Tax Tribunal’s Exclusion of Comparables Quashed for Lack of Evidence Review

Get the full picture - access the original judgement of the court order here

Case Name:

Principal Commissioner of Income Tax and Anr. Vs M/s. EDS Electronics Data Systems India Pvt. Ltd. (High Court of Karnataka)

ITA No. 681 of 2015

Date: 15th January 2021

Key Takeaways:

• The tribunal’s decision was overturned because it failed to adequately consider the evidence presented by the Transfer Pricing Officer.
• The case emphasizes the importance of a thorough review of evidence in transfer pricing disputes.
• The High Court remanded the case back to the tribunal for a fresh decision with a detailed order.

Issue

Should the tribunal have excluded certain companies as comparables in the transfer pricing study without thoroughly considering the evidence provided by the Transfer Pricing Officer?

Facts

• The assessee, M/s. EDS Electronics Data Systems India Pvt. Ltd., was involved in software development and had international transactions with associated enterprises.
• For the financial year 2005-06, the assessee used the transactional net margin method for its transfer pricing study, selecting certain companies as comparables.
• The Transfer Pricing Officer and the Dispute Resolution Panel had determined a significant difference in the arm’s length price.
• The tribunal excluded two companies, Vishal Information Technologies Ltd. and Nucleus Netsoft & GIS (India) Ltd., from the list of comparables, siding with the assessee.

Arguments

• Revenue’s Argument: The tribunal erred by excluding the comparables without considering the evidence and findings of the Transfer Pricing Officer. The assessee should not have been allowed to change its stance on comparables.
• Assessee’s Argument: The tribunal’s decision was a factual finding, and the excluded companies were not functionally comparable. The revenue did not challenge this finding as perverse.

Key Legal Precedents

• VIJAY KUMAR TALWAR VS. COMMISSIONER OF INCOME TAX, 330 ITR 1: Cited by the revenue to argue that ignoring evidence can give rise to a substantial question of law.
• SUDARSHAN SILKS & SAREES VS. CIT, 300 ITR 205: Cited by the assessee to support the tribunal’s decision as a factual finding.
• PCIT VS. IHG IT SERVICES (INDIA) PVT. LTD. ITA NO.264/2016: Cited by the assessee for similar reasons.
• CIT VS. UT STARCOM INC., ITA NO.767/2017: Another case cited by the assessee.

Judgement

The High Court quashed the tribunal’s order due to its failure to consider the evidence and findings of the Transfer Pricing Officer. The case was remanded back to the tribunal for a fresh decision, requiring a detailed and reasoned order.

FAQs

Q1: Why was the tribunal’s decision overturned?

A1: The tribunal’s decision was overturned because it did not adequately consider the evidence and findings presented by the Transfer Pricing Officer.

Q2: What does this mean for the parties involved?

A2: The case will be reconsidered by the tribunal, which must now provide a detailed and reasoned decision based on the evidence.

Q3: What is the significance of this case?

A3: This case highlights the necessity for tribunals to thoroughly review and consider all evidence in transfer pricing disputes, ensuring decisions are well-reasoned and justified.

This appeal under Section 260A (of Income Tax Act, 1961) (hereinafter referred to as the Act for short) has been preferred by the revenue. The subject matter of the appeal pertains to the Assessment year 2006-07.

The appeal was admitted by a bench of this Court vide order dated 24.08.2016 on the following substantial questions of law:

"(i) Whether on the facts ad in the circumstances of the case, the Tribunal is right in law in excluding M/s Vishal Information Technologies Ltd as

comparable company of ITES segment in holding that M/s VITL outsources majority of its work ignoring the fact that outsourcing entails higher cost resulting in lower operating profit.

(ii) Whether on the facts and in the circumstances of the case, the Tribunal

is right in law in excluding M/s Nucleus Netsoft & GIS (India) ltd., is not a comparable brushing aside the fact that it was taken as a comparable by the assessee on its own TP study and the fact that ITES is the primary business of the company?".

2. Facts leading to filing of this appeal briefly

stated are that the assessee is a company engaged in

the business of development of computer software

through different units i.e., Software Technology Park

(STP) and Non STP units. The assessee got merged with

M/s Mphasis Ltd. The assessee was having interaction

transaction with associated enterprises. During the

financial year 2005-06, the assessee rendered IT

enabled services and had earned margin of 14.26% on

total costs. In the transfer pricing study maintained by

the assessee, it applied the transactional net mariginal

method as the most appropriate method and on

selection of certain companies as comparables whose

average margin stood at 19.67%, the assessee

concluded its international transaction as being at arms

length. The Assessing Authority referred the matter to

the Transfer Pricing Officer by an order dated

10.09.2009 determined the difference at

Rs.120,973,568/- and subsequently, on the basis of the

directions issued by the dispute resolution panel,

Assessing Authority determined the arms length price

difference at Rs.5,18,68,568/-. The assessee thereupon

filed an appeal before the Income Tax Appellate Tribunal

(hereinafter referred to as 'the tribunal' for short). The

tribunal directed exclusion of Vishal Information

Technologies Ltd. And Nucleus Netsoft and by placing

reliance on decision of the coordinate bench of the

tribunal in 'HSBC ELECTRONIC DATEA PROCESSING

INDIA LTD. VS. ACIT', (2013) 38 TAXMANN.COM

141 (HYDERABAD - TRIB) held that profile of HSBC

supra is similar to assessee and therefore, Vishal

Information Technologies Ltd. And Nucles Netsoft and

GIS India Ltd. are required to be excluded. In the

aforesaid factual background, this appeal has been filed.

3. Learned counsel for the revenue submitted

that the tribunal without appreciating the fact that the

assessee in its transfer pricing study before the Transfer

Pricing Officer had chosen certain comparables and had

later on contended before the tribunal that the same

cannot be taken as comparables. Therefore, the

assessee could not have been permitted to take

contradictory stand and therefore, the tribunal could not

have excluded the comparables. It is further submitted

that the tribunal has failed to consider the findings of

the Transfer Pricing Officer and Dispute Resolution Panel

and has even failed to refer to the material brought on

record by the Transfer Pricing Officer. It is also urged

that when the appellate authority ignores the evidence

on record, the same gives rise to substantial question of

law. In support of aforesaid submission, reliance has

been placed on 'VIJAY KUMAR TALWAR VS.

COMMISSIONER OF INCOME TAX', 330 ITR 1.

4. On the other hand, learned counsel for the

assessee submitted that the decision of the tribunal that

Vishal Information Technologies Ltd. And Nuclues

Netsoft and GIS (India) Ltd. are functionally not

comparable is a finding of fact and the revenue has

neither challenged the same as perverse nor has

brought any material on record to demonstrate its

perversity and therefore, no substantial questions of law

arises for consideration. It is further submitted that in

any event, Vishal Information Technologies Ltd is not

comparable to the assessee and has rightly been

excluded as it is functionally dissimilar. In support of

aforesaid submissions, reliance has been placed on

SUDARSHAN SILKS & SAREES VS. CIT, 300 ITR

205 and decision of Punjab and Haryana High Court in

PCIT VS. IHG IT SERVICES (INDIA) PVT. LTD. ITA

NO.264/2016 DATED 05.12.2016 and decision of the

High Court of Delhi in CIT VS. UT STARCOM INC., ITA

NO.767/2017 DATED 25.09.2017.

5. We have considered the submissions made

by learned counsel for the parties and have perused the

record. It is trite law that tribunal is a final fact finding

authority and has to consider the material brought

before it. In the instant case, the relevant extract of the

order passed by the tribunal, reads as under:

14. We have considered the rival

submission sand are of the view that in light of

the aforesaid decision of ITAT rendered in case

of a company, which is engaged in rendering

ITES services similar to that of the assessee,

the aforesaid companies have to be excluded

as functionally not comparable with that of the

assessee. We hold and direct accordingly. The

AO is directed to compute the arithmetic mean

after excluding the aforesaid companies from

the list of comparables. The AO is also directed

to give the benefit of +/- 5% variation to the

arithmetic mean of the assessee with that of

the comparables as provided in the 2nd

proviso to Section 92CA (of Income Tax Act, 1961). Other

issues raised in grounds No.1.1 to 1.5 by the

assessee do not require any adjudication in

view of the above conclusions and as conceded

by the ld. Counsel for the assessee.

6. Thus, from perusal of the relevant extract of

the order passed by the tribunal, it is evident that the

tribunal has neither considered evidence brought on

record by the Transfer Pricing Officer and has neither

considered the findings of the Transfer Pricing Officer as

well as the dispute resolution panel and in a cryptic and

cavalier manner has recorded a finding in favour of the

assessee. No cogent reasons worth the name have been

assigned by the tribunal for recording the findings.

Therefore, in the facts and circumstances of the case,

the order passed by the tribunal dated 23.06.2015 is

hereby quashed. The substantial questions of law are

answered accordingly. The matter is remitted to the

tribunal for decision afresh in accordance with law by a

speaking order.

In the result, the appeal is disposed of.

Sd/-

JUDGE

Sd/-

JUDGE