to have special knowledge and training for computing the 'Arm's Length Price' in the international transactions. The Report of the Transfer Pricing Officer is binding on the Assessing Authority as per Section 92-CA (4) of the Act, but where the Assessee raises an objection against the Draft Assessment Order of the Assessing Authority based on such Report of the Transfer Pricing Officer, the Assessee Company within 30 days can either accept the said Draft Order or file its objections before the Dispute Resolution Panel (DRP) and the Assessing Officer as per Section 144- C of the Act. The said Dispute Resolution Panel comprises of a Collegium of three Principal Commissioners or Commissioners of Income Tax constituted by the Board

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as defined in Section 144-C (15) of the Act and it has to comply with the principles of natural justice by giving an opportunity of hearing to the Assessees. The order passed by the Assessing Authority in pursuance of the directions of the Dispute Resolution Panel (DRP) is directly appealable to the Income Tax Tribunal under Section 253 (1) (d) of the Act. Section 254 of the Act empowers the Appellate Tribunal to pass such orders on the appeals 'as it thinks fit' after giving an opportunity of hearing to both the parties.

¶202

38. From the aforesaid Scheme of assessment with regard to international transactions, it is clear that the process of determination of 'Arm's Length Price' has to be undertaken by the Expert Wing of the Income Tax Department which is manned by Transfer Pricing Officer (TPO) and at the higher level by a Collegium of three Commissioners in the form of Dispute Resolution Panel (DRP) whose orders on questions of facts are appealable before the highest fact finding body, viz., the Appellate Tribunal.

¶203

39. The process of determination of 'Arm's Length Price' as observed above, necessarily takes into account the comparable cases of other similarly situated or nearly similarly situated Corporate Entities whose data are in public domain or on the Data Bases like Prowess and Capital Line Data Base etc. “

¶204

16. The Court, thereafter, proceeded to discuss whether any substantial question of law could be said to be involved in the matter.

¶205

“No Substantial Question of Law Arises in these Cases:

¶206

40. The dispute essentially before us is the pairing and matching such comparables with the Transfer Pricing Analysis of the profit margins given by the Assessee himself during the course of determination of such 'Arm's Length Price'.

¶207

41. The shades of arguments raised by both the sides before us in these appeals and most of which have been filed by the Revenue are that either the wrong Filters have been applied or Filters have been wrongly applied, particularly qua Turnover Filter giving a far too wide or

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narrower range of comparables or even though comparable Entities were functionally different entities from the Entities in the list of Departmental comparables, as against the comparables sought to be provided by the assessees but the Revenue Department generally insists on their inclusion to get high profit ratio leading to higher Transfer Pricing adjustments, whereas the assessee would like to keep the comparables in a narrower range to justify its Transfer Pricing Analysis and profits declared.

¶211

42. In sum and substance, we find that such an exercise having been undertaken by the Authorities below may have resulted not only in high pitched Transfer Pricing Adjustments in the declared profits of the Assessee, but a flood of such appeals go before the Tribunal itself where finally the inclusion or exclusion of comparables has been determined by the Tribunal on due analysis giving its own reasons.

¶212

43. The contention raised before us that in view of some different views taken by the Tribunal by different Benches at different places, the present appeals under Section 260-A of the Act deserve to be entertained and admitted by this Court for laying down certain Guidelines about the Filters or Most Appropriate Method to be adopted for determination of the 'Arm's length price', does not, in our considered opinion falls within the parameters of the substantial question of law. None of the sides was able to point out any perversity in the Orders of the Appellate Tribunal in this regard.

¶213

44. 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 nor any technical expertise is available with this Court to undertake any such fact finding exercise in the said appeals under Section 260-A 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 260-A of the Act, we cannot disturb those findings of fact under

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Section 260-A of the Act, unless such findings are exfacie perverse and unsustainable and exhibit a total nonapplication of mind by the Tribunal to the relevant facts of the case and evidence before the Tribunal.

¶217

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 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 260-A 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 High Court under Section 260-A 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 duly established with the relevant evidence and facts. Unless it is so, no other key or for that matter, even the in-consistent 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. “

¶218

17. The Court, thereafter, expressed its concern for giving primacy to the Tribunal in the area of fact finding.

¶219

“46. Undoubtedly, the Income Tax Tribunal is the final and highest fact finding body under the Act. It is manned by Expert Members (Judicial Members are selected from District Judges or Advocates and Accountant Members selected from practicing Chartered Accountants or persons of CIT level in the Department). Therefore this quasi-judicial forum is expected and as some of the nicely articulated Judgments and Orders from the Tribunal would indicate, the Orders passed by the Tribunal should normally put an end and quietus to the findings of facts and factual aspects of assessment. The lower Revenue Authorities cannot be allowed to make it their prestige issue, if their stand is not upheld by the Tribunal and agitate against their Orders before the higher Courts by resort to Section 260-A or Section 261 of the Act merely because they are dissatisfied with the

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findings of facts by the Tribunal.

¶223

47. In the case before us now, the pick of comparables, short-listing of them, applying of filters, etc., are all fact finding exercises and therefore the final Orders passed by the Tribunal are binding on the lower Authorities of the Department as well as High Court.

¶224

48. The Tribunal of course is expected to act fairly, reasonably and rationally and should scrupulously avoid perversity in their Orders. It should reflect due application of mind when they assign reasons for returning the particular findings.

¶225

For instance, while dealing with comparables or Filters, if un-equals like Software Giant Infosys or Wipro are compared to a newly established small size Company engaged in Software service, it would obviously be wrong and perverse. The very word "comparable" means that the Group of Entities should be in a homogeneous Group. They should not be wildly dissimilar or unlike or poles apart. Such wild comparisons may result in the best judgment assessment going haywire and directionless wild, which may land up the findings of the Tribunal in the realm of perversity attracting interference under Section 260-A of the Act. “

¶226

18. In the last, the Court concluded as under:

¶227

“The procedure of assessment under Chapter X relating to international transactions as indicated above is already a lengthy one and involves multiple Authorities of the Department. A huge, cumbersome and tenacious exercise of Transfer Pricing Analysis has to be undertaken by the Corporate Entities who have to comply with the various provisions of the Act and Rules with a huge Data Bank and in the first instance they have to satisfy that the profits or the income from transactions declared by them is at 'Arm's length' which analysis is invariably put to test and inquiry by the Authorities of the Department and through the process of Transfer Pricing Officer (TPO) and Dispute Resolution Panel (DRP) and the Tribunal at various stages, the assessee has a cumbersome task of compliance and it has to satisfy the Authorities that what has been declared by them is true and fair disclosure and much of the Transfer Pricing

¶228

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Adjustments is not required but the Tax Authorities have their own view on the other side and the effort on the part of the Tax Revenue Authorities is always to extract more and more revenue. This process of making huge Transfer Pricing Adjustments results in multi- layer litigation at multiple Fora. After the lengthy process of the same, the matter reaches the Tribunal which also takes its own time to decide such appeals. In the course of this dispute resolution, much has already been lost in the form of time, man-hours and money, besides giving an adverse picture of the sluggish Dispute Resolution process through these channels. If appeals under Section 260-A of the Act were to be lightly entertained by High Court against the findings of the Tribunal, without putting it to a strict scrutiny of the existence of the substantial questions of law, it is likely to open the flood-gates for this litigation to spill over on the dockets of the High Courts and up to the Supreme Court, where such further delay may further cause serious damage to the demand of expeditious judicial dispensation in such cases.

¶231

Conclusion:

¶232

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 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.

¶233

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

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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.

¶237

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 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. “

¶238

19. The Delhi High Court, in the case of CIT vs. EKL Appliances Ltd. , reported in (2012) 345 ITR 241 (Delhi) , in context with Section 92CA of the Act, had observed as under:

¶239

“It seems to us that the decision taken by the Tribunal is the right decision. The TPO applied the CUP method while examining the payment of brand fee/ royalty. The CUP method which in its expanded form is known as "comparable uncontrolled price" method is provided for in Rule 10B(1)(a) of the Income Tax Rules, 1962. It is one of the methods recognised for determining the ALP in relation to an international transaction. Rule 10B(1) says that for the purposes of Section 92C(2), the ALP shall be determined by any one of the five methods, which is found to be the most appropriate method, and goes on to lay down the manner of determination of the ALP under each method. The five methods recognized by the rule are (i) comparable uncontrolled price method (CUP), (ii) re-sale price method, (iii) cost plus method, (iv) profit split method and (v) transactional net marginal method (TNMM). The manner by which the ALP in relation to an international transaction is determined under CUP is prescribed in clause (a) of the sub-rule (1) of Rule 10B. The following three steps have been prescribed: -

¶240

"(a) comparable uncontrolled price method, by which,

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(i) the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified;

¶244

(ii) such price is adjusted to account for differences, if any, between the international transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market;

¶245

(iii) the adjusted price arrived at under sub- clause (ii) is taken to be an arm's length price in respect of the property transferred or services provided in the international transaction;"

¶246

The Organization for Economic Co-operation and Development (“OECD‟, for short) has laid down "transfer pricing guidelines" for Multi-National Enterprises and Tax Administrations. These guidelines give an introduction to the arm‟s length price principle and explains article 9 of the OECD Model Tax Convention. This article provides that when conditions are made or imposed between two associated enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises then any profit which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, if not so accrued, may be included in the profits of that enterprise and taxed accordingly. By seeking to adjust the profits in the above manner, the arm‟s length principle of pricing follows the approach of treating the members of a multi-national enterprise group as operating as separate entities rather than as inseparable parts of a single unified business. After referring to article 9 of the model convention and stating the arm‟s length principle, the guidelines provide for "recognition of the actual transactions undertaken" in paragraphs 1.36 to 1.41. Paragraphs 1.36 to 1.38 are important and are relevant to our purpose. These paragraphs are reproduced below: -

¶247

"1.36 A tax administration's examination of a controlled transaction ordinarily should be based on the transaction actually undertaken by the associated enterprises as it has been structured by them, using the methods applied

¶248

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by the taxpayer insofar as these are consistent with the methods described in Chapters II and III. In other than exceptional cases, the tax administration should not disregard the actual transactions or substitute other transactions for them. Restructuring of legitimate business transactions would be a wholly arbitrary exercise the inequity of which could be compounded by double taxation created where the other tax administration does not share the same views as to how the transaction should be structured.

¶251

1.37 However, there are two particular circumstances in which it may, exceptionally, be both appropriate and legitimate for a tax administration to consider disregarding the structure adopted by a taxpayer in entering into a controlled transaction. The first circumstance arises where the economic substance of a transaction differs from its form. In such a case the tax administration may disregard the parties' characterization of the transaction and re-characterise it in accordance with its substance. An example of this circumstance would be an investment in an associated enterprise in the form of interest-bearing debt when, at arm's length, having regard to the economic circumstances of the borrowing company, the investment would not be expected to be structured in this way. In this case it might be appropriate for a tax administration to characterize the investment in accordance with its economic substance with the result that the loan may be treated as a subscription of capital. The second circumstance arises where, while the form and substance of the transaction are the same, the arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner and the actual structure practically impedes the tax administration from determining an appropriate transfer price. An example of this circumstance would be a sale under a long-term contract, for a lump sum payment, of unlimited entitlement to the intellectual property rights arising as a result of future research for the term of the contract (as previously indicated in paragraph 1.10). While in this case it may be proper to respect the transaction as a transfer of commercial property, it would nevertheless be appropriate for a tax administration to conform the terms

¶252

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of that transfer in their entirety (and not simply by reference to pricing) to those that might reasonably have been expected had the transfer of property been the subject of a transaction involving independent enterprises. Thus, in the case described above it might be appropriate for the tax administration, for example, to adjust the conditions of the agreement in a commercially rational manner as a continuing research agreement.

¶255

1.38 In both sets of circumstances described above, the character of the transaction may derive from the relationship between the parties rather than be determined by normal commercial conditions as may have been structured by the taxpayer to avoid or minimize tax. In such cases, the totality of its terms would be the result of a condition that would not have been made if the parties had been engaged in arm's length dealings. Article 9 would thus allow an adjustment of conditions to reflect those which the parties would have attained had the transaction been structured in accordance with the economic and commercial reality of parties dealing at arm's length."

¶256

The significance of the aforesaid guidelines lies in the fact that they recognise that barring exceptional cases, the tax administration should not disregard the actual transaction or substitute other transactions for them and the examination of a controlled transaction should ordinarily be based on the transaction as it has been actually undertaken and structured by the associated enterprises. It is of further significance that the guidelines discourage re-structuring of legitimate business transactions. The reason for characterisation of such restructuring as an arbitrary exercise, as given in the guidelines, is that it has the potential to create double taxation if the other tax administration does not share the same view as to how the transaction should be structured.

¶257

Two exceptions have been allowed to the aforesaid principle and they are (i) where the economic substance of a transaction differs from its form and (ii) where the form and substance of the transaction are the same but arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a

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commercially rational manner.

¶261

There is no reason why the OECD guidelines should not be taken as a valid input in the present case in judging the action of the TPO. In fact, the CIT (Appeals) has referred to and applied them and his decision has been affirmed by the Tribunal. These guidelines, in a different form, have been recognized in the tax jurisprudence of our country earlier. It has been held by our courts that it is not for the revenue authorities to dictate to the assessee as to how he should conduct his business and it is not for them to tell the assessee as to what expenditure the assessee can incur. We may refer to a few of these authorities to elucidate the point. In Eastern Investment Ltd. v. CIT, (1951) 20 ITR 1, it was held by the Supreme Court that "there are usually many ways in which a given thing can be brought about in business circles but it is not for the Court to decide which of them should have been employed when the Court is deciding a question under Section 12(2) of the Income Tax Act". It was further held in this case that "it is not necessary to show that the expenditure was a profitable one or that in fact any profit was earned". In CIT v. Walchand & Co. etc., (1967) 65 ITR 381, it was held by the Supreme Court that in applying the test of commercial expediency for determining whether the expenditure was wholly and exclusively laid out for the purpose of business, reasonableness of the expenditure has to be judged from the point of view of the businessman and not of the Revenue. It was further observed that the rule that expenditure can only be justified if there is corresponding increase in the profits was erroneous. It has been classically observed by Lord Thankerton in Hughes v. Bank of New Zealand, (1938) 6 ITR 636 that "expenditure in the course of the trade which is unremunerative is none the less a proper deduction if wholly and exclusively made for the purposes of trade. It does not require the presence of a receipt on the credit side to justify the deduction of an expense". The question whether an expenditure can be allowed as a deduction only if it has resulted in any income or profits came to be considered by the Supreme Court again in CIT v. Rajendra Prasad Moody, (1978) 115 ITR 519, and it was observed as under: -

¶262

"We fail to appreciate how expenditure which is otherwise a proper expenditure can cease to be such

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merely because there is no receipt of income. Whatever is a proper outgoing by way of expenditure must be debited irrespective of whether there is receipt of income or not. That is the plain requirement of proper accounting and the interpretation of Section 57(iii) cannot be different. The deduction of the expenditure cannot, in the circumstances, be held to be conditional upon the making or earning of the income."

¶266

It is noteworthy that the above observations were made in the context of Section 57(iii) of the Act where the language is somewhat narrower than the language employed in Section 37(1) of the Act. This fact is recognised in the judgment itself. The fact that the language employed in Section 37(1) of the Act is broader than Section 57(iii) of the Act makes the position stronger.

¶267

In the case of Sassoon J. David & Co. Pvt. Ltd. v. CIT, (1979) 118 ITR 261 (SC), the Supreme Court referred to the legislative history and noted that when the Income Tax Bill of 1961 was introduced, Section 37(1) required that the expenditure should have been incurred "wholly, necessarily and exclusively" for the purposes of business in order to merit deduction. Pursuant to public protest, the word "necessarily" was omitted from the section.

¶268

The position emerging from the above decisions is that it is not necessary for the assessee to show that any legitimate expenditure incurred by him was also incurred out of necessity. It is also not necessary for the assessee to show that any expenditure incurred by him for the purpose of business carried on by him has actually resulted in profit or income either in the same year or in any of the subsequent years. The only condition is that the expenditure should have been incurred "wholly and exclusively" for the purpose of business and nothing more. It is this principle that inter alia finds expression in the OECD guidelines, in the paragraphs which we have quoted above.

¶269

Even Rule 10B(1)(a) does not authorise disallowance of any expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same or that in the view of the Revenue the expenditure was unremunerative or that in view of the continued losses suffered by the assessee in his business, he could have

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fared better had he not incurred such expenditure. These are irrelevant considerations for the purpose of Rule 10B. Whether or not to enter into the transaction is for the assessee to decide. The quantum of expenditure can no doubt be examined by the TPO as per law but in judging the allowability thereof as business expenditure, he has no authority to disallow the entire expenditure or a part thereof on the ground that the assessee has suffered continuous losses. The financial health of assessee can never be a criterion to judge allowability of an expense; there is certainly no authority for that. What the TPO has done in the present case is to hold that the assessee ought not to have entered into the agreement to pay royalty/ brand fee, because it has been suffering losses continuously. So long as the expenditure or payment has been demonstrated to have been incurred or laid out for the purposes of business, it is no concern of the TPO to disallow the same on any extraneous reasoning. As provided in the OECD guidelines, he is expected to examine the international transaction as he actually finds the same and then make suitable adjustment but a wholesale disallowance of the expenditure, particularly on the grounds which have been given by the TPO is not contemplated or authorised.

¶273

Apart from the legal position stated above, even on merits the disallowance of the entire brand fee/ royalty payment was not warranted. The assessee has furnished copious material and valid reasons as to why it was suffering losses continuously and these have been referred to by us earlier. Full justification supported by facts and figures have been given to demonstrate that the increase in the employees cost, finance charges, administrative expenses, depreciation cost and capacity increase have contributed to the continuous losses. The comparative position over a period of 5 years from 1998 to 2003 with relevant figures have been given before the CIT (Appeals) and they are referred to in a tabular form in his order in paragraph 5.5.1. In fact there are four tabular statements furnished by the assessee before the CIT (Appeals) in support of the reasons for the continuous losses. There is no material brought by the revenue either before the CIT (Appeals) or before the Tribunal or even before us to show that these are incorrect figures or that even on merits the reasons for the losses are not genuine.

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We are, therefore, unable to hold that the Tribunal committed any error in confirming the order of the CIT (Appeals) for both the years deleting the disallowance of the brand fee/ royalty payment while determining the ALP. Accordingly, the substantial questions of law are answered in the affirmative and in favour of the assessee and against the Revenue. The appeals are accordingly dismissed with no order as to costs. “

¶277

We are of the view that the findings of fact recorded by the Tribunal in its impugned order cannot be termed as perverse or contrary to the evidence on record. The very same issue was duly considered by the ITAT vide order dated 28.12.2017 for the A.Y. 2008-09. However, according to the learned counsel appearing for the Revenue, having regard to the low tax effect, the order passed by the ITAT for the A.Y. 2008-09 could not be challenged.

¶278

In the overall view of the matter, we are convinced that the decision of the Tribunal is correct and requires no interference.

¶279

The Tribunal took into consideration the voluminous documentary evidence on record in the form of e-mails correspondence indicating the rendition of services. The Tribunal is right in its view that the assessee would be the right person to know whether the services are required or not. Such issues should be left best to the commercial wisdom of the assessee. What is important is whether the services were rendered or not and whether the cost allocation was on a fair and reasonable basis. In the case on hand, the rendition of services has not been disputed. However, lot of emphasis has been put on the issue of Arm's length price in respect of the

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management fees. This aspect has also been well discussed by the Tribunal.

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