Date Of Judgment 07-08-2018, Ita v. M/S. Inteva Products India Automotive Pvt. Ltd

IN THE HIGH COURT OF KARNATAKA, BENGALURU DATED THIS THE 7 DAY OF AUGUST 2018 PRESENT THR HON’BLEK DR.JUSTICE VINBBT KOTHARI ANT) THR HON’BLE MRS..JUSTICK S.SUJATHA I.T.A. No.395/2017 BETWEEN : 1.THE PR. COMMISSIONER OF INCOME-ITAX "[‘T]FLOOR, BMTC BUILDING 80 FEET ROAD, KORMANGALA| BENGALURU-560095.. «|THERE DEPUTLY COMMISSIONEOF INCOME-TAX, CIRCLE-3]1]}1].OF INCOME-TAX, CIRCLE-3]1]}1]. ~ FLOOR, BMTC BUILDING 80 FEET ROAD, KORMANGALA| BENGALURU-560095.. . APPELLANTS| (BY SRI ARAVIND.K.V., ADV.) AND ; M/s. INTEVA PRODUCTS INDIAAUTOMOTIVE PVT. LTD.,|FORMERLY KNOWN ASMERITOR LVS INDIA PVT. LTD..,|No.69, AI-AMEEN TOWERS,|HOSUR ROAD, NEAR LALBAGHMAIN GATEBENGALURU-56002_. RESPONDENT. (BY SRI K.R.VASUDEVAN AND SRI ANKUR PAI, ADVS.) Date of Judgment 07-08-2018, ITA No.395/2017 The Pr. Commissioner of Income-tax & Another Vs. M/s. Inteva Products India Automotive Pvt. Ltd., 2/15 THIS INCOMB TAX APPBAL IS FILED UNDER SECTION|260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER|DATED 20.07.2016 PASSED IN IT/TP|A No.136/BANG/2015, FOR:THE ASSESSMENT YEAR 2010-11, ANNEXURE-D, PRAYING TO.fi] FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW.STATED ABOVE. {11} ALLOW THE APPEAL AND SET ASIDE THE.ORDER PASSED BY THE ITAT, BENGALURU IN IT|TP|A.No.136/BANG/2015|DATED20.07.2016,ANNEXURE-D,CONFIRMING THR ORDBR OF THR DRP AND CONFIRM THE!ORDER PASSED BY THR DBPUTY COMMISSIONER OF [INCOMETAX, CIRCLE-3]1]/1], BENGALURU. THIS APPEAL COMING ON FOR ADMISSION, THIS DAY,|S. SUJATHA, J., DELIVERED THE FOLLOWING: JU DBiGMENT Mr. Aravind.K.V.,,Adv. for Appellants — Revenue.Mr. K.R.Vasudevan,Adv. AndMr. Ankur Pai,Adv. for Respondent — Assessee. This Appeal is filed by the Revenue purportedlyraising substantial questions of law arising from theOrder of the Income Tax Appellate Tribunal, Bangalore Bench ‘B’, Bangalore, inIT[TP|A No.136/Bang/2015dated|20.07.2016, relating to the Assessment Year2010-11. 2.The substantial questions of law framed bythe Revenue in the Memorandum of Appeal are asunder: Date of Judgment 07-08-2018, ITA No.395/2017 The Pr. Commissioner of Income-tax & Another Vs. M/s. Inteva Products India Automotive Pvt. Ltd., 3/15 aWhether on the facts and in thecircumstances of the case, the Tribunal ts right in|law in directing the AO/TPO to confine ArmsLength Adjustment to the value of internationaltransactions in the manufacturing segment of theassessee by relying on the decision of it in case ofassessee itself which has not reached finalitywithout appreciating that TPO has chosen TNMMmethod as the most appropriate method fordeterminationOf|ALP|withregardto|themanufacturing segment and has accepted samecomparable as selected by assessee for benchmarking analysis? D2 Whether on the facts and in thecircumstances of the case, the Tribunal ts right in|directed the AO/TPO to compute operating marginof the assessee as well as companies includingforex gain/loss to foreign exchange fluctuation inrespect of sale proceeds by following its earlierdecision in case of M/s. Triology E-Businesssoftware? 3.|Whether on the facts and in thecircumstances of the case, the Tribunal ts right in|setting aside issue of working capital adjustmentby following its earlier order which has _ noreached.finalitywithoutappreciatingthat Date of Judgment 07-08-2018, ITA No.395/2017 The Pr. Commissioner of Income-tax & Another Vs. M/s. Inteva Products India Automotive Pvt. Ltd., 4/15 working capital its calculated to find out as to howmuch is cost of capital that must be recoveredfrom the customers by increasing sales price andworking capital is equal to sum of total of currentassets in the balance sheetfirm?| 4 |Whether on the facts and in thecircumstances of the case, the Tribunal ts right in|setting aside treatment of royalty by assessingauthority even though the assessing authority|has given detailed reasoning’s? 3.|Whether on the facts and in thecircumstances of the case, the Tribunal ts right in|setting aside issue of working capital adjustmentby following its earlier order which has _ noreached.finalitywithoutappreciatingthat Date of Judgment 07-08-2018, ITA No.395/2017 The Pr. Commissioner of Income-tax & Another Vs. M/s. Inteva Products India Automotive Pvt. Ltd., 4/15 working capital its calculated to find out as to howmuch is cost of capital that must be recoveredfrom the customers by increasing sales price andworking capital is equal to sum of total of currentassets in the balance sheetfirm?| 4 |Whether on the facts and in thecircumstances of the case, the Tribunal ts right in|setting aside treatment of royalty by assessingauthority even though the assessing authority|has given detailed reasoning’s? 5.|Whether on the facts and in thecircumstances of the case, the Tribunal ts right in|setting aside the issue pertaining to the record ofthe TPO to re-compute the operating margin of theassessee excluding the corresponding lease’expenditure from the operating cost? 6.|Whether on the facts and in thecircumstances of the case, the Tribunal is right inexcluding certain comparable on the basis offunctional dissimilarity by following its earlierorder on the ground of functional dissimilarityeven though the said decision has not reached)finality and even when the TPO had chosen thecomparables as it satisfies qualitative andquantitative filters applied by the TPO and Date of Judgment 07-08-2018, ITA No.395/2017 The Pr. Commissioner of Income-tax & Another Vs. M/s. Inteva Products India Automotive Pvt. Ltd., Tribunal ought to have decided the comparabilityof these companies on the basis of specific factsbrought out on record by the TPO in the case ofthe assessee?” 3.The learned Tribunal, after discussing the rival contentions of both the Appellants-Revenue andRespondent-Assessee, has returned the findings asunder: Regarding Substantial Question of Law Nos.1 & 6: O98. Havingconsideredthe rivalsubmissions and careful perusal of the record, wenote that the TPO has rejected this company onthe ground that it has 90% of its income fromDubat operations in comparison to the assessee’'s100% income from the Indian operations. Itappears that the TPO has considered the exportincome from Dubai clients of the company asincome from Dubai operations. Accordingly, weset aside the issue of comparability of thiscompany to the record of the A.O./TPO forreadjudication of the same after considering thecorrect and proper facts and details of theCOMPA? y. Date of Judgment 07-08-2018, ITA No.395/2017 The Pr. Commissioner of Income-tax & Another Vs. M/s. Inteva Products India Automotive Pvt. Ltd., 6/15 30.3.We|have|consideredtherivalSubmissions as well as the relevant material onrecord. There is no dispute that this company isearning its revenue from the ‘on site’ servicesprovided to the off shore clients. Further thiscompany is a leader in the industry and enjoyeda huge brand value and owns_ intellectualproperty. By considering all these facts, the co-ordinate bench of this Tribunal in assessee's owncase (IT(TPJA No.1534/Bang/2012 vide orderDt.11.04.2014 for the Assessment Year 2008-09has held in paras 11.2 to 11.4 as under: | KVeVNKK” Accordingly,whenTLOSubstantialdifference in the business activity of the companyfor the year under consideration we do not findany error or ulegality in the directions of the DRP|for exclusion of this company.” Regarding Substantial Question of Law No.2: “3. We have heard the learned Authorised|Representative as well as learned DepartmentalRepresentativeand consideredthe relevantmaterial on record on admission of the additionalground raised by the assessee. As it is clear that Date of Judgment 07-08-2018, ITA No.395/2017 The Pr. Commissioner of Income-tax & Another Vs. M/s. Inteva Products India Automotive Pvt. Ltd., 7/15 KVeVNKK” Accordingly,whenTLOSubstantialdifference in the business activity of the companyfor the year under consideration we do not findany error or ulegality in the directions of the DRP|for exclusion of this company.” Regarding Substantial Question of Law No.2: “3. We have heard the learned Authorised|Representative as well as learned DepartmentalRepresentativeand consideredthe relevantmaterial on record on admission of the additionalground raised by the assessee. As it is clear that Date of Judgment 07-08-2018, ITA No.395/2017 The Pr. Commissioner of Income-tax & Another Vs. M/s. Inteva Products India Automotive Pvt. Ltd., 7/15 the additional ground raised by the assessee isonly in respect of inclusion of foreign exchangefluctuation in the operating margins of theassessee as well as comparable companies. Wefind that this issue is now settled by variousdecisions of this Tribunal that if any gain or lossdue to the foreign exchange fluctuation arising inrespect of the sale proceeds, the same will be partof the operating margin of the assessee as wellas comparable companies. Since the TPO/ TPOhas excluded the foreign exchange gain/loss fromthe operating margins of the assessee therefore itwould be a serious injustice to the assessee if aparity treatment has not been given to the foreignexchange fluctuation gain/loss while computingtheoperatingmargins|ofthe comparablecompanies.Accordingly, WE|find thattheadditional ground raised by the assessee is not inthe form offresh issue but it is part of the existingissue of the Transfer Pricing Adjustment andbased on the principle of consistent treatment ofoperating margins of the tested party as well ascomparables.Hencein|thefactsand|circumstancesofthecase,We|admittheadditional ground raised by the assessee foradjudication. Date of Judgment 07-08-2018, ITA No.395/2017 The Pr. Commissioner of Income-tax & Another Vs. M/s. Inteva Products India Automotive Pvt. Ltd., 8/15 Regarding Substantial Question of Law No.3: “10.Havingconsideredtherivalsubmissions and careful perusal of the record, wenote that the DRP in para 3.16 directed the TPO tocompute the working capital adjustment inrespect of the comparables after gwing the effectto the directions aS under: KVeVNKK” since the TPO has not complied with thedirections given by the DRP therefore, we setaside this issue to the record of the TPO/A.O. forgiving the proper working capital adjustmentwithout any restriction as held by the co-ordinatebench of this Tribunal in the case of Citrix R & DIndia Put. Ltd. in IT(TP)A No.1289/ Bang/ 201wherein it was held that the TPO cannot restrictthe working capital adjustment artificially fromthe actual computation. ~ Regarding Substantial Question of Law No.4: “90.|We|have.consideredtherivalSubmissions as well as the relevant material onrecord. At the outset we note that the TPO hastreated the ALP of royalty in question at Nil on theground that the assessee failed to produce any Date of Judgment 07-08-2018, ITA No.395/2017 The Pr. Commissioner of Income-tax & Another Vs. M/s. Inteva Products India Automotive Pvt. Ltd., 9/15 Regarding Substantial Question of Law No.4: “90.|We|have.consideredtherivalSubmissions as well as the relevant material onrecord. At the outset we note that the TPO hastreated the ALP of royalty in question at Nil on theground that the assessee failed to produce any Date of Judgment 07-08-2018, ITA No.395/2017 The Pr. Commissioner of Income-tax & Another Vs. M/s. Inteva Products India Automotive Pvt. Ltd., 9/15 Supporting evidence as to how the royalty hasbeen computed and further the assessee hasfailed to show that the assessee has derivedsome benefit from the transfer of technology forwhich the royalty to be paid to the AE. As far asthe justification and deriving the benefit fromtransfer of technology is concerned this is beyondthe scope of the process of determining the ALPby the TPO, therefore we do not agree with theview of the TPO that the assessee was required toestablish the benefit derived from the technologytransfer by the AE against which the royalty hasbeen paid. Once the assessee is under obligationas per the license agreement to manufacture theitems under the license owned by the AE then itis irrelevant to prove that the assessee hasderived special benefit from the technologytransferred by the AE. When the manufacturingactivity itself has been carried out as per thelicense granted by the AE under the terms andconditions of the license agreement then the TPOis not allowed to outrightly reject the claim ofroyalty. The jurisdiction and power of the TPO is only to determine the ALP of the royalty incomparison to the comparable price. The TPO hasnot made any endeavour or took any step toexamine the royalty payment by considering with Date of Judgment 07-08-2018, ITA No.395/2017 The Pr. Commissioner of Income-tax & Another Vs. M/s. Inteva Products India Automotive Pvt. Ltd., 10/15 comparable prices. We further note that for theAssessment Year 2012-13, the TPO vide its orderdt.12.2.2016 has accepted the royalty andservice charges at in para 6 as under: KVeVNKK” As the assessee has produced the relevantevidence including the license agreement underwhich the Royalty has been paid to AE therefore,in the facts and circumstances of the case, we setaside this issue to the record of the TPO / TPO tore-examine the issue as per the provisions oftransfer pricing and in the light of the evidenceproduced by the assessee as well as the T.P.order passed under Section 92CA for theAssessment Year 2012-13. Needless to say thatthe assessee be given an appropriate opportunityof hearing before deciding the issue.” Regarding Substantial Question of Law No.5: “21. Ground Nos.7 & 8& are regardingincorrect computation of operating margin of theassessee and proportionate T.P. Adjustment. Thelearned Authorised Representative has submittedthat the TPO has excluded sub lease income fromthe operating margins however the correspondinglease expenses has not been excluded from the Date of Judgment 07-08-2018, ITA No.395/2017 The Pr. Commissioner of Income-tax & Another Vs. M/s. Inteva Products India Automotive Pvt. Ltd., 11/15 operating cost. Thus the learned AuthorisedRepresentative has contended that if the sub-lease income is excluded from the operatingmargin then the corresponding expenditure shallalso be excluded from the operating cost for thepurpose of computing the operating margin.Further the TPO has made adjustment on theentire manufacturing segment instead of value ofinternational transactions. | 22. The learned D. R. has relied upon theorders of the authorities below. Date of Judgment 07-08-2018, ITA No.395/2017 The Pr. Commissioner of Income-tax & Another Vs. M/s. Inteva Products India Automotive Pvt. Ltd., 11/15 operating cost. Thus the learned AuthorisedRepresentative has contended that if the sub-lease income is excluded from the operatingmargin then the corresponding expenditure shallalso be excluded from the operating cost for thepurpose of computing the operating margin.Further the TPO has made adjustment on theentire manufacturing segment instead of value ofinternational transactions. | 22. The learned D. R. has relied upon theorders of the authorities below. YS.Havingconsideredthe.rivalSubmissions as well as the relevant material onrecord, we find merit in the contention of theassessee that tf sub-lease income is excludedfrom the operating profit then corresponding leaseexpenditure shall also be excluded from theoperating cost while computing the operatingmargin of the assessee. Accordingly, we set asidethis issue to the record of the A.O./TPO tocompute the operating margin of the assesseeafter’excludingthecorrespondingleaseexpenditure from the operating cost. The TPO isalso directed to confine the adjustment to thevalue of international transactions only.” Date of Judgment 07-08-2018, ITA No.395/2017 The Pr. Commissioner of Income-tax & Another Vs. M/s. Inteva Products India Automotive Pvt. Ltd., 12/15 4However, this Court in a recent judgment in I.T.A. Nos.536/2015 c/w 537/2015delivered on 25.06.2018 (Prl. Commissioner of Income Tax & Anr. —v- M/s Softbrands India Pvt. Ltd.») has held that inthese type of cases, unless an ex-facie perversity in thefindings of the learned Income Tax Appellate Tribunal is"established by the appellant, the appeal at the instanceof an assessee or the Revenue under Section J60-A otthe Act is not maintainable. The relevant portion of the said judgment is.quoted below for ready reference: “Conclusion: 55.Asubstantial quantumof|international trade and transactions depends|upon the fair and quick Judicial dispensation|in such cases. Had it been a case oOf|Substantialquestionof|interpretation|of|provisions of Double Taxation AvoidanceTreaties (DTAA), interpretation ofprovisions ofthe Income Tax Act or Overriding Effect of the| Date of Judgment 07-08-2018, ITA No.395/2017 The Pr. Commissioner of Income-tax & Another Vs. M/s. Inteva Products India Automotive Pvt. Ltd., 13/15 Treaties over the Domestic Legislations or the |questions like Treaty Shopping, Base Erosionand Profit Shifting (BEPS), Transfer of Shares|in Tax Havens (like in the case of Vodafone|etc.), tf based on relevant facts, such|substantial questions of law could beraised before the High Court underSection260-Aof the Act, the Courts could have|embarked upon such exercise offraming 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, Futers for|arriving at the correct list of comparables|have been rightly applied or not, do not in our|consideredopinion, giveriseTo anysubstantial question of law. 06. Weare therefore of the consideredopinion that the present appeals filed by the|Revenue do not give rise to any substantialquestionof|law.andthe|Suggested|substantial questions of law do not meet therequirements ofSection 260-A|of the Act andthus the appeals filed by the Revenue are| 14/15 found to be devoid of merit and the same are.liable to be dismissed. 06. Weare therefore of the consideredopinion that the present appeals filed by the|Revenue do not give rise to any substantialquestionof|law.andthe|Suggested|substantial questions of law do not meet therequirements ofSection 260-A|of the Act andthus the appeals filed by the Revenue are| 14/15 found to be devoid of merit and the same are.liable to be dismissed. 57. We make it cleqr that the sameyardsticks and parameters will have to beapplied, even tf 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|7S. “ArLength Price”’ in the case of the assesseeswith which the assessees may not be|satisfied and have filed such appeals beforethis Court. Therefore we clarify that mere|dissatisfaction with the findings of facts|arrived at by the learned Tribunal ts not at all|a sufficient reason to invoke.Section 260-Aof the Act before this Court. o8. The appeals filed by the Revenueare therefore dismissed with no order as to|costs.” 5.Havingheardthelearnedcounsels. appearing for the parties, we are therefore of the opinion Date of Judgment 07-08-2018, ITA No.395/2017 The Pr. Commissioner of Income-tax & Another Vs. M/s. Inteva Products India Automotive Pvt. Ltd., 15/15 that no substantial question of law arises in the present case also. The Appeal filed by the Appellants-Revenueis liable to be dismissed and it is dismissed accordingly. —No costs. NC. Sd/-.JUDGE. Sd/-.JUDGE.