Ita/282/2013 Of The Commissioner Of Income Tax v. M/S Ge India Technology

IN THE HIGH COURT OF KARNATAKA AT BENGALURUDATED THIS THE 1/[TH|]DAY OF DECEMBER 2020. PRESENT| THE HON’BLE MR. JUSTICE ALOK ARADHE AND| THE HON’BLE MR. JUSTICE H.T.NARENDRA PRASAD1LT.A. NO.2Z82 OF 201 BETWEEN: 1.|THE COMMISSIONER OF INCOME-TA® C.R. BUILDING, QUEENS ROAD BANGALORE. 2 |THE DY. DIRECTOR OF INCOME-TAX. CIRCLE-11(3) RASHTROTHANA BHAVAN NRUPATHUNGA ROAD, BANGALORE. (BY SRI. DILIP KUMAR, ADV., FOR| SRI. K.V. ARAVIND, ADV.,) _... APPELLANTS AND" M/S. GE INDIA TECHNOLOGYCENTRE PVT. LTD., NO.122, EXPORT PROMOTIONINDL. PARK, WHITEFIELD ROADBANGALORE-560066,. (BY SRI. SACHIT JOLLY, ADV., FOR| SRI. B.N. PRAKASH, ADV.,) .., RESPONDENT THIS I.T.A. IS FILED UNDER SEC. J6O0-A OF INCOME TAXACT 1961, ARISING OUT OF ORDER DATED 31.12.2012 PASSED IN ITA NO.925/BANG/2011 FOR THE ASSESSMENT YEAR 2006-07,PRAYING TO: |(i) FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW,STATED THEREIN. | (ii) ALLOW THE APPEAL AND SET ASIDE THE ORDER DATED.31.12.2012 IN ITA NO.925/BANG/2011 PASSED BY THE ITAT,BANGALORE AND CONFIRM THE ORDER OF THE DISPUTE.RESOLUTION PANEL AND THE CONSEQUENTIAL ORDER PASSEDBY THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-11(3),_BANGALORE. THIS ILT.A. COMING ON FOR’ HEARING, THIS DAY, |ALOK ARADHE J.,DELIVERED THE FOLLOWING: | JUDGMENT This appeal under Section 260-A of the Income Tax Act, 1961 (nereinafter referred to as the Act, for snort)Nas been filed Dy the revenue. The subject matter ofthe appeal pertains to the Assessment Year 2006-07.The appeal was admitted by a Bench of this Court videorder dated 06.01.2015 on the following substantial|questions of law:| “(1) Whetner tne Appellate Authorities were|CorrectIn|holdingthattelecommunication expenses and travelingexpenses incurred in_ foreign currencyreduced from export turnover has to bereduced from total turnover for computing deduction under Section 10A of the Act inthe absence of any provisions in SectionLOA|oftheAct.whichreguires theconcerned expenses to be reduced fromtotal turnover also? (2)Whether the Tribunal on the factsand in circumstances of the case wascorrect in setting aside the arms lengthprice adjustment on account of interest onexternal commercial borrowings on theground the rate of interest is not disputedin the earlier assessment years uptoassessme/lnYearPDOOS8-Oexceptfor2006-07 without taking into considerationtheTransferPrICINgOfficerhas.NOTexamined the controversy in detail in theearlier years and the determination ofarms length price is independent in eacnof the assessment year and recorded aperverse finding? (3)Whether the Tribunal committedan error in not appreciating the fact thatloans or external commercial borrowingsbetween the cross border entities resulting in an tnternational transaction and eachtransaction has to be considered everyyear with respect to the arms lengthprice?, " 2. Factual background in which the aforesaidsubstantial questions of law arise for our consideration.need mention. The assessee is engaged in the business|of research and development in the area of materialsciences and process technology and providing and|related software development services. The assesseefiled return of income for the Assessment Year 2006-07|ON|31.10.7006|anddeclared.an|incomeOF Rs.2,12,18,961/-. The return of income was processedunder Section 143(1) on 10.09.2007. Subsequently, thecase of the assessee was selected for scrutiny and noticeunder Section 143(2) of the Act was issued on.05.10.2007. During the relevant financial year, it was|observedthat|theaSSeCSSCEhacinternationaltransactions exceeding Rs.15 Crores. Therefore, with.prior approval of the Commissioner of Income Tax. 2. Factual background in which the aforesaidsubstantial questions of law arise for our consideration.need mention. The assessee is engaged in the business|of research and development in the area of materialsciences and process technology and providing and|related software development services. The assesseefiled return of income for the Assessment Year 2006-07|ON|31.10.7006|anddeclared.an|incomeOF Rs.2,12,18,961/-. The return of income was processedunder Section 143(1) on 10.09.2007. Subsequently, thecase of the assessee was selected for scrutiny and noticeunder Section 143(2) of the Act was issued on.05.10.2007. During the relevant financial year, it was|observedthat|theaSSeCSSCEhacinternationaltransactions exceeding Rs.15 Crores. Therefore, with.prior approval of the Commissioner of Income Tax. (Appeals), Bangalore-I, Bangalore, a reference was.made to the Transfer Pricing Officer to determine thearms length price as per Section 92CA of the Act. The|order dated 27.10.2009 under Section 92ZCA of the Actwas passed by the Joint Director, Transfer Pricing-I],|Bangalore, by which it was held that adjustment to the|arms length price to the extent of Rs.1,04,96,20,245/-|is required to be made under Section 92CA of the Act. 3. The order of the Transfer Pricing Officer was|SENT|tOtheaSS@SSCECvideCommunication|dated13.11.2009 in order to enable the assessee to respond|to tne order. TJInereafter, the assessee disputed thedraft assessment and preferred objections before tneDispute Resolution Panel. Tne Dispute Resolution Panel,by order dated 27.08.2010, upheld the determination of.arms length price in respect of interest paid / payable by the assessee to the associated enterprises. Tnereafter,an order of assessment dated 22.08.2011 was passedby which the Assessing Officer gave effect to the orders. passed by the Transfer Pricing Officer and the Dispute|Resolution Panel and recomputed the interest paid /payable by the assessee at the rate of 5.67% instead of7.50% and 8.49% as calculated by the assessee. TheAssessing Officer further noticed that the assessee Nad|claimed deduction under Section 10A of the Act without|reducing communication expenses from export turn|over. The Assessing Officer recomputed the same by |exciuding the said expenses from export turn over.Thereafter, the assessee filed an appeal before theIncome Tax Appellate Tribunal (hereinafter referred to.as the Tribunal’ for short). The Tribunal, by an orderdated 31.12.2012,inter aliaheld that in respect of thecomputation of deduction under Section 10A of the Act,communication|EXPENSESand|travelingExpensesincurred in foreign currency reduced from export turn|over has to be reduced from total turn over. It was/§further held that the interest was paid at the same rateson tne basis of loan agreements entered into by the assessee during the Assessment Year 2000-01 and the|Same was accepted by the revenue for the AssessmentYears 2004-05, 2005-06 and 2008-09 and therefore, the.Same cannot be disputed for the Assessment Year 2006-O07 while determining the interest at the arms lengthprice. Accordingly, the transfer pricing adjustment on|account of interest on external commercial borrowings|was set aside. In the aforesaid factual background, the|revenue Nas filed this appeal. 4. Learned counsel for the assessee, at the outset,submitted that the first substantial question of law has.already been answered against the revenue Dy adecision of the Supreme Court in.‘COMMISSIONER OF INCOMETAX,CENTRAL-IITYS,HCLTECHNOLOGIES LTD."in Civil Appeal Nos.8469-90/2013. The aforesaid aspect of the matter could notdisputed py the learned counsel for the revenue. | 5. In view of the decision of the Supreme Court,the first substantial question of law involved in this.appeal is answered against the revenue and in favour of the assessee. 4. Learned counsel for the assessee, at the outset,submitted that the first substantial question of law has.already been answered against the revenue Dy adecision of the Supreme Court in.‘COMMISSIONER OF INCOMETAX,CENTRAL-IITYS,HCLTECHNOLOGIES LTD."in Civil Appeal Nos.8469-90/2013. The aforesaid aspect of the matter could notdisputed py the learned counsel for the revenue. | 5. In view of the decision of the Supreme Court,the first substantial question of law involved in this.appeal is answered against the revenue and in favour of the assessee. 6. With reference to the second and £ thirsubstantial questions of law, it is submitted that theTribunal, without examining the controversy in terms of Rule 10B(4) of the Income Tax Rules, 1962 (hereinafterreferred to as ‘the Rules’ for short), Dy merely relying onthe statement of the assessee that similar rate of|interest paid by the assessee has been accepted by therevenue in earlier Assessment Years |.e. 2002-03, 2003-04, 2004-05, 2005-06 and 2008-09, recorded a findingin favour of the assessee. It Is further submitted that.the order of the Tribunal is without application of mindand is contrary to the manner of determination of arms.length price provided under Rule 10B of the Rules. It isalso submitted tnat tne aforesaid issue of determination|of interest on external commercial borrowings to the related party was never an issue in previous Assessment.Years and therefore, the finding recorded by the Tribunalis perverse. It is also pointed out that the Reserve Bankof India, in order to regulate the foreign exchange,|prescribes the minimum and maximum rate of interestpayable on external commercial borrowings and the|Reserve Bank of India does not determine the armslength nature of interest paid between the related|parties. The rate of interest has to be determined on.the basis of the rate of interest applicable between theunrelated parties. It is also submitted that the finding of |the Tribunal by placing reliance on the order passed by the Transfer Pricing Officer for the Assessment Year.2008-09 IS perverse. 7. Alternatively, it is submitted that even assumingthat the issue with regard to rate of interest was'adjudicated in the previous years, the Tribunal ought to.Nave appreciated that the principles ofres judicataare|not applicable and eacn Assessment Year is a different unit. It is submitted that if any mistake / error in theapplication of law, if at all is committed, the same couldnot be perpetuated for the Assessment Year in question.It is also argued that the transfer pricing issues Naveto |be determined on the basis of financial sun transactions|of the previous financial year relevant to the assessment.year involved as mandated under Rule 10B of the Rules. |Alternatively, it is submitted that the order passed by.the Tribunal has Deen passed without any reasons andsuffers from the vice of non-application of mind and.therefore, the matter has to be remitted to the Tribunalby re-adjudication. | 8. On the other nand, learned counsel for the|assessee has invited our attention to paragrapns 55 and57 of the order passed by the Tribunal and hassubmitted that the material was produced by theassessee pefore tne Tribunal that tne rate of interest In|the previous assessment years was accepted by tnerevenue and therefore, the revenue could not be permitted to take out a stand for the Assessment Year.2006-07. It is also submitted that the rate of interest|has to be determined with reference to the date on.which the transaction takes place. It is also submitted|that the Reserve Bank of India has given approval with|regard to the rate of interest which is a relevant.consideration to determine the rate of interest. § I[Support of aforesaid submission, reliance has been.placed on the judgment dated 18.11.2015 of theBombay High Court in'COMMISSTONER OF INCOME-TAX-X Vs. SGS PVT. LTD.’|in ITA No.1807/2013 andthe judgment dated 18.05.2020 of Delhi High Court in|‘PRL, COMMISSIONER OF INCOME-TAX-7 Vs. OPENSOLUTIONS SOFTWARE SERVICES PVT. LTD.|in ITA)No.201/2018. permitted to take out a stand for the Assessment Year.2006-07. It is also submitted that the rate of interest|has to be determined with reference to the date on.which the transaction takes place. It is also submitted|that the Reserve Bank of India has given approval with|regard to the rate of interest which is a relevant.consideration to determine the rate of interest. § I[Support of aforesaid submission, reliance has been.placed on the judgment dated 18.11.2015 of theBombay High Court in'COMMISSTONER OF INCOME-TAX-X Vs. SGS PVT. LTD.’|in ITA No.1807/2013 andthe judgment dated 18.05.2020 of Delhi High Court in|‘PRL, COMMISSIONER OF INCOME-TAX-7 Vs. OPENSOLUTIONS SOFTWARE SERVICES PVT. LTD.|in ITA)No.201/2018. 9. We have considered the submissions made onboth sides and have perused the record. Section 10B.deals with determination of Arms Length Price under.Section 92C of the Act. In the instant case, the assessee had calculated the rate of interest at 7.50% and 8.49%.However, the Assessing Officer has scaled down thesame to 5.6/%. It is pertinent to mention here thatReserve Bank of India has given the approval in respect|of the rate of interest and the approval given by the|Reserve Bank of India with regard to rate of interest is a|relevant factor while determination of the rate of.interest. It is equally well settled that rate of interestShould pe determined on the basis of rate of interest|prevailing at the time of availing the loan. From perusalof the order passed by the tribunal, it is evident thatbefore the tribunal, the assessee had filed the copy ofshow cause notice issued by Transfer Pricing Officer, the|assessees submission in response to the same andorder of the Transfer Pricing Officer for Assessment Year.2008-09. The tribunal has further found that the loans|were obtained by the assessee in the year 2000-01 atthe rate of 7.5% and 8.49% respectively. The tribunalnas further recorded the finding tnat assessee has obtained theloans in the year 2001 and the issue has.been considered by the Transfer Pricing Officer for theAssessment Years 2004-05 and 2005-06 and also for theAssessment Year 2008-09. It has further been held that|Transfer Pricing Officer after considering the assessee's|submission has accepted the rate of interest fixed in theloan agreements. It is also pertinent to mention here.that the rate of interest has been accepted by theAssessing Officer for the years 2002-03 to AssessmentYear 2008-09 except the Assessment Year 2006-07.Therefore, the tribunal has rightly held that the revenue|cannot be allowed to make a departure in case of rate ofinterest for Assessment Year 2006-07. 10. Tne!SupremeCourtIn|RADHASOAMTSATSANG Vs. COMMISSIONER OF INCOME-TAX’|(1992) 60 TAXMAN 248 (SC)|has held that even.thnougn principles of res judicata do not apply to incometax proceedings, but where a fundamental aspectpermeating through the different Assessment Years has- been found as the fact one way or the other and theparties have allowed the position to be sustained by notchallenging the order, it would not be at all appropriate|to allow the position to be changed in subsequent year. |For this reason also, in the facts of the case, a different|view cannot be taken. In view of preceding analysis, substantial questionsof law 2 and 3 are answered against the revenue and in|favour of the assessee. In the result, we do not findmerit in this appeal, the same fails and is herebydismissed. Sd/-JUDGE Sd/-—JUDGE RV/SS_