Date Of Judgment 12-07-2018, Ita v. M/S. Ue Development India Pvt. Ltd

IN THE HIGH COURT OF KARNATAKA, BENGALURU DATED THIS THE 12 DAY OF JULY 2O18| PRESENT THR HON’BLEK DR.JUSTICE VINBBT KOTHARI ANT) THR HON’BLE MRS..JUSTICK S.SUJATHA I.T.A.No.52/2014 BETWEEN : 1.THE COMMISSIONER OFINCOME TAX-IIlC.R.BUILDINGQUEENS ROADBANGALORE-560 O78 «|THER DEPUTY COMMISSIONEROF INCOME TAX.CIRCLE 12(5), BANGALORE._ APPBLLANTS| (BY SRI E.I.SANMATHI, ADV.) AND : M/S. UE DEVELOPMENT—INDIA PVT LTD.,‘QUORUM, #85, 7[‘L]CROSS|*[‘T]BLOCK, KORAMANGALA|BANGALORE,PAN: AAACUDSOOLN.. RESPONDENT. (BY SRI K.S.PONNAPPA, ADV. FOR SRI K.ARUN KUMAR, ADV.) THIS INCOMB TAX APPBAL IS FILED UNDER SECTION|2600-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDERDATED 30.08.2013 PASSED IN ITA NO.284/BANG/2012, FOR:THE ASSESSMENT YEAR 2004-2005, ANNEXURE-D, PRAYING| Date of Judgment 12-07-2018, ITA No.52/2014 The Commissioner of Income Tax-III & Another Vs. M/s. UE Development India Pvt. Ltd., TO: 1]. DECIDE THE FOREGOING QUESTION OF LAW AND/OR,SUCH OTHER QUESTIONS OF LAW AS MAY BE FORMULATED|BY THE HON’BLE COURT AS DEEMED FIT. 2]. SET ASIDE THE.APPELLATE ORDER DATE: 30/08/2013 PASSED BY THE.INCOME TAX APPELLATE TRIBUNAL, ‘A’ BENCH, BANGALORE,|AS SOUGHT FOR, IN THE RESPONDENT-ASSESSEE'S CASE, IN|APPEAL PROCEEDINGS No.284/BANG/2012 FOR ASSESSMENTYEHAR 2004-05, ANNE XURE-D THIS APPEAL COMING ON FOR FINAL HEARING, THISDAY,S. SUJATHA, J., DELIVERED THE FOLLOWING: JU DGMENT Mr. E.I.Sanmathi, Adv. for Appellants — Revenue.Mr. K.S.Ponnappa,Adv. forMr. K.Arun Kumar,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, BangaloreBench ‘A’, Bangalore, inIT(TPIA No.284/Bang/2012dated300.08 .2Z, relating to the Assessment Year2004-05. 2.|TheappealhasbeenadmittedOTlI24 O2J2OO1CO consider.the|followingsubstantial|question of law: Date of Judgment 12-07-2018, ITA No.52/2014 The Commissioner of Income Tax-III & Another Vs. M/s. UE Development India Pvt. Ltd., 3/11 “Whether on the facts and in thecircumstances of the case the Tribunal ts right|in law in holding that in mirror transactions|ALP adjustments cannot be done, 1.e., if onetransaction is treated as at Arm’s Length, no|adjustment can be made on the other related|corresponding transaction of the AE withoutappreciating that this stand is against the|provisions of Section 92(3) of the Act?” 3.|Now, Learned Counsel for the Revenue hassuggested the additional substantial question of law,which reads as under: “WhetherOTFthe factsandin|thecircumstances of the case, the Tribunal is right inlaw in allowing claim of assessee with regardprofit margin of the assessee and incurring lossby holding that as the Tribunal has already heldthat the Transfer Pricing Officer cannot takedifferent stand with regard accepting Arm’sLength Price in the hands of assessee and in thehands of Associated Enterprises though it iscontrary to section 92/3] of the Act and withoutaffording an opportunity to Transfer Pricing Officer to consider the evidences produced beforeTribunal?” 4The learned Tribunal, after discussing therival contentions of both the Appellants-Revenue andRespondent-Assessee, has returned the findings asunder: )Regarding both the substantial questions of law: “WhetherOTFthe factsandin|thecircumstances of the case, the Tribunal is right inlaw in allowing claim of assessee with regardprofit margin of the assessee and incurring lossby holding that as the Tribunal has already heldthat the Transfer Pricing Officer cannot takedifferent stand with regard accepting Arm’sLength Price in the hands of assessee and in thehands of Associated Enterprises though it iscontrary to section 92/3] of the Act and withoutaffording an opportunity to Transfer Pricing Officer to consider the evidences produced beforeTribunal?” 4The learned Tribunal, after discussing therival contentions of both the Appellants-Revenue andRespondent-Assessee, has returned the findings asunder: )Regarding both the substantial questions of law: “13. Having heard both the parties andhaving considered the rival contentions, we findthat the TPO has accepted the expenditureincurred by the AE to be at arm’s length but hasnot accepted the income of the assessee to be atarm’s length. Both the assesses are differentlegalentities|withdifferentcomponents|of|expenditure and income. But when a transactionis entered into with an AE, it has to be at arm’slength from each other. If the transaction is foundto be at ALP in the hands of one of the parties,then the other end of the transaction also has tobe considered to be at arm’s length. Therefore,when the TPO has accepted the transaction to beat arm’s length in the hands of the AE, then thetransaction will have to be accepted to be atarm’s length in the hands of the assessee also. In Date of Judgment 12-07-2018, ITA No.52/2014 The Commissioner of Income Tax-III & Another Vs. M/s. UE Development India Pvt. Ltd., 5/11 view of the same, we are of the opinion that theDRP was right in holding that what is true of oneend is true of the other end of the transaction butit erred in holding that the remedy its to suitablysubstitute the ALP determined in the hands ofassessee also in the hands of the AE. As rightlypointed out by the learned counsel for theassessee, the DRP can only give directions asregards the determination of ALP in the hands ofthe assessee before it. It cannot give directions toconsider the issue in the hands of an assesseewhose case is not before it. It is for the relevantTPO/AO to take action in accordance with law inthe light of facts and circumstances of the casebefore them applying their mind independentlyand not on the directions of DRP or any otherauthority in another case. Therefore, the relevantground of appeal on this issue is allowed. 14.AS|regardsthemarginof|theassessee and the reasons for incurring of loss areconcerned, we find that the assessee has madeelaborate submissions before the TPO as well asthe CIT/[A//DRP. According to the learned counselfor the assessee and the material on record, theassessee has incurred loss on the project due tothe following reasons: KVeVNKK” Date of Judgment 12-07-2018, ITA No.52/2014 The Commissioner of Income Tax-III & Another Vs. M/s. UE Development India Pvt. Ltd., 6/11 14.AS|regardsthemarginof|theassessee and the reasons for incurring of loss areconcerned, we find that the assessee has madeelaborate submissions before the TPO as well asthe CIT/[A//DRP. According to the learned counselfor the assessee and the material on record, theassessee has incurred loss on the project due tothe following reasons: KVeVNKK” Date of Judgment 12-07-2018, ITA No.52/2014 The Commissioner of Income Tax-III & Another Vs. M/s. UE Development India Pvt. Ltd., 6/11 However, we find that neither the AO/TPOTLOTthe|CIT[A]/DRPhasconsideredthe|assessee’s contention or the explanation for theloss incurred by the assessee for the relevantassessment year. U/s 92CA of the Act, the TPOhas to determine the ALP of the transaction andwhile doint so, the TPO has to examine thereasons for the margin of the assessee being lessthan the comparable companies. The TPO isrequired to determine whether the price fixed bythe assessee with its AE is at arm’s length takinginto consideration the margin earned by theSimilarcomparablecompanitesin|Similarcircumstances. For determining the same, theTPO is required to examine whether similarmarket conditions exist in the case of theassessee also. Any abnormal or extraordinaryevent has to be taken into account and whereverpossible suitable and reasonable adjustment tosuch extraordinary event or circumstance has tobe made. The claim of the assessee that theextraordinary cost that the assessee had incurreddue to various circumstances enumerated above,have not been considered by the TPO or the AO.According to the learned counselfor the assessee,this expenditure has to be taken into account Date of Judgment 12-07-2018, ITA No.52/2014 The Commissioner of Income Tax-III & Another Vs. M/s. UE Development India Pvt. Ltd., 7/11 while arriving at the profit margin of the assesseeand also the average margins of the comparablecompanies or in the alternative, award of theArbitral Tribunal should also be taken intoconsideration as the income of the assessee fordetermination of the ALP adjustment. As neitherthe AO/TPO nor the first appellate authority haveconsidered these circumstances of the assesseefor the loss and also in view of the evidence filedbefore us such as letter of NHAI stating that theestimated cost was much higher than the contractawarded to the assessee, we are of the opinionthat the ALP determined by the TPO/AO was notjustified. In such circumstances, the normalcourse of action would be to remand the issue tothe file of the TPO/AO to re-determine the ALPafter taking all the above facts into consideration.But, we have already held above that where theTPO has accepted the transaction to be at ALP inthe hands of the AE, then he cannot take adifferent stand in the case of the other party tothe transaction t.e., the assessee herein. In viewof the same, we do not see any useful purposebeing served by remanding the issue to the lowerauthorities.| Date of Judgment 12-07-2018, ITA No.52/2014 The Commissioner of Income Tax-III & Another Vs. M/s. UE Development India Pvt. Ltd., 8/11 15.In the result, the assessee’s appealsare allowed.” 5The controversy involved herein is no moreres integrain view oft the decision of this Court inI1.T.A.Nos.536/2015 c/w 537/2015dated25.06.2018[Prl. Commissioner of Income Tax & Anr. V/s. M/s.Softbrands India Pvt. Ltd.,]|wherein it has beenobserved that unless the finding of the Tribunal is foundex facie perverse, the Appeal u/s. 260-A of the Act, isnot maintainable. The relevant portion of the Judgment is quoted below for ready reference: “Conclusion: 05. A substantial quantum of international|trade and transactions depends upon the fair|and quick judicial dispensation in such cases.Had it been a case of substantial question ofinterpretation ofprovisions of Double Taxation|Avoidance Treaties (DTAA), interpretation ofprovisions of the Income Tax Act or Overriding|Effect of the Treaties over the DomesticLegislations or the questions like Treaty M/s.Softbrands India Pvt. Ltd.,]|wherein it has beenobserved that unless the finding of the Tribunal is foundex facie perverse, the Appeal u/s. 260-A of the Act, isnot maintainable. The relevant portion of the Judgment is quoted below for ready reference: “Conclusion: 05. A substantial quantum of international|trade and transactions depends upon the fair|and quick judicial dispensation in such cases.Had it been a case of substantial question ofinterpretation ofprovisions of Double Taxation|Avoidance Treaties (DTAA), interpretation ofprovisions of the Income Tax Act or Overriding|Effect of the Treaties over the DomesticLegislations or the questions like Treaty Date of Judgment 12-07-2018, ITA No.52/2014 The Commissioner of Income Tax-III & Another Vs. M/s. UE Development India Pvt. Ltd., 9/11 Shopping, Base Erosion and Profit Shifting|(BEPS), Transfer of Shares in Tax Havens|(like in the case of Vodafone etc.), if based on|relevant facts, such substantial questions|of law could be raised before the High|Court underSection 260-Aof the Act, theCourts could have embarked upon such.exercise of framing and answering such|substantial question of law. On the otherhand, the appeals of the present tenor as to|whether the comparables have been rightly|picked up or not, Filters for arriving at thecorrect list of comparables have been rightly|applied or not, do not in our considered|opinion, give rise to any substantial question|of law. 06. Weare therefore of the consideredopinion that the present appeals filed by the|Revenue do not give rise to any substantialquestionof|lawand.theSuggested|substantial questions of law do not meet therequirements ofSection 260-A|of the Act andthus the appeals filed by the Revenue are| Date of Judgment 12-07-2018, ITA No.52/2014 The Commissioner of Income Tax-III & Another Vs. M/s. UE Development India Pvt. Ltd., 10/11 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 Revenue are|therefore dismissed with no order as_ tocosts.” 6. In the circumstances, having heard the learned Counsel appearing for both the sides, we are of the considered opinion that no substantial question of law arises for consideration in the present case. TS|Hence, the Appeal filed by the Appellants-Revenue is liable to be dismissed and is accordinglydismissed. Nocosts.| NC. Sd/-.JU DGE Sd/-.JU DGE