Date Of Judgment 23-07-2018, Ita v. M/S Sami Labs Ltd

IN THE HIGH COURT OF KARNATAKA, BENGALURU DATED THIS THE 23 DAY OF JULY 2018 PRESENT THR HON’BLEK DR.JUSTICE VINBBT KOTHARI ANT) THR HON’BLE MRS..JUSTICK S.SUJATHA I.T.A. No.683/2015 BETWEEN : 1.Pr. COMMISSIONER OF INCOME TAX-VI,_C.R.BUILDING, QUEENS ROAD,BANGALORE.C.R.BUILDING, QUEENS ROAD,BANGALORE. «|ASSISTANT COMMISSIONEROF INCOME TAX, CIRCLE 12(3), |BANGALORE. _ APPBLLANTS| (BY SRI E.I.SANMATHI, ADV.) AND : M/s SAMI LABS LTD.|18/1 & 19/2,|FIRST MAIN ROAD, II PHASE,PEENYA INDUSTRIAL AREA,BANGALORE._. RESPONDENT. (RESPONDENT SERVED.)| THIS TTA IS FILED UNDER SECIION 2J6O0-A OF INCOMTAX ACT 1961, ARISING OUT OF ORDER DATED 08/05/2015)PASSEDIN|IT(TP)ANO.1197/BANG/2012,KOR.THEASSEHKSSMENT YEAR 2JOO8-2009 ANNEBEXURE-A. PRAYING TODECIDE THE FOREGOING QUESTION OF LAW AND/OR SUCH.OTHER QUESTIONS OF LAW AS MAY BE FORMULATED BY THEHON'BLE COURT AS DEEMED FIT. 2. SEIT ASIDE JHE Date of Judgment 23-07-2018, ITA No.683/2015 Pr. Commissioner of Income Tax-VI & another Vs. M/s Sami Labs Ltd. 2/9 APPELLATE ORDER DATED 08/05/2015 PASSED BY THE ITAT,‘AC!BENCH,BENGALURU,AS|SOUGHTFOR, IN|THERESPONDENT-ASSESSEE'S CASE, IN APPEAL PROCEEDINGSIT(TP)A NO.1197/BANG/2012 FOR A.Y.2008-09 ANNEXURE-A. THIS APPEAL COMING ON FOR HEARING, THIS DAY,|S. SUATHA, J., DELIVERED THE FOLLOWING: JU DBiGMENT Mr. E.I. Sanmathi, Adv. for Appellants — Revenue. | This Appeal is filed by the Revenue purportedlyraising substantial questions of law arising from theOrder of the Income Tax Appellate Tribunal, BangaloreBench ‘A’, Bangalore in.IT|TP|A No.1197/Bang/2012dated|08.05.2015, relating to the Assessment Year2008-09. a2ThisAppealhas|beenadmitted|OTL 05.04.2016to consider the following substantialquestions of law as framed by the Revenue in theMemorandum of Appeal. “1.WhetherOTLthefactsand|circumstances of the case, the Tribunal is right indirecting to include forex gain/loss as operating in nature without ascertaining the nexus with thebusiness activity of the taxpayer? D2 Whether on the facts and in thecircumstances of the case, the Tribunal ts right in|law in directing idle capacity can be worked outonly based on machine capacities and utilizationof the machines in manufacturing sector, whereasthe taxpayer has failed to demonstrate that theindustry capacity was better utilized situationsthan its own? 3.|Whether on the facts and in thecircumstances of the case, the Tribunal ts right in|law in giving relief to the assessee on the issue ofinterest charged to Associated Enterprise when itis clear that interest is not charged at ArmsLength Price?”| Regarding Substantial Question Nos.1 & 2: 3.The learned Tribunal, after discussing the rival contentions of both the Appellants-Revenue and Respondent-Assessee, has returned findings as under: “20. There also is much strength in the|argument of assessee that the margins of thecomparables worked out by the AO required to be 3.|Whether on the facts and in thecircumstances of the case, the Tribunal ts right in|law in giving relief to the assessee on the issue ofinterest charged to Associated Enterprise when itis clear that interest is not charged at ArmsLength Price?”| Regarding Substantial Question Nos.1 & 2: 3.The learned Tribunal, after discussing the rival contentions of both the Appellants-Revenue and Respondent-Assessee, has returned findings as under: “20. There also is much strength in the|argument of assessee that the margins of thecomparables worked out by the AO required to be adjusted for discrepancy in stock, excessive R &D expenditure etc., sumilarly, co-ordinate bench ofthis Tribunal has held in the case of Trilogy E-Business Software India P. Ltd. v. DCIT (2013)140 ITD 540, that forex gain relating to exportbusiness were part of the operating revenues andhad to be considered while working out the ALPof the international transactions undertaken by it.Lower authorities have also not verified the claimof assessee that non-operating expenditures werenot excluded while working out the operatingexpenditure.similarly|its|claimthatTP|adjustment has to be confined to the internationaltransaction with AE is also justified in view of thedecision of the co-ordinate bench in the case ofKirloskar Toyota Textiles Machinery P. Ltd. V.ACIT|HT(TP)ANo. 1401/ Bang/ 201dt.14.11.2014/. On the other hand, we find thatthe working out of idle cost done by assesseewas not based on any specific principles. It took apresumption that fixed costs varies with turnover.Reduction in turnover can be Que to reduction inprices and need not always be due to reduction inproduction. Idle capacity can be worked out onlybased on machine capacities and utilization of themachine in manufacturing sector. Exercises doneby the assessee for working out the fixed cost Date of Judgment 23-07-2018, ITA No.683/2015 Pr. Commissioner of Income Tax-VI & another Vs. M/s Sami Labs Ltd. attributable to idle capacity at 31% was incorrect.However, tf assessee is able to show that therewas any idle capacity, then proper adjustmenthas to be while accepting TNNM adopted by theTPO, we are of the opinion that analysis of thetransfer pricing of the international transactionrequires a fresh look by the TPO/AO_ byconsidering all the averments taken by assesseein detail. We, therefore, set aside the orders of theauthorities below and remit the issue with regardto fixing of ALP of the international transaction,back to the file of TPO/AO for considerationafresh in accordance with the directions givenabove. No doubt, if the study made afresh showthat the margin of the assessee on the cost waswithin +/-5% of the arithmetic mean, the AO shallnot make any adjustment. YI6.In the result, grounds 12 to 16 ofassessee are treated as partly allowed. " Regarding Substantial Question No.3: “11. We have perused the orders and|heard the rival contentions. TPO in his order Qt.30.10.2011, has noted that the interest ofRs.5,57,226/- recetved by assessee from itssubsidiary in Australia was on a loan ofRs. 1,46,40,800/.-EquitySharecapitalOf| Date of Judgment 23-07-2018, ITA No.683/2015 Pr. Commissioner of Income Tax-VI & another Vs. M/s Sami Labs Ltd. 6/9 aASSCSSCEalongwithShare.capitalmoney—TESeCTVESandsurplusbyitselfCarneToRs. 74,50,67,577/- as on 31.03.2008 and thiswas Rs.70,03,98,771/- as on 31.03.2007. Thus,|obviously assessee had substantial own funds)and even if we presume that the loan which wasgiven to a subsidiary was from a common pool,we cannot say that any loan funds were used forsuch purpose. When own funds are more than theloans, an assessee can always take an argumentthat loan funds had gone from own funds. In anycase, in the case of M/s Swa Industries &Holdings Ltd., (supra), in which one of us was aparty, it was held as under in para 11 of itsorder: NXXXXX Date of Judgment 23-07-2018, ITA No.683/2015 Pr. Commissioner of Income Tax-VI & another Vs. M/s Sami Labs Ltd. 6/9 aASSCSSCEalongwithShare.capitalmoney—TESeCTVESandsurplusbyitselfCarneToRs. 74,50,67,577/- as on 31.03.2008 and thiswas Rs.70,03,98,771/- as on 31.03.2007. Thus,|obviously assessee had substantial own funds)and even if we presume that the loan which wasgiven to a subsidiary was from a common pool,we cannot say that any loan funds were used forsuch purpose. When own funds are more than theloans, an assessee can always take an argumentthat loan funds had gone from own funds. In anycase, in the case of M/s Swa Industries &Holdings Ltd., (supra), in which one of us was aparty, it was held as under in para 11 of itsorder: NXXXXX We are, therefore, of the opinion that assessee’sreceipt of interest which was within +/-5% of libordid not require any ALP adjustment. Addition ofRs.10,77,990/- made on this count standsdeleted. Grounds & to 10 of assessee are treatedas allowed.” 4The controversy involved herein is no more res integrain view of the decision of this Court in|L.T.A. Date of Judgment 23-07-2018, ITA No.683/2015 Pr. Commissioner of Income Tax-VI & another Vs. M/s Sami Labs Ltd. 7/9 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 Judgmentis quoted below for ready reference: <Conclusion: oo. A substantial quantum of international tradeand transactions depends upon the fair and quick|judicial dispensation in such cases. Had it beena case of substantial question of interpretation ofprovisions of Double Taxation Avoidance Treaties(DTAA), interpretation of provisions of the IncomeTax Act or Overriding Effect of the Treaties overthe Domestic Legislations or the questions likeTreaty Shopping, Base Erosion and Profit Shifting(BEPS), Transfer of Shares in Tax Havens (like inthe case of Vodafone etc.), | based on relevantfacts, such substantial questions of law could |be raised before the High Court underSection|260-A|of the Act, the Courts could haveembarked upon such exercise of framing and)answering such substantial question of law. On Date of Judgment 23-07-2018, ITA No.683/2015 Pr. Commissioner of Income Tax-VI & another Vs. M/s Sami Labs Ltd. the other hand, the appeals of the present tenoras to whether the comparables have been rightlypicked up or not, Filters for arriving at the correctlist of comparables have been rightly applied ornot, do not in our considered opinion, give rise toany substantial question of law. 56. We are therefore of the consideredopinion that the present appeals filed by theRevenue do not give rise to any substantialquestion of law and the suggested substantialquestions of law do not meet the requirements ofSection 260-A.of the Act and thus the appealsfiled by the Revenue are found to be devoid ofmerit and the same are liable to be dismissed. | 57. We make it clear that the same'|yardsticks and parameters will have to beapplied, even tf such appeals are filed by theAssessees, because, there may be cases wherethe Tribunal giving its own reasons and findingshas found certain comparables to be goodcomparables to arrive at an‘Arm’s LengthPrice“ in the case of the assessees with whichthe assessees may not be satisfied and have filedsuch appeals before this Court. Therefore weclarify that mere dissatisfaction with the findingsoffacts arrived at by the learned Tribunal is not at all a sufficient reason to invokeSection 260-Aof the Act before this Court. 58 The appeals filed by the Revenue aretherefore dismissed with no order as to costs.” 5.In the circumstances, having heard the learned Counsel appearing for the Appellants-Revenue, We are of the considered opinion that no substantialquestion of law arises for consideration in the presentCase. | at all a sufficient reason to invokeSection 260-Aof the Act before this Court. 58 The appeals filed by the Revenue aretherefore dismissed with no order as to costs.” 5.In the circumstances, having heard the learned Counsel appearing for the Appellants-Revenue, We are of the considered opinion that no substantialquestion of law arises for consideration in the presentCase. | 6.Hence, the Appeal filed by the Appellants-Revenue is liable to be dismissed and is accordinglydismissed. Nocosts. Copy of this order be sent to the Respondent- ASSeCSS€@e AN/- Sd/-.JUDGE| Sd/-.JUDGE|