PCIT Vs Applied Materials India Pvt. Ltd. (Karnataka High Court)
A Comparable Must Perform Comparable Functions: Karnataka High Court Upholds Exclusion of Three Companies
Summary: The Revenue challenged the Bengaluru Tribunal’s direction to exclude Mindtree Ltd., Persistent Systems Ltd. and Larsen & Toubro Infotech Ltd. from the transfer pricing comparables for AY 2013–14. Its contention was that the TPO had selected the companies after applying the prescribed tests under Rule 10B, and that the Tribunal’s contrary findings were perverse.
The High Court examined the reasons for excluding each company. Mindtree carried out research and development and had created substantial intangibles. Persistent Systems earned royalty income and developed products, whereas the assessee did neither. Larsen & Toubro Infotech was a full-fledged software development service provider whose functions differed from the assessee’s limited functions. The Court found the Tribunal’s reasons proper and noted that the Revenue had brought no additional facts or circumstances to show that its findings were perverse.
The substantial questions of law were therefore answered in favour of the assessee, and the Revenue’s appeal was dismissed. The useful point from the decision is that selection by the TPO under Rule 10B does not, by itself, settle functional comparability: the actual functions, product activity, royalty income and intangibles of a proposed comparable remain material. The ruling also turns on the specific factual differences recorded for these three companies; it should not be read as excluding them in every transfer pricing case.
FULL TEXT OF THE JUDGMENT OF KARNATAKA HIGH COURT
Heard Sri.Y.V.Raviraj learned standing counsel for the appellants as well as learned Senior counsel Sri.K.R.Vasudevan who represents the respondent.
2. This appeal is directed against the orders passed by the Income-Tax Appellate Tribunal, Bengaluru in IT(TP)A No.2687/Bang/2017 dated 13.05.2020.
3. On hearing both sides, the appeal was admitted for consideration of the following substantial questions of law:
1. “Whether, on the facts and in the circumstances of the case and law, the Tribunal is right in directing Transfer Pricing Officer to exclude even when the Transfer Pricing Officer had chosen comparable’s in accordance with Rule 10B and after satisfying required tests prescribed under the Act?
2. Whether, on the facts and in the circumstances of the case and law, the Tribunal is right in directing Transfer Pricing Officer to exclude Mind Tree Ltd, Persistent Systems Ltd and Larsen and Tourbo Ltd Persistent Systems Pvt.Ltd and Larsen & Tourbo Infotech Ltd as comparable’s by holding that they are functionally dissimilar by following its earlier order without considering the findings and materials bought on record by TPO for computation of ALP which is in accordance with parameters set out in section 92 of the Act and Rule 10B as well?
3. Whether on the facts and in circumstances of the case, the Tribunal’s order can be said as perverse in nature as Tribunal has ignored Rule 10B while directing TPO to exclude or include certain comparable’s”?
4. On hearing both the learned counsel, the core question that arises for consideration as per the substantial questions of law formulated is whether the Tribunal erred in directing Transfer Pricing Officer to exclude Mindtree Limited, Persistent Systems Ltd., and Larsen and Toubro Ltd as comparables by giving observations in that regard.
5. Having gone through the entire material that is brought on record we are of the view that the Tribunal did not err in exclusion of the aforementioned comparables. The reasons given are proper and does not warrant any interference. So far as the Mindtree Limited is concerned, the opinion of the Tribunal that Mindtree Limited is not a comparable with that of the capital services provided by the assessee on the ground that the Mindtree Limited carries out Research and Development activities and has created huge intangibles. Thus, we do not find any reason to interfere with the findings that the assessee company is functionally not similar with that of the Mindtree Limited. So far as the Persistent Systems Ltd is concerned, the Persistent Systems Ltd cannot be compared with assessee company because the assessee company does not earn income from royalty fee and is not engaged in development of products as that of Persistent Systems Ltd. Therefore, the Tribunal rightly observed that this comparable is liable to be excluded.
6. Coming to Larsen and Toubro Infotech Ltd, the functions performed by the assessee company is dissimilar to the Larsen and Toubro Infotech Ltd as per the material produced before us. Therefore, the limited functions performed by the assessee cannot be compared with Larsen and Toubro Infotech Ltd as the same is a full fledged Software Development Service. No additional facts or circumstances are brought before us so as to hold that the findings given by the Tribunal regarding the comparables as mentioned supra are perverse and therefore, there requires interference by this Court exercising appellate jurisdiction. Hence, the substantial questions of law taken up for consideration are answered in favour of the assessee and against the appellant.
7. Thus, the ultimate finding is that the Tribunal’s order cannot be said to be perverse or against the provision of the IT Act or Rules framed thereunder. Hence, we hold that the appeal deserves to be dismissed.
Resultantly, the appeal is dismissed.
