C/TAXAP/106/2019 ORDER IN HIGH COURT OF GUJARAT AT AHMEDABAD R/TAX APPEAL NO. 106 of 2019 PRINCIPAL COMMISSIONER OF INCOME TAX GANDHINAGAR Versus TUDOR INDIA PRIVATE LIMITED Appearance: MRS MAUNA M BHATT(174) for Appellant(s) No. 1 MR MANISH J SHAH(1320) for Opponent(s) No. 1 CORAM: HONOURABLE MR.JUSTICE J.B.PARDIWALA and HONOURABLE MR.JUSTICE A.C. RAO Date : 27/08/2019 ORAL ORDER (PER : HONOURABLE MR.JUSTICE J.B.PARDIWALA) 1. This tax appeal under Section 260-A of Income Tax Act, 1961 (for short Act, 1961 ) is at instance of revenue and is directed against order passed by Income Tax Appellate Tribunal, Ahmedabad 'D' Bench, Ahmedabad dated 07.09.2018 in ITA No.381/Ahd/2015 for A.Y. 2010-11. 2. Revenue has proposed following two questions of law for consideration of this Court; (A) Whether Appellate Tribunal has erred in law and on facts o case in deleting upward adjustment amounting to Rs.3,47,66,541/- made by Transfer Pricing Officer on account of Management fees? (B) Whether Appellate Tribunal has erred in law and on facts in deleting upward adjustment Page 1 of 38 Downloaded on : Tue Jan 28 12:18:19 IST 2020 C/TAXAP/106/2019 ORDER amounting to Rs.2,46,527/- made by Transfer Pricing Officer on account of Insurance Payment? 3. It appears from materials on record that assessee filed its return of income on 29.10.2010, declaring total income at Rs. NIL and showed book profit of Rs.2,64,64,686/- under Section 115JB of Act. case was selected for scrutiny and, accordingly, notice under Section 143(2) of Act was issued. case was referred to Transfer Pricing Officer as per Section 92CA of Act. Transfer Pricing Officer made upward adjustment of Rs.3,50,13,068/- for payment of management and allocation for both AE's and insurance allocation, i.e. Rs.3,47,66,541/- plus Rs.2,46,527/-. assessee was intimated regarding order passed by Transfer Pricing Officer and proposed additions. draft order was passed on 10.02.2014 considering upward adjustment made by Transfer Pricing Officer and same was communicated to assessee. 4. assessee, being dissatisfied with order passed by Transfer Pricing Offiicer, approached Dispute Resolution Panel, Ahmedabad. Dispute Resolution Panel, Ahmedabad, vide order dated 28.11.2014, upheld upward adjustment of Rs.3,50,13,068/- for payment of management allocation for both AEs and insurance allocation (i.e. Rs.3,47,66,541/- plus Rs.2,46,527/-) as proposed by Transfer Pricing Officer. In view of Section 44(C)(10) of Act, upward adjustment was added to total income of assessee. Page 2 of 38 Downloaded on : Tue Jan 28 12:18:19 IST 2020 C/TAXAP/106/2019 ORDER 5. assessee, being dissatisfied with order of Dispute Resolution Panel, preferred appeal before Appellate Tribunal. Appellate Tribunal deleted addition on account of upward adjustment made by Transfer Pricing Officer to tune of Rs.3,50,13,068/- for payment of management allocation as referred to above. 6. Being dissatisfied with order passed by Appellate Tribunal,the Revenue is here before this Court with present appeal. 7. substantial ground of challenge to order passed by Appellate Tribunal, as pleaded in memo of tax appeal, is as under: decision of Appellate Tribunal is erroneous. With respect to payment of management fee, assessee failed to produce evidence in support for allocation of expenditure at 11.7% and also failed to provide basis of estimation of time spent by President Asia Pacific for supervising operations of group entities. assessee failed to demonstrate claim of ALP of management fee. No details were submitted to support of estimation of time spent by president-Asia Pacific and no basis was submitted for taking figure of 11.72%. assessee also failed to submit that how experience of Mr.Lu was utilized for benefit of assessee company. In absence of any documentary evidences and concrete reply of assessee to justify receipt of benefit by assessee from payment of such management fees (through non submission of evidence to show that President -Asia Pacific had indeed devoted time for supervising Operations) and in absence of any documentary evidence to justify arm s length nature of this payment, management fee was considered at NIL by A0 is justified. Regarding payment towards allocation of insurance cost, Page 3 of 38 Downloaded on : Tue Jan 28 12:18:19 IST 2020 C/TAXAP/106/2019 ORDER assessee paid amount of Rs.2,46,527/ on account of insurance premium on public liability. Since there was duplication, assessee submitted that this payment does not cover any product liability which gets covered from Master Policy taken by parent. assessee has not produced any evidence to substantiate this claim. assessee neither submitted actual policy document nor its copy to show that AE had taken out insurance covering assessee s risk and not only AEs risk though arising through assessee. assessee has not clarified as to whether insurance against public liability covers claims arising from defective or malfunctioning of products. Therefore TPO had considered payment to AE as not required by assessee s business and duplicate in nature. Therefore insurance payment to AE is considered by AO as NIL is justified. tax effect involved in this case is Rs.1,03,93,261/- which exceeds limit as prescribed by Board vide Circular No.03/2018 dated 11.07.2018 8. relevant observations made by Dispute Resolution Panel, in its order dated 28.11.2014 is as follows; It is contended by assessee that Mr. Lu was very competent, experienced and highly knowledgeable person whose benefit was utilized by assessee. However, how said benefit was utilized was not submitted. Two types of email correspondences were submitted-one showing his involvement in decision making about expansion of project related to increase in capacity utilization and other showing supervision carried out by him in respect of procurement of lead plates and control of receivables. fact that he was appointed by group to oversee working of entities in Asia Pacific indicates towards fact that he is making supervision on account of parent and thus activities are in nature of share holding activities. In emails provided, almost all of them pertain to his approval for placing purchase orders or show control he exercises in respect of smallest decision making. fact that even purchase orders are being sent to him for approval signifies control that Page 4 of 38 Downloaded on : Tue Jan 28 12:18:19 IST 2020 C/TAXAP/106/2019 ORDER parent group is exercising over subsidiaries. Therefore these activities are more in nature of supervising activities being undertaken on behalf of parent rather than any activity which could benefit assessee. Therefore, it can be seen that activities being undertaken by Mr. Lu are more in nature of shareholding activities for parent group and thus no charge for same needs to be levied. iv. Further assessee could not justify if such services were indeed required by it or called for by it from Asia Pacific headquarters or they were simply piled upon it since it was group entity. v. As per para 4.2 of agreement, as reproduced below, all expenses incurred by office of Mr Lu are first required to be allocated to beneficiary entities on basis of time spent. 4.2 APBA expenses referred to in clause 4.1 above shall be allocated to Reporting entities on basis of time spent, which is best estimated and determined by PAP, on each of reporting entities in accordance with business volumes and complexity of operations. APBA expenses so allocated among reporting entities as provided in this clause 4.2 shall be shared in accordance with following ratio (Cost sharing ratio ):- GNB-H:2.42%, Exide-China:13.86%, Exide- Singapoer:10.29%, GNB-Japan:2.40%, Exide Australia: 44.91%, Exide-New Zealand:10.46%, GNB-India-3.94%, Tudor-Indiazl 1.72% 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 estimation of time spent by Mr. Lu on activities of all subsidiaries. As per terms of agreement, it is this expenditure which is then shared by reporting entities. Its further allocation at 11.72% was also could not be substantiated. It was accepted by assessee that no reconciliation was made subsequently to align arbitrary figure of 11.72% with actual time spent by Mr Lu. Even though there was no requirement for such reconciliation, as per agreement, for purposes of finding arms length price for such payment, it is necessarily required. Page 5 of 38 Downloaded on : Tue Jan 28 12:18:19 IST 2020 C/TAXAP/106/2019 ORDER figure was sought to be justified on basis of proportion of Indian entity sales to total sales of Asia pacific entities. By taking such factor into account, assessee is trying to imply that entire sales of Asia Pacific region is on account of efforts of Mr Lu, which is contrary to stand taken by them that allocation was to be made on basis of estimated time spent by him for supervising administration of entities implying thereby that his contribution is only limited to time provided by him to subsidiaries. Even if for assumption sake, this is taken into account, assessee could not substantiate difference which so remained. above discussion clearly implies that there is no basis on which such management fees was sought to be allocated by assessee. vi. 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 show- cause notice stating that it documents related party Management service transactions for services provided by Exide China to group entities for F.Y. 2008 to 2013 . said report does not substantiate genuineness of Management Services , since it is not clear whether Transfer Pricing authorities of China had accepted this report or not. Even if it is assumed that TP authorities of China accepted this report, this has no relevance in TP proceedings in India, since requirement of Indian Income tax law nowhere provides any reliance of transfer pricing report of AE as evidence for determination of ALP of any transaction of Indian entity. Indian entity has to prove ALP of its transaction analyzing in detail in its own transfer pricing report; while assessee has failed to analyze in detail Management services in its report. Again this report only enumerates nature of services but doesn't provide any proof of actual services received by various entities including assessee. On perusal of above, it is clear that cost sharing is not being made on basis of time spent, it has been fixed alleged expenses occurred. It is to be noted that date of signing agreement is 3.12.2009 while agreement is stated to be effective on April 1, 2009 (Clause 3.3 of agreement). This means that Page 6 of 38 Downloaded on : Tue Jan 28 12:18:19 IST 2020 C/TAXAP/106/2019 ORDER agreement is not made prior to rendering any service rather it shows that it is arrangement after alleged services have been rendered just to siphon revenue in form of cost sharing from assessee to its AEs. It is interesting to note that in both agreements, cost allocation ratio between various countries did not change even by fraction. It clearly reveals that, cost sharing is not happening on basis of actual services availed by various entities, rather than it is distributed among them on 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 vast part of globe i.e. Asia Pacific. viii. It is also mentioned here that assessee has not submitted working of actual time spent on basis of alleged cost sharing ratio (for Tudor India 11.72%) is arrived. documents submitted by assessee as various annexure to its submission dated 08.10.2013 are mere two agreements. assessee enclosed some other documents annexed with it called as Transfer Pricing Questionnaire in support of service cost method. for various cost centers. Even on perusal of these questionnaires, it is found that name/nature of services is only mentioned, what benefits were obtained by entities/assessee are not depicted despite fact that in heading para, it is requested to describe procedure and benefits; sample of same is reproduced below: Please provide brief description of various specific projects you have taken part in during FY 2010 for benefit of our affiliates in Europe and Asia-Pacific. Please describe nature, target and benefits from such specific projects. Please also describe how services provided in general directly benefit Europe and Asia Pacific. In some of questionnaire, it is also found that for particular country no services provided are listed despised that it is awarded share in expenses of management services. For example, for cost centre Finance of APAC, in tabulated services, services Page 7 of 38 Downloaded on : Tue Jan 28 12:18:19 IST 2020 C/TAXAP/106/2019 ORDER for China, India, Japan, Australasia (Australia & New Zealand) are mentioned but no services of any type for Singapore and Hong Kong are mentioned yet 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 genuineness of services rendered and allocation of expenses. Therefore, on basis of facts mentioned above, it is clear that since there was no requirement for such payment and assessee somehow wanted to make such payment, it was made on ad-hoc basis. Further, assessee submitted Transfer Pricing Report of Exide Technologies (Shanghai) Co. Ltd., China. This document just gives theoretical analysis of cost digestion which is not substantiated by ample documentary proofs supporting methodology adopted in this report, in absence of detailed computations and other supporting documentation this report cannot be accepted as justification of management fee to be at APL. Thus, asessee fails on both counts i.e. substantiation of requirement for such payment with direct and substantial benefit arising out of same and substantiation of basis of payment. As result of above, Arms length Price of management fees paid by assessee is taken as NIL. Similarly, Management fee charged by Exide Technologies Inc, USA is also not justifiable on basis of reply of show cause. i. During T.P. proceedings for this A.Y. 2010-11, assessee had submitted Expense Sharing Agreement made on 17th March 2010. In clause 4 of this agreement terms & Payments were mentioned. relevant portion is reproduced as below: It is to be noted that date of signing agreement is 17.03.2010 while agreement is stated to be effective on April 1, 2009 (Clause 3.3 of agreement). This means that cement is not made prior to rendering any service rather it shows that it is arrangement after alleged services have been rendered just to siphon revenue in form of cost baring from assessee to its AEs at end of year. Page 8 of 38 Downloaded on : Tue Jan 28 12:18:19 IST 2020 C/TAXAP/106/2019 ORDER On perusal of above clause of agreement; it is also clear that expenses shall be located on basis of time spent assessee has not given any documentary evidences for computation of this time spent apart from questionnaire for transfer pricing which just mentioned percentage for various countries but is not supported with evidences that how these percentages have been arrived by various cost centres. 9. Appellate Tribunal, while allowing appeal preferred by assessee took into consideration fact that issue stood broadly covered by order dated 28.12.2017 in assessee's own case for A.Y. 2008-09. Appellate Tribunal incorporated entire order passed by Coordinate Bench for A.Y.2008-09 and, ultimately, held as under: 11 We find that issue is covered issue by co- ordinate bench for assessment year 2008-09 though there is difference on facts inasmuch as expenditure to extent of 60% was held to be capitalized on ground that during that year expenses of Asia Pacific headquarters were also aimed at increasing installed capacity from 6 lakhs units p.a. to 10 lakhs units p.a. That aspect of 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 rendition of services, but, as in last year, dispute is about services being in nature of shareholder services. That plea, in our considered view, is wholly unsustainable in law. core management support service, under cost contribution arrangement, is inherently outside limited scope of shareholder services. These services are required for effective administration and management of 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 commercial wisdom of assesses. What is material is whether services were rendered or not. and whether or not cost allocation was on fair and Page 9 of 38 Downloaded on : Tue Jan 28 12:18:19 IST 2020 C/TAXAP/106/2019 ORDER reasonable, even if not wholly precise and accurate, basis and both of these tests are clearly satisfied on facts of this case. it is also not case in which benefits are so trivial or illusory that it can be said that assesses did not derive any benefit from these services at all. emails, correspondence and other corroborative details clearly show rendition of services, and allocation being on approximate time basis show reasonableness in allocation of costs. As for fact that date of agreement is date subsequent to commencement of work under agreement, nothing really turns on it inasmuch as existence of formal agreement is not even sine qua non for cost contribution arrangement. it is not case of revenue that agreement is not sham agreement. agreement may have been formally entered into on later date but it covers entire period and there is no dispute about rendition of services. In our considered view, in light of these discussions and respectfully following co-ordinate bench decision in assessee's own case for assessment year 2008-09, we are unable to see any legally sustainable merits in impugned arm's length price adjustments in respect of management fees. As regards arm's length price adjustment in respect of insurance premium share, we find that this issue is also covered by co-ordinate bench decision in assessee s own case for assessment year 2008-09 wherein co-ordinate bench has, inter alia. observed as follows: "11. Ground No. 2 & 3 of Revenue's appeal challenges order of Ld. CIT(A) deleting upward adjustment of Rs. 5,04, 702/- in relation to payment of allocation of insurance expenditure. 12. Ld. D.R. supported order of Ld. A.0. and Ld. counsel for assessee relied on fining of Ld. CIT as well as submissions made before First Appellate Authority. We have heard rival contentions and perused record placed before us. We find that 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 Page 10 of 38 Downloaded on : Tue Jan 28 12:18:19 IST 2020 C/TAXAP/106/2019 ORDER these liability. Public liability, gets covered by global Insurance policy. We further observe that during course of proceedings before lower authorities assessee has submitted copy of sample insurance and also provided basis of allocation which is turnover of respective subsidiaries. . 14. We further appreciate finding of Ld. CIT(A) accepting basis of turnover as proper allocation key to proportionately allocate insurance charges in relation to master insurance policy taken by Exide Technology which takes care of product liability claim. 15. We therefore in given facts and circumstance of case are of view that there was no error on part of assessee claim 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 finding of Ld. CIT (A) and dismiss ground No.2 & 3 raised by Revenue. 12. We see no reason to take any other view of matter than view so taken by co-ordinate bench. Respectfully following same, we are unable to see any legally sustainable merits in impugned arm's length price adjustments in respect of insurance premium share as well. 10. Mr. J.P. Shah, learned senior counsel is on caveat. Mr. Shah has vehemently opposed this tax appeal. He submitted that having regard to findings of fact recorded by Appellate Tribunal, Revenue should not have preferred present appeal, more particularly, having regard to scope of Section 260-A of Act. Mr. Shah laid much emphasis on fact that there is no dispute about rendition of services. According to Mr. Shah, if there is no dispute at end of Revenue as regards rendition of services, then other issues which were considered by Page 11 of 38 Downloaded on : Tue Jan 28 12:18:19 IST 2020 C/TAXAP/106/2019 ORDER Dispute Resolution Panel would pale into insignificance. He submitted that none of two questions proposed by Revenue could be termed as questions of law much less substantial questions of law. 11. Karnataka High Court, in case of Pr. Commissioner of Income Tax, Bangalore & Ors. vs. Softbrands India P. Ltd., reported in (2018) 406 ITR 513 had occasion to consider special provisions relating to Avoidance of Tax in Chapter-X of Act comprising of Sections 92 to 94-B with regard to assessment to be done for computation of income from international transactions on principles of Arm's Length Price (ALP) and relevant Rules for computation of such income under aforesaid provisions of Chapter-X in form of Rule 10-A to 10-E in Income Tax Rules, 1962. We may quote relevant portion of judgment; Perspective of International Trade and Transactions: 4. With ever increasing international Trade and transactions, particularly, in Software Industries and Bangalore, being 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 hub of this Service Industry and essentially Indian Companies have business linkages with large Companies spread worldwide particularly in Western Hemisphere of Globe. 5. implementation of Tax laws in this field in smooth, clear and quick manner is of utmost importance to build image of efficient Tax Administration both at Departmental level and in Judicial Courts so that economic activity in such borderless trade thrives and enures to benefit of Indian economy at large and Software Industry in particular. Page 12 of 38 Downloaded on : Tue Jan 28 12:18:19 IST 2020 C/TAXAP/106/2019 ORDER While special provisions have been made for computation of 'Arm's Length Price' to arrive at fair assessment of income taxable in hands of Indian Resident Companies and these special provisions also provide for elaborate and in-depth analysis of huge data of comparable cases of other similarly situated Companies to arrive at fair 'Arm's Length Price' and for that, Special Cells and designated Authorities have been created under Income Tax Act, 1961, but still retaining normal provisions for assessments of appeals in Indian Income Tax Act about remedial Forums or appeal mechanisms and Income Tax Appellate Tribunal constituted under Section 253 of Act continues to be final fact finding body under Act even with regard to assessments of international transactions under Special Chapter X as aforesaid and appeal to Constitutional Courts as provided in Section 260-A to High Court and Section 261 to Hon'ble Supreme Court are applicable to these special assessments under Chapter X as well. 12. In para-11 of judgment, Hon'ble Court diluted upon following three questions; [I] analysis of provisions relating to Transfer Pricing/ determination of 'Arm's Length Price'; [II] Scheme of procedure of assessment and appeals to Tribunal and High Court/Supreme Court. [III] scope of interference by High Court under Section 260-A of Act in these type of cases. 13. Court, thereafter, expressed its prima facie opinion as regards transfer pricing adjustments. Prima Facie Opinion: 15. We are of considered opinion that this entire exercise of making Transfer Pricing Adjustments on basis of comparables is nothing but matter of estimate of broad and fair guess-work of Authorities based on relevant material brought before Authorities including Appellate Tribunal, but nonetheless Tribunal being final fact finding body remains so for this Special Chapter X also and therefore, Page 13 of 38 Downloaded on : Tue Jan 28 12:18:19 IST 2020 C/TAXAP/106/2019 ORDER unless this Court is satisfied that substantial question of law is arising from order of Tribunal, appeal under Section 260-A cannot be entertained at instance by either Revenue or Assessee and exercise of fact finding or 'Arm's Length Price' determination or 'Transfer Pricing Adjustments' should be allowed to become final with quietus at hands of final fact finding body, i.e. Tribunal. 14. Court, thereafter, undertook comparative analysis of Section 260-A of Act, 1961, Section 100 and Section 103 of CPC and proceeded to observe as under: 16. We would analyze provisions of Section 260-A of Act in little more detail but we are of firm opinion that entry into High Court under Section 260-A of Act is locked with words "Substantial questions of law" and key to open that lock to maintain such appeal can only be perversity of findings of Tribunal in these type of cases and perversity in findings not only averred by appellant before this Court but, established on basis of cogent material which was available before Authorities below including Tribunal and findings arrived at by Tribunal can be so held to be perverse within well settled parameters for determining same as perverse. It is not allowed to either of parties, i.e. Assessee or Revenue to invoke jurisdiction of this Court under Section 260-A of Act merely because Tribunal comes to reverse or modify findings given by lower Authority, viz. Transfer Pricing Officer (TPO) or Dispute Resolution Panel (DRP) which comprises of three Commissioners and Revenue or assessee may feel dissatisfied, because of reversal or modification of such findings by Tribunal resulting in leaving out of certain comparables or adding on of certain comparables for determining 'Arm's Length Price' in hands of Assessee Company. 17. Unless such perversity in findings of Tribunal is established we are of opinion that appeals under Section 260-A of Act cannot and should not be Page 14 of 38 Downloaded on : Tue Jan 28 12:18:19 IST 2020 C/TAXAP/106/2019 ORDER entertained at instance of either of parties and present cases before us, we find that 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 Tribunal perverse in any manner so as to require our interference under Section 260-A of Act. 18. We now take up analysis of Section 260- of Act which we have already said is in pari materia with Sections 100 and 103 of Civil Procedure Code. 19. said provisions are quoted below for ready reference and comparison. Section 260-A of Income Tax Act, 1961 reads as under: "260A - Appeal to High Court: (1) appeal shall lie to High Court from every order passed in appeal by Appellate Tribunal [before date of establishment of National Tax Tribunal], if High Court is satisfied that case involves substantial question of law. (2) [The [Principal Chief Commissioner or] Chief Commissioner or [Principal Commissioner or] Commissioner or assessee aggrieved by any order passed by Appellate Tribunal may file appeal to High Court and such appeal under this sub-section shall be-] (a) filed within one hundred and twenty days from date on which order appealed against is [received by assessee or [Principal Chief Commissioner or] Chief Commissioner or [Principal Commissioner or] Commissioner]; (b) [*******] (c) in form of memorandum or appeal precisely stating therein substantial question of law Involved. [(2A) High Court may admit appeal after expiry of period of one hundred and twenty days referred to in Clause (a) of sub-section (2), if it is satisfied Page 15 of 38 Downloaded on : Tue Jan 28 12:18:19 IST 2020 C/TAXAP/106/2019 ORDER that there was sufficient cause for not filing same within that period.] (3) Where High Court is satisfied that substantial question of law is involved in any case, it shall formulate that question. (4) appeal shall be heard only on question so formulated, and respondents shall, at hearing of appeal, be allowed to argue that case does not involve such question: Provided that nothing in this sub- section shall be deemed to take away or abridge power of Court to hear, for reasons to be recorded, appeal on any other substantial question of law not formulated by it, if it is satisfied that case involves such question. (5) High Court shall decide question of law so formulated and deliver such judgment thereon containing grounds on which such decision is founded and may award such cost as it deems fit. (6) High Court may determine any issue which - (a) has not been determined by Appellate Tribunal; or (b) has been wrongly determined by Appellate Tribunal, by reason of decision on such question of law as is referred to in sub-section (1). [(7) Save as otherwise provided in this Act, provisions of Code of Civil Procedure, 1908 (5 of 1908), relating to appeals to High Court shall, as far as may be, apply in case of appeals under this Section.] Sections 100 and 103 of Code of Civil Procedure, 1908 read thus: "Section 100 - Second Appeal. (1) Save as otherwise expressly provided in body of this Code or by any other law for time being in force, appeal shall lie to High Court from every decree passed in appeal by any Court subordinate to High Court, if High Court is satisfied that case involves substantial question of law. (2) appeal may lie under this section from appellate decree passed ex- parte. Page 16 of 38 Downloaded on : Tue Jan 28 12:18:19 IST 2020 C/TAXAP/106/2019 ORDER (3) In appeal under this section, memorandum of appeal shall precisely state substantial question of law involved in appeal. (4) Where High Court is satisfied that substantial question of law is involved in any case, it shall formulate question. (5) appeal shall be heard on question so formulated and respondent shall, at hearing of appeal, be allowed to argue that case does not involve such question: Provided that nothing in this sub- section shall be deemed to take away or abridge power of Court to hear, for reasons to be recorded, appeal on any other substantial question of law, not formulated by it, if it is satisfied that case involves such question." Section 103 - Power of High Court to determine issues of fact - In any second appeal, High Court may, if evidence on record is sufficient, determine any issue necessary for disposal of appeal, - (a) which has not been determined by lower Appellate Court or both by Court of first instance and lower Appellate Court, or (b) which has been wrongly determined by such Court or Courts by reason of decision on such question of law as is referred to in section 100." What is Substantial Question of Law? 20. From bare comparison of provisions quoted above and as discussed in various judgments of Constitutional Courts, which we will refer in brief herein below, it is clear that Scheme of both Section 260-A in Income Tax Act, 1961 and Section 100 r/w. Section 103 of Code of Civil Procedure are in pari materia and in same terms. 21. existence of substantial question of law is sine qua non for maintaining appeal before High Court. While appeal to High Court under Section 260-A of Act may be First appeal in sense from order of final fact finding by Tribunal under Income Tax Act, whereas Second Appeal on substantial question Page 17 of 38 Downloaded on : Tue Jan 28 12:18:19 IST 2020 C/TAXAP/106/2019 ORDER of law before High Court under Section 100 would lie against Judgment and Decree of first Appellate Court disposing of appeal against Judgment and Decree of Trial Court, but nonetheless it is third round of consideration at level of High Court, where facts and law both have been screened, discussed and analyzed by Authorities or Courts below and therefore tenor and color of words "substantial question of law" in both these enactments remains same. 22. High Court has power to not only formulate substantial questions of law and rather it has duty to do so and can also frame additional substantial questions of law at later stage, if such substantial question of law is involved in appeal before it under these provisions and appeal should be heard and decided only on such substantial questions of law after allowing parties to address their arguments on same. extended power given to High Courts to decide even issue under Sub- section (6) of Section 260-A of Income Tax Act, which is in pari materia with Section 103 of Civil Procedure Code and which says that High Courts may determine any issue which (a)has not been determined by Tribunal or (b) has been wrongly determined by Tribunal, can be so determined by High Court, only if High Court comes to conclusion that 'by reason of decision on substantial question of law rendered by it', such determination of issue of fact also would be necessary and incidental to answer given by it to substantial question of law arising and formulated by it. 23. argument raised by learned counsel for Respondent Assessee before us by making disjuncted reading of Clause (a) and Clause (b) of Sub- Section (6) of Section 260-A of Income Tax Act, 1961 to submit that High Court can touch upon issues of facts also in appeal under this provision bereft of substantial question of law, is misconceived argument. 24. In our opinion, both Clause (a) and Clause (b) of Sub-Section (6) of Section 260-A of Act are circumscribed by words 'by reason of decision on such question of law as is referred to in Sub- section (1)'. Therefore, even if issue which has not been determined by Tribunal, which was required to be so Page 18 of 38 Downloaded on : Tue Jan 28 12:18:19 IST 2020 C/TAXAP/106/2019 ORDER determined in terms of answer to substantial question of law given by High Court, such issue not determined by Tribunal could also be decided by High Court with reference to Clause (a) and more so, if such issue has been wrongly decided according to answer given by High Court to such substantial question of law, then also High Court can set it right to fall in line with answer given by High Court to such substantial question of law raised before it and determined by it in terms of Clause (b) thereof. 25. Sub-section (6) of Section 260-A of Act, therefore, does not give any extended power, beyond parameters of substantial question of law to High Court to disturb findings of fact given by Tribunal below. 26. Sub-section (7) inserted in Section 260-A of Act by Finance Act of 1999 with effect from 01/06/1999 after period of about 8 months of substituting new provisions of Section 260-A to Act as they now stand by Finance Act of 1998, with effect from 01/10/1998 was only to clarify and support that parameters of Sections 100 & 103 of Civil Procedure Code and other provisions of Civil Procedure Code relating to appeals of High Court shall apply to appeals under Section 260-A of Income Tax Act also. 27. insertion of Sub-section (7) in Section 260-A of Act does not give any new or extended powers to High Court and pre-existing provisions from Sub- section (1) to Sub-section (6) in Section 260-A of Act already had all trappings of Sections 100 and 103 of Civil Procedure Code. Case Laws on Substantial Question of Law: 28. In leading and first and foremost case on interpretation of Section 100 of Code of Civil Procedure Code, Constitution Bench of Hon'ble Supreme Court in 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: "6. We are in general agreement with view taken by Madras High Court and we think that while view taken by Bombay High Court is rather narrow one taken by former High Court of Nagpur is too wide. proper test for determining whether question of law Page 19 of 38 Downloaded on : Tue Jan 28 12:18:19 IST 2020 C/TAXAP/106/2019 ORDER raised in case is substantial would, in our opinion, be whether it is of general public importance or whether if directly and substantially affects rights of parties and if so whether it is either open question in sense that it is not finally settled by this Court or by Privy Council, or by Federal Court or is not free from difficulty or calls for discussion of alternative views. If question is settled by highest Court or general principles to be applied in determining question are well settled and there is mere question of applying those principles or that plea raised is palpably absurd question would not be substantial question of law." 29. In case of Santosh Hazari Vs. Purushottam Tiwari (Deceased) by LRs., [2001] 3 SCC 179, another Three Judges' Bench of Honble Supreme Court explained meaning of substantial questions of law in paras.11 and 12 in following manner. "11. Even under old Section 100 of Code (pre-1976 amendment), pure finding of fact was not open to challenge before High Court in second appeal. However Law Commission noticed plethora of conflicting judgments. It noted that in dealing with second appeals, courts were devising and successfully adopting several concepts such as, mixed question of fact and law, legal inference to be drawn from facts proved, and even point that case has not been properly approached by courts below. This was creating confusion in minds of public as to legitimate scope of second appeal under Section 100 and had burdened High courts with unnecessarily large number of second appeals. Section 100 was, therefore, suggested to be amended so as to provide that right of second appeal should be confined to cases where question of law is involved and such question of law is substantial one. (See Statement of Objects and Reasons.) Select Committee to which Amendment Bill was referred felt that scope of second appeals should be restricted so that litigations may not drag on for 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 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 one formulated under sub-section (4). Page 20 of 38 Downloaded on : Tue Jan 28 12:18:19 IST 2020 C/TAXAP/106/2019 ORDER 12. phrase "substantial question of law", as occurring in 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 legislature has chosen not to qualify scope of "substantial question of law" by suffixing words "of general importance" as has been done in many other provisions such as Section 109 of Code or Article 133(1)(a) of Constitution. substantial question of law on which second appeal shall be heard need not necessarily be substantial question of law of general importance. In Guran Ditta v. T. Ram Ditta", phrase "substantial question of law" as it was employed in last clause of then existing Section 110 CPC (since omitted by Amendment Act, 1973) came up for consideration and their Lordships held that it did not mean substantial question of general importance but substantial question of law which was involved in case as between parties. In Sir Chunilal V. Mehta & Sons Ltd. v. Century Spg. And Mfg. Co. Ltd. Constitution Bench expressed agreement with following view taken by Full Bench of Madras High Court in Rimmalapudi Subba Rao v. Noony Veeraju." 30. In case of Hero Vinoth (Minor) Vs. Seshammal [2006]5 SCC 545, Two Judges' Bench of Hon'ble Supreme Court following earlier precedents, summarises principles in following manner. relevant portion of said judgment at para.24 is quoted below for ready reference: "24. principles relating to Section 100 CPC relevant for this case may be summarized thus: (i) inference of fact from recitals or contents of document is question of fact. But legal effect of terms of document is question of law. Construction of document involving application of any principle of law, is also question of law. Therefore, when there is misconstruction of document or wrong application of principles of law in construing document, it gives rise to question of law. Page 21 of 38 Downloaded on : Tue Jan 28 12:18:19 IST 2020 C/TAXAP/106/2019 ORDER (ii) High Court should be satisfied that case involves substantial question of law, and not mere question of law. question of law having material bearing on decision of case (that is, question, answer to which affects rights of parties to suit) will be 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 debatable legal issue. substantial question of law will also arise in contrary situation; where legal position is clear, either on account of express provisions of law or binding precedents, but Court below has decided matter, either ignoring or acting contrary to such legal principle. In second type of cases, substantial question of law arises not because law is still debatable, but because decision rendered on material question, violates settled position of law. (iii) general rule is that High Court will not interfere with concurrent findings of courts below. But it is not absolute rule. Some of well-recognised exceptions are where (i) courts below have ignored material evidence or acted on no evidence; (ii) courts have drawn wrong inferences from proved facts by applying law erroneously; or (iii) courts have wrongly cast burden of proof. When we refer to "decision based on no evidence", it not only refers to cases where there is total dearth of evidence, but also refers to any case, where evidence, taken as whole, is not reasonably capable of supporting finding." 31. In case of Vijay Kumar Talwar Vs. Commissioner of Income Tax, Delhi, [2011] 1 SCC 673, comparing provisions of Section 260-A of Act with Section 100 of Civil Procedure Code, Hon'ble Supreme Court held that in absence of demonstrated perversity in findings of Tribunal, Court cannot interfere and finding of fact may give rise to substantial question of law, only if it is perverse. Paragraphs 23 and 25 of said judgment is quoted below for ready reference:- "23. finding of fact may give rise to substantial question of law, inter alia, in event findings are based on no evidence and/or while arriving at said finding, relevant admissible evidence has not been taken into consideration or inadmissible evidence has been Page 22 of 38 Downloaded on : Tue Jan 28 12:18:19 IST 2020 C/TAXAP/106/2019 ORDER taken into consideration or legal principles have not been applied in appreciating evidence, or when 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.). 25. We are of opinion that on conspectus of factual scenario, noted above, conclusion of Tribunal to effect that assessee has failed to prove source of cash credits cannot be said to be perverse, giving rise to substantial question of law. Tribunal being final fact-finding authority, in absence of demonstrated perversity in its finding, interference therewith by this Court is not warranted." 15. Court, thereafter, proceeded to explain scheme of assessment of Transfer Pricing Cases. Scheme of Assessment of Transfer Pricing Cases: 32. Let us briefly now discuss 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 'Arm's Length Price' (Sec.92). 33. Section 92-A defines 'Associate Enterprise' viz., Company which participates directly or indirectly, or through one or more intermediaries, in its Management or control or Capital of other Enterprise by holding more than 26% of share holding in such other Enterprises and satisfy other criterias as stated in Section 92-A of Act. 34. word 'International Transaction' is defined in Section 92-B of Act. 35. most important provision concerning us in this batch of cases is Section 92-C of Act which provides for 'Computation of Arm's Length Price' and said provision stipulates that 'Arm's Length Price' in relation to international transactions shall be determined by following any of these methods enumerated in Section 92-C of Act which is considered to be 'Most Appropriate Method' by Page 23 of 38 Downloaded on : Tue Jan 28 12:18:19 IST 2020 C/TAXAP/106/2019 ORDER Authorities under Act. methods provided are: Clause (a): Comparable Uncontrolled Principles Method (CUP); Clause (b): Resale Price Method (RP) Clause (c): Cost Plus Method (CP) Clause (d): Profit Split Method (PS) Clause (e): Transactional Net Margin Method (TNMM); and Clause (f): such other Method as may be prescribed by Board. 36. It appears from true facts of various cases before us and arguments of learned counsels that TNNM Method appears to be most popular and widely adopted Method for determining 'Arm's length price' in which Operating Profit Margin of comparable Companies are considered by Authorities and applied to cases of Assessees to determined 'Arm's Length Price' and make Transfer Pricing Adjustments. Rules 10-A, 10-AB, 10-B, 10-C & 10-CA of Income Tax Rules, 1962 prescribe manner for working out 'Arms Length Price' under aforesaid prescribed Methods. 37. Section 92-CA of Act envisages that Assessing Authority, if he considers necessary or expedient so to do, he can with previous approval of Principal Commissioner, refer 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 'Arm's Length Price' in international transactions. Report of Transfer Pricing Officer is binding on Assessing Authority as per Section 92-CA (4) of Act, but where Assessee raises objection against Draft Assessment Order of Assessing Authority based on such Report of Transfer Pricing Officer, Assessee Company within 30 days can either accept said Draft Order or file its objections before Dispute Resolution Panel (DRP) and Assessing Officer as per Section 144- C of Act. said Dispute Resolution Panel comprises of Collegium of three Principal Commissioners or Commissioners of Income Tax constituted by Board Page 24 of 38 Downloaded on : Tue Jan 28 12:18:19 IST 2020 C/TAXAP/106/2019 ORDER as defined in Section 144-C (15) of Act and it has to comply with principles of natural justice by giving opportunity of hearing to Assessees. order passed by Assessing Authority in pursuance of directions of Dispute Resolution Panel (DRP) is directly appealable to Income Tax Tribunal under Section 253 (1) (d) of Act. Section 254 of Act empowers Appellate Tribunal to pass such orders on appeals 'as it thinks fit' after giving opportunity of hearing to both parties. 38. From aforesaid Scheme of assessment with regard to international transactions, it is clear that process of determination of 'Arm's Length Price' has to be undertaken by Expert Wing of Income Tax Department which is manned by Transfer Pricing Officer (TPO) and at higher level by Collegium of three Commissioners in form of Dispute Resolution Panel (DRP) whose orders on questions of facts are appealable before highest fact finding body, viz., Appellate Tribunal. 39. process of determination of 'Arm's Length Price' as observed above, necessarily takes into account comparable cases of other similarly situated or nearly similarly situated Corporate Entities whose data are in public domain or on Data Bases like Prowess and Capital Line Data Base etc. 16. Court, thereafter, proceeded to discuss whether any substantial question of law could be said to be involved in matter. No Substantial Question of Law Arises in these Cases: 40. dispute essentially before us is pairing and matching such comparables with Transfer Pricing Analysis of profit margins given by Assessee himself during course of determination of such 'Arm's Length Price'. 41. shades of arguments raised by both sides before us in these appeals and most of which have been filed by Revenue are that either wrong Filters have been applied or Filters have been wrongly applied, particularly qua Turnover Filter giving far too wide or Page 25 of 38 Downloaded on : Tue Jan 28 12:18:19 IST 2020 C/TAXAP/106/2019 ORDER narrower range of comparables or even though comparable Entities were functionally different entities from Entities in list of Departmental comparables, as against comparables sought to be provided by assessees but Revenue Department generally insists on their inclusion to get high profit ratio leading to higher Transfer Pricing adjustments, whereas assessee would like to keep comparables in narrower range to justify its Transfer Pricing Analysis and profits declared. 42. In sum and substance, we find that such exercise having been undertaken by Authorities below may have resulted not only in high pitched Transfer Pricing Adjustments in declared profits of Assessee, but flood of such appeals go before Tribunal itself where finally inclusion or exclusion of comparables has been determined by Tribunal on due analysis giving its own reasons. 43. contention raised before us that in view of some different views taken by Tribunal by different Benches at different places, present appeals under Section 260-A of Act deserve to be entertained and admitted by this Court for laying down certain Guidelines about Filters or Most Appropriate Method to be adopted for determination of 'Arm's length price', does not, in our considered opinion falls within parameters of substantial question of law. None of sides was able to point out any perversity in Orders of Appellate Tribunal in this regard. 44. This Court cannot be expected to undertake exercise of comparison of comparables itself which is essentially fact finding exercise. Neither sufficient Data nor factual informations nor any technical expertise is available with this Court to undertake any such fact finding exercise in said appeals under Section 260-A of Act. This Court is only concerned with question of law and that too substantial one, which has well defined connotations as explained above and findings of facts arrived at by Tribunal in these type of assessments like any other type of assessments in other regular assessment provisions of Act, viz. Sections 143, 147 etc. are final and are binding on this Court. While dealing with these appeals under Section 260-A of Act, we cannot disturb those findings of fact under Page 26 of 38 Downloaded on : Tue Jan 28 12:18:19 IST 2020 C/TAXAP/106/2019 ORDER Section 260-A of Act, unless such findings are ex- facie perverse and unsustainable and exhibit total non- application of mind by Tribunal to relevant facts of case and evidence before Tribunal. 45. Otherwise if High Court takes path of making such comparative analysis and pronounces upon questions as to which Filter is good and which comparable is really comparable case or not, it will drag High Courts into whirlpool of such Data analysis defeating very purpose and purport of provisions of Section 260-A of Act. Therefore what we observed above appears to us to be sustainable view that key to lock for entering into jurisdiction of High Court under Section 260-A of Act is existence of substantial question of law involved in matter. key of ex-facie perversity of findings of Tribunal duly established with relevant evidence and facts. Unless it is so, no other key or for that matter, even in-consistent view taken by Tribunal in different cases depending upon relevant facts available before it cannot lead to formation of substantial question of law in any particular case to determine aspects of determination of 'Arm's Length Price' as is sought to be raised before us. 17. Court, thereafter, expressed its concern for giving primacy to Tribunal in area of fact finding. 46. Undoubtedly, Income Tax Tribunal is final and highest fact finding body under 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 Department). Therefore this quasi-judicial forum is expected and as some of nicely articulated Judgments and Orders from Tribunal would indicate, Orders passed by Tribunal should normally put end and quietus to findings of facts and factual aspects of assessment. lower Revenue Authorities cannot be allowed to make it their prestige issue, if their stand is not upheld by Tribunal and agitate against their Orders before higher Courts by resort to Section 260-A or Section 261 of Act merely because they are dissatisfied with Page 27 of 38 Downloaded on : Tue Jan 28 12:18:19 IST 2020 C/TAXAP/106/2019 ORDER findings of facts by Tribunal. 47. In case before us now, pick of comparables, short-listing of them, applying of filters, etc., are all fact finding exercises and therefore final Orders passed by Tribunal are binding on lower Authorities of Department as well as High Court. 48. 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 particular findings. 49. For instance, while dealing with comparables or Filters, if un-equals like Software Giant Infosys or Wipro are compared to newly established small size Company engaged in Software service, it would obviously be wrong and perverse. very word "comparable" means that Group of Entities should be in homogeneous Group. They should not be wildly dissimilar or unlike or poles apart. Such wild comparisons may result in best judgment assessment going haywire and directionless wild, which may land up findings of Tribunal in realm of perversity attracting interference under Section 260-A of Act. 18. In last, Court concluded as under: procedure of assessment under Chapter X relating to international transactions as indicated above is already lengthy one and involves multiple Authorities of Department. huge, cumbersome and tenacious exercise of Transfer Pricing Analysis has to be undertaken by Corporate Entities who have to comply with various provisions of Act and Rules with huge Data Bank and in first instance they have to satisfy that profits or income from transactions declared by them is at 'Arm's length' which analysis is invariably put to test and inquiry by Authorities of Department and through process of Transfer Pricing Officer (TPO) and Dispute Resolution Panel (DRP) and Tribunal at various stages, assessee has cumbersome task of compliance and it has to satisfy Authorities that what has been declared by them is true and fair disclosure and much of Transfer Pricing Page 28 of 38 Downloaded on : Tue Jan 28 12:18:19 IST 2020 C/TAXAP/106/2019 ORDER Adjustments is not required but Tax Authorities have their own view on other side and effort on part of 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 lengthy process of same, matter reaches Tribunal which also takes its own time to decide such appeals. In course of this dispute resolution, much has already been lost in form of time, man-hours and money, besides giving adverse picture of sluggish Dispute Resolution process through these channels. If appeals under Section 260-A of Act were to be lightly entertained by High Court against findings of Tribunal, without putting it to strict scrutiny of existence of substantial questions of law, it is likely to open flood-gates for this litigation to spill over on dockets of High Courts and up to Supreme Court, where such further delay may further cause serious damage to demand of expeditious judicial dispensation in such cases. Conclusion: 55. substantial quantum of international trade and transactions depends upon fair and quick judicial dispensation in such cases. Had it been case of substantial question of interpretation of provisions of Double Taxation Avoidance Treaties (DTAA), interpretation of provisions of Income Tax Act or Overriding Effect of Treaties over Domestic Legislations or questions like Treaty Shopping, Base Erosion and Profit Shifting (BEPS), Transfer of Shares in Tax Havens (like in case of Vodafone etc.), if based on relevant facts, such substantial questions of law could be raised before High Court under Section 260-A of Act, Courts could have embarked upon such exercise of framing and answering such substantial question of law. On other hand, appeals of present tenor as to whether comparables have been rightly picked up or not, Filters for arriving at correct list of comparables have been rightly applied or not, do not in our considered opinion, give rise to any substantial question of law. 56. We are therefore of considered opinion that present appeals filed by Revenue do not give rise to any substantial question of law and suggested Page 29 of 38 Downloaded on : Tue Jan 28 12:18:19 IST 2020 C/TAXAP/106/2019 ORDER substantial questions of law do not meet requirements of Section 260-A of Act and thus appeals filed by Revenue are found to be devoid of merit and same are liable to be dismissed. 57. We make it clear that same yardsticks and parameters will have to be applied, even if such appeals are filed by Assessees, because, there may be cases where Tribunal giving its own reasons and findings has found certain comparables to be good comparables to arrive at 'Arm's Length Price' in case of assessees with which assessees may not be satisfied and have filed such appeals before this Court. Therefore we clarify that mere dissatisfaction with findings of facts arrived at by learned Tribunal is not at all sufficient reason to invoke Section 260-A of Act before this Court. 19. Delhi High Court, in case of CIT vs. EKL Appliances Ltd., reported in (2012) 345 ITR 241 (Delhi), in context with Section 92CA of Act, had observed as under: It seems to us that decision taken by Tribunal is right decision. TPO applied CUP method while examining payment of brand fee/ royalty. CUP method which in its expanded form is known as "comparable uncontrolled price" method is provided for in Rule 10B(1)(a) of Income Tax Rules, 1962. It is one of methods recognised for determining ALP in relation to international transaction. Rule 10B(1) says that for purposes of Section 92C(2), ALP shall be determined by any one of five methods, which is found to be most appropriate method, and goes on to lay down manner of determination of ALP under each method. five methods recognized by 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). manner by which ALP in relation to international transaction is determined under CUP is prescribed in clause (a) of sub-rule (1) of Rule 10B. following three steps have been prescribed: - "(a) comparable uncontrolled price method, by which, Page 30 of 38 Downloaded on : Tue Jan 28 12:18:19 IST 2020 C/TAXAP/106/2019 ORDER (i) price charged or paid for property transferred or services provided in comparable uncontrolled transaction, or number of such transactions, is identified; (ii) such price is adjusted to account for differences, if any, between international transaction and comparable uncontrolled transactions or between enterprises entering into such transactions, which could materially affect price in open market; (iii) adjusted price arrived at under sub- clause (ii) is taken to be arm's length price in respect of property transferred or services provided in international transaction;" 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 introduction to arm s length price principle and explains article 9 of 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 enterprises, but, by reason of those conditions, if not so accrued, may be included in profits of that enterprise and taxed accordingly. By seeking to adjust profits in above manner, arm s length principle of pricing follows approach of treating members of multi-national enterprise group as operating as separate entities rather than as inseparable parts of single unified business. After referring to article 9 of model convention and stating arm s length principle, guidelines provide for "recognition of 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 re- produced below: - "1.36 tax administration's examination of controlled transaction ordinarily should be based on transaction actually undertaken by associated enterprises as it has been structured by them, using methods applied Page 31 of 38 Downloaded on : Tue Jan 28 12:18:19 IST 2020 C/TAXAP/106/2019 ORDER by taxpayer insofar as these are consistent with methods described in Chapters II and III. In other than exceptional cases, tax administration should not disregard actual transactions or substitute other transactions for them. Restructuring of legitimate business transactions would be wholly arbitrary exercise inequity of which could be compounded by double taxation created where other tax administration does not share same views as to how transaction should be structured. 1.37 However, there are two particular circumstances in which it may, exceptionally, be both appropriate and legitimate for tax administration to consider disregarding structure adopted by taxpayer in entering into controlled transaction. first circumstance arises where economic substance of transaction differs from its form. In such case tax administration may disregard parties' characterization of transaction and re-characterise it in accordance with its substance. example of this circumstance would be investment in associated enterprise in form of interest-bearing debt when, at arm's length, having regard to economic circumstances of borrowing company, investment would not be expected to be structured in this way. In this case it might be appropriate for tax administration to characterize investment in accordance with its economic substance with result that loan may be treated as subscription of capital. second circumstance arises where, while form and substance of transaction are same, arrangements made in relation to transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in commercially rational manner and actual structure practically impedes tax administration from determining appropriate transfer price. example of this circumstance would be sale under long-term contract, for lump sum payment, of unlimited entitlement to intellectual property rights arising as result of future research for term of contract (as previously indicated in paragraph 1.10). While in this case it may be proper to respect transaction as transfer of commercial property, it would nevertheless be appropriate for tax administration to conform terms Page 32 of 38 Downloaded on : Tue Jan 28 12:18:19 IST 2020 C/TAXAP/106/2019 ORDER of that transfer in their entirety (and not simply by reference to pricing) to those that might reasonably have been expected had transfer of property been subject of transaction involving independent enterprises. Thus, in case described above it might be appropriate for tax administration, for example, to adjust conditions of agreement in commercially rational manner as continuing research agreement. 1.38 In both sets of circumstances described above, character of transaction may derive from relationship between parties rather than be determined by normal commercial conditions as may have been structured by taxpayer to avoid or minimize tax. In such cases, totality of its terms would be result of condition that would not have been made if parties had been engaged in arm's length dealings. Article 9 would thus allow adjustment of conditions to reflect those which parties would have attained had transaction been structured in accordance with economic and commercial reality of parties dealing at arm's length." significance of aforesaid guidelines lies in fact that they recognise that barring exceptional cases, tax administration should not disregard actual transaction or substitute other transactions for them and examination of controlled transaction should ordinarily be based on transaction as it has been actually undertaken and structured by associated enterprises. It is of further significance that guidelines discourage re-structuring of legitimate business transactions. reason for characterisation of such re- structuring as arbitrary exercise, as given in guidelines, is that it has potential to create double taxation if other tax administration does not share same view as to how transaction should be structured. Two exceptions have been allowed to aforesaid principle and they are (i) where economic substance of transaction differs from its form and (ii) where form and substance of transaction are same but arrangements made in relation to transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in Page 33 of 38 Downloaded on : Tue Jan 28 12:18:19 IST 2020 C/TAXAP/106/2019 ORDER commercially rational manner. There is no reason why OECD guidelines should not be taken as valid input in present case in judging action of TPO. In fact, CIT (Appeals) has referred to and applied them and his decision has been affirmed by Tribunal. These guidelines, in different form, have been recognized in tax jurisprudence of our country earlier. It has been held by our courts that it is not for revenue authorities to dictate to assessee as to how he should conduct his business and it is not for them to tell assessee as to what expenditure assessee can incur. We may refer to few of these authorities to elucidate point. In Eastern Investment Ltd. v. CIT, (1951) 20 ITR 1, it was held by Supreme Court that "there are usually many ways in which given thing can be brought about in business circles but it is not for Court to decide which of them should have been employed when Court is deciding question under Section 12(2) of Income Tax Act". It was further held in this case that "it is not necessary to show that expenditure was profitable one or that in fact any profit was earned". In CIT v. Walchand & Co. etc., (1967) 65 ITR 381, it was held by Supreme Court that in applying test of commercial expediency for determining whether expenditure was wholly and exclusively laid out for purpose of business, reasonableness of expenditure has to be judged from point of view of businessman and not of Revenue. It was further observed that rule that expenditure can only be justified if there is corresponding increase in 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 course of trade which is unremunerative is none less proper deduction if wholly and exclusively made for purposes of trade. It does not require presence of receipt on credit side to justify deduction of expense". question whether expenditure can be allowed as deduction only if it has resulted in any income or profits came to be considered by Supreme Court again in CIT v. Rajendra Prasad Moody, (1978) 115 ITR 519, and it was observed as under: - "We fail to appreciate how expenditure which is otherwise proper expenditure can cease to be such Page 34 of 38 Downloaded on : Tue Jan 28 12:18:19 IST 2020 C/TAXAP/106/2019 ORDER merely because there is no receipt of income. Whatever is proper outgoing by way of expenditure must be debited irrespective of whether there is receipt of income or not. That is plain requirement of proper accounting and interpretation of Section 57(iii) cannot be different. deduction of expenditure cannot, in circumstances, be held to be conditional upon making or earning of income." It is noteworthy that above observations were made in context of Section 57(iii) of Act where language is somewhat narrower than language employed in Section 37(1) of Act. This fact is recognised in judgment itself. fact that language employed in Section 37(1) of Act is broader than Section 57(iii) of Act makes position stronger. In case of Sassoon J. David & Co. Pvt. Ltd. v. CIT, (1979) 118 ITR 261 (SC), Supreme Court referred to legislative history and noted that when Income Tax Bill of 1961 was introduced, Section 37(1) required that expenditure should have been incurred "wholly, necessarily and exclusively" for purposes of business in order to merit deduction. Pursuant to public protest, word "necessarily" was omitted from section. position emerging from above decisions is that it is not necessary for assessee to show that any legitimate expenditure incurred by him was also incurred out of necessity. It is also not necessary for assessee to show that any expenditure incurred by him for purpose of business carried on by him has actually resulted in profit or income either in same year or in any of subsequent years. only condition is that expenditure should have been incurred "wholly and exclusively" for purpose of business and nothing more. It is this principle that inter alia finds expression in OECD guidelines, in paragraphs which we have quoted above. Even Rule 10B(1)(a) does not authorise disallowance of any expenditure on ground that it was not necessary or prudent for assessee to have incurred same or that in view of Revenue expenditure was unremunerative or that in view of continued losses suffered by assessee in his business, he could have Page 35 of 38 Downloaded on : Tue Jan 28 12:18:19 IST 2020 C/TAXAP/106/2019 ORDER fared better had he not incurred such expenditure. These are irrelevant considerations for purpose of Rule 10B. Whether or not to enter into transaction is for assessee to decide. quantum of expenditure can no doubt be examined by TPO as per law but in judging allowability thereof as business expenditure, he has no authority to disallow entire expenditure or part thereof on ground that assessee has suffered continuous losses. financial health of assessee can never be criterion to judge allowability of expense; there is certainly no authority for that. What TPO has done in present case is to hold that assessee ought not to have entered into agreement to pay royalty/ brand fee, because it has been suffering losses continuously. So long as expenditure or payment has been demonstrated to have been incurred or laid out for purposes of business, it is no concern of TPO to disallow same on any extraneous reasoning. As provided in OECD guidelines, he is expected to examine international transaction as he actually finds same and then make suitable adjustment but wholesale disallowance of expenditure, particularly on grounds which have been given by TPO is not contemplated or authorised. Apart from legal position stated above, even on merits disallowance of entire brand fee/ royalty payment was not warranted. 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 increase in employees cost, finance charges, administrative expenses, depreciation cost and capacity increase have contributed to continuous losses. comparative position over period of 5 years from 1998 to 2003 with relevant figures have been given before CIT (Appeals) and they are referred to in tabular form in his order in paragraph 5.5.1. In fact there are four tabular statements furnished by assessee before CIT (Appeals) in support of reasons for continuous losses. There is no material brought by revenue either before CIT (Appeals) or before Tribunal or even before us to show that these are incorrect figures or that even on merits reasons for losses are not genuine. Page 36 of 38 Downloaded on : Tue Jan 28 12:18:19 IST 2020 C/TAXAP/106/2019 ORDER We are, therefore, unable to hold that Tribunal committed any error in confirming order of CIT (Appeals) for both years deleting disallowance of brand fee/ royalty payment while determining ALP. Accordingly, substantial questions of law are answered in affirmative and in favour of assessee and against Revenue. appeals are accordingly dismissed with no order as to costs. 20. We are of view that findings of fact recorded by Tribunal in its impugned order cannot be termed as perverse or contrary to evidence on record. very same issue was duly considered by ITAT vide order dated 28.12.2017 for A.Y. 2008-09. However, according to learned counsel appearing for Revenue, having regard to low tax effect, order passed by ITAT for A.Y. 2008-09 could not be challenged. 21. In overall view of matter, we are convinced that decision of Tribunal is correct and requires no interference. 22. Tribunal took into consideration voluminous documentary evidence on record in form of e-mails correspondence indicating rendition of services. Tribunal is right in its view that assessee would be right person to know whether services are required or not. Such issues should be left best to commercial wisdom of assessee. What is important is whether services were rendered or not and whether cost allocation was on fair and reasonable basis. In case on hand, rendition of services has not been disputed. However, lot of emphasis has been put on issue of Arm's length price in respect of Page 37 of 38 Downloaded on : Tue Jan 28 12:18:19 IST 2020 C/TAXAP/106/2019 ORDER management fees. This aspect has also been well discussed by Tribunal. 23. In result, this appeal fails and is hereby dismissed. (J. B. PARDIWALA, J) (A. C. RAO, J) Vahid Page 38 of 38 Downloaded on : Tue Jan 28 12:18:19 IST 2020 Principal Commissioner of Income-tax, Gandhinagar v. Tudor India Private Limited