PCIT Vs FMC India Pvt Ltd. (Karnataka High Court)
High Court Cannot Rework Comparables Like a TPO: Karnataka HC Dismisses Revenue’s Transfer-Pricing Appeals
Transfer-Pricing Findings Cannot Be Reopened Under Section 260A Without Perversity
The Karnataka High Court has dismissed the Revenue’s appeals challenging the exclusion of a functionally dissimilar comparable, reconsideration of the foreign-exchange revenue filter, allowance of working-capital adjustment and restriction of the transfer-pricing adjustment to international transactions.
The Court held that the issues raised by the Revenue essentially required reconsideration of factual findings recorded by the Income Tax Appellate Tribunal. The High Court’s jurisdiction under Section 260A cannot be invoked merely to conduct a fresh comparability or FAR analysis. Unless the Tribunal’s findings are shown to be perverse, based on no evidence or contrary to the statutory scheme, no substantial question of law arises.
Assessee’s Business and Transfer-Pricing Adjustment
FMC India Pvt. Ltd. was engaged in selling its finished products to third parties in India and reselling chemicals and formulations imported from FMC Corporation, USA. It also imported raw materials, including lithium metal, and finished goods for trading from its associated enterprises in the USA and the UK.
The assessee additionally rendered business development, SAP application support, human-resource and regulatory-affairs management services to different divisions of the FMC group.
For Assessment Year 2013-14, the assessee filed its return declaring a loss of ₹14.39 crore. The case was selected for scrutiny and referred to the Transfer Pricing Officer under Section 92CA. The TPO proposed an adjustment of ₹24.42 crore in the manufacturing segment, which was incorporated in the assessment order passed under Section 143(3).
The Commissioner (Appeals) partly allowed the assessee’s appeal. Both the assessee and the Revenue approached the Tribunal. By its common order dated September 29, 2022, the Tribunal partly allowed the assessee’s appeal and disposed of the Revenue’s appeal.
The Revenue thereafter approached the High Court under Section 260A.
Rallis India Functionally Different from the Assessee
One of the principal objections raised by the Revenue concerned the Tribunal’s direction to exclude Rallis India Ltd. from the final set of comparables.
The Tribunal had examined the functional profiles of both companies. The assessee manufactured pesticides using chemical formulations imported as raw materials from its associated enterprise. Rallis India, on the other hand, manufactured non-pesticide products, including products based on organic compost and other materials.
Based on the difference in the products manufactured, functions performed and raw materials used, the Tribunal concluded that Rallis India was not functionally comparable with the assessee.
The High Court observed that the Tribunal had not excluded Rallis India merely on the basis of a broad industrial classification. It had examined the relevant financial statements and applied the FAR analysis to the material available on record.
A conclusion based on a detailed factual comparison does not become perverse merely because another view may also be possible. The Revenue could not ask the High Court to substitute its own comparability analysis for the factual conclusion reached by the specialised Tribunal.
Working-Capital Adjustment Remanded for Verification
The Revenue also objected to the Tribunal’s direction regarding working-capital adjustment, contending that the assessee had not furnished sufficient documentation establishing the impact of working-capital differences on the margins of the comparables. It further argued that granting an adjustment without an upper ceiling could distort the operating margin.
The High Court rejected the objection because the Tribunal had not granted any unconditional or quantified adjustment. It had directed the assessee to furnish the necessary details and remanded the matter to the AO/TPO for examination in accordance with the principles laid down in Huawei Technologies India (P.) Ltd. v. JCIT.
The questions whether an adjustment was justified and, if so, the extent to which it could be reasonably computed were left open.
Thus, the Tribunal had preserved the requirement that any working-capital adjustment must be supported by relevant data and capable of reasonably accurate computation. Such a remand direction did not give rise to a substantial question of law.
Foreign-Exchange Revenue Filter Requires Consistent Approach
The assessee had sought a foreign-exchange revenue filter of 25% considering its predominantly domestic operations, while the Commissioner (Appeals) adopted a 40% filter.
The Tribunal found that there was no proper basis for fixing the filter at 40%. Instead of conclusively accepting either percentage, it remanded the issue to the AO/TPO with a direction to adopt a consistent approach after giving the assessee an opportunity of being heard.
The High Court clarified that the Tribunal had not permanently excluded any comparable by laying down an inflexible filter. The Revenue would have a complete opportunity during the remand proceedings to establish the appropriate filter based on the relevant facts.
The direction was therefore factual and procedural and did not involve any substantial question of law.
TP Adjustment Restricted to International Transactions
The Tribunal had also directed the AO/TPO to restrict the transfer-pricing adjustment to the international transactions involving the import of raw materials from associated enterprises.
The High Court upheld the direction, observing that the transfer-pricing provisions are concerned with determining the arm’s-length price of international transactions entered into with associated enterprises.
The Revenue failed to demonstrate that the Tribunal’s conclusion was perverse or based on an interpretation that was patently unsustainable. A mere disagreement with the Tribunal’s conclusion was insufficient to invoke jurisdiction under Section 260A.
High Court Dismisses Revenue’s Appeals
The Court concluded that the questions proposed by the Revenue sought a reconsideration of factual determinations made during the transfer-pricing exercise.
Since no perversity, absence of evidence or violation of the statutory framework was established, no substantial question of law arose. Both appeals were consequently dismissed, and the Tribunal’s common order was confirmed.
Author’s Comments
This judgment reinforces the limits of an appeal under Section 260A. The High Court is not another transfer-pricing authority empowered to redo the FAR analysis, select comparables or recalculate adjustments merely because the Revenue prefers a different conclusion.
The decision also brings out the distinction between an unconditional relief and a remand for factual verification. Where the Tribunal merely directs the TPO to verify data, adopt a consistent filter or compute an adjustment with reasonable accuracy, the Revenue ordinarily cannot contend that the ultimate relief has already been granted to the assessee.
Equally important is the affirmation that an entity cannot be treated as comparable merely because it operates within the same broad industry. The actual functions performed, products manufactured, raw materials employed, risks assumed and economic circumstances remain decisive.
Lastly, the adjustment must ordinarily remain confined to the relevant international transactions with associated enterprises. An entity-level adjustment extending to uncontrolled domestic transactions would travel beyond the purpose of the transfer-pricing provisions, unless the facts and available segmental data justify a legally sustainable alternative.
Cases Discussed
- Huawei Technologies India (P.) Ltd. v. JCIT (2019) 101 taxmann.com 313 — principles relating to working-capital adjustment; Tribunal remanded the issue for examination in accordance with the principles stated in this decision.
FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT
1. The two appeals under Section 260-A of the Income-tax Act, 1961 (for short, ‘the Act’) are preferred by the Revenue calling in question the common order dated 29.09.2022 passed by the Income Tax Appellate Tribunal, ‘B’ Bench, Bengaluru (for short, ‘the Tribunal’) in ITA Nos.2611/Bang/2018 and 2732/Bang/2018 relating to the assessment year 2013-14.
2. Since both the appeals arise out of the same order of the Tribunal and concern the same assessee and assessment year, they are heard together and are being disposed of by this common judgment.
3. Brief facts leading to the filing of these appeals are as under:
The assessee sells its finished products to third parties in India and also resells chemicals and formulations imported from FMC Corporation, USA. In addition, it imports raw materials (Lithium Metal) and finished goods for trading from FMC Corporation, USA, and FMC Chemicals Ltd, UK. The assessee further provides various support services to different divisions of FMC. These include development services to API Hong Kong and application support services to the Health & Nutrition (Pharma) division of FMC Corporation, USA. The support services rendered to its Associated Enterprises comprise business development services, SAP application support services, human resource services, and regulatory affairs management services etc.
4. For Assessment Year 2013-14, the assessee filed its return of income on 30 November 2013, declaring a loss of Rs.14,39,56,613. Its case was taken up for scrutiny and a reference was made to the Transfer Pricing Officer for determination of the Arm’s Length Price under Section 92CA of the Act. The Transfer Pricing Officer, after examining the matter, proposed an adjustment of Rs.24,42,82,807/- in respect of the manufacturing segment. The Assessing Officer passed the assessment order under Section 143(3) of the Act in conformity with the order of the Transfer Pricing Officer. The assessee preferred an appeal before the Commissioner of Income Tax (Appeals), who partly allowed the appeal by order dated 23.07.2018. Aggrieved by the said order, both the assessee and the Revenue preferred appeals before the Tribunal.
5. The Tribunal, by the impugned common order dated 29.09.2022, partly allowed the appeal of the assessee and disposed of the appeal of the Revenue. The Revenue is in appeal before this Court challenging the said order.
6. In ITA No.580/2023, the Revenue has proposed the following substantial questions of law:
1. “Whether on the facts and in the circumstances of the case, the Tribunal’s order can be said as perverse in nature in law in directing the Transfer Pricing Officer to exclude comparable namely to exclude comparable’s namely, Rallis India Ltd as on ground of functional dissimilarity without appreciating that the selection of comparables in a case depends on transfer pricing on assessee’s specific FAR analysis and specific facts brought out on record by the TPO and as per Rule 10B of I.T.Rules?”
2. “Whether on the facts and in the circumstances of the case, the Tribunal is right in law in directing the Transfer Pricing Officer to grant working capital adjustment without an upper limit would make the profit earned within the permitted range even if no operating profit is earned and assesse had also failed to provide details or documentation as to how difference in working capital has impacted the profit margins of the comparable’s”?
7. In ITA No.575/2023, the Revenue has proposed the following substantial questions of law:
1. ‘Whether on the facts and in the circumstances of the case, the Tribunal’s order can be said as perverse in nature In law in directing Transfer Pricing Officer to exclude companies having earnings in foreign currency exceeding 40% of the turnover when assesse and transfer Pricing Officer had not applied filter in the manufacturing segment and as a result of same the comparable namely, Bhagiradha Chemicals & Inds Ltd, Sabero Organics Gujurat Ltd were excluded”?
2. “Whether on the facts and in the circumstances of the case, the Tribunal’s order can be said as perverse in nature in law in not without appreciating that the selection of comparables in a case depends on transfer pricing on assessee’s specific FAR analysis and specific facts brought out on record by the TPO and as per Rule 10B of I.T.Rules?”
3. “Whether on the facts and in the circumstances of the case, the Tribunal is right in law in directing transfer Pricing Officer to restrict transfer pricing adjustment to international transactions alone contrary to provisions of the Act”?
8. Per contra, the learned counsel for the respondent-assessee supported the order of the Tribunal and submitted that the findings recorded by the Tribunal are pure findings of fact based on appreciation of material on record and do not give rise to any substantial question of law.
9. We have heard the learned counsel for the Revenue and the learned counsel for the respondent-assessee and have carefully perused the orders of the authorities below and the material placed on record.
Re: ITA No.580/2023
10. The first issue concerns the exclusion of Rallis India Ltd. as a comparable. The Tribunal has noticed that the assessee is engaged in manufacturing pesticides using chemical formulations imported as raw materials from its Associated Enterprise. In contrast, on examination of the audited financial statements of Rallis India Ltd., the Tribunal found that the latter was engaged in manufacturing non-pesticide products, including products based on organic compost and other materials, and that its functional profile was materially different from that of the assessee. On that factual analysis, the Tribunal directed its exclusion from the final set of comparables.
11. The Revenue seeks to substitute its own assessment of comparability for that of the Tribunal by contending that selection of comparables is required to be made on the basis of FAR analysis under Rule 10B of the Income-tax Rules. There can be no quarrel with the proposition that the selection of comparables must be undertaken in accordance with Rule 10B. The question, however, is whether the Tribunal’s application of that principle to the material before it gives rise to a substantial question of law.
12. In our considered view, it does not. The Tribunal has not excluded Rallis India Ltd. merely on the basis of a broad classification. It has examined the functions performed, the nature of the products manufactured and the raw materials used by the assessee and the comparable. Having found a material functional difference, it has reached a conclusion on comparability. Such a conclusion, founded upon appreciation of the material on record, cannot be characterised as perverse merely because another view may also be possible.
13. The jurisdiction under Section 260-A is not intended to permit this Court to undertake a fresh comparability analysis or re-appreciate the material which has already been considered by the specialised appellate Tribunal. Unless the finding is shown to be perverse, based on no evidence, or contrary to the statutory scheme, interference is not warranted. The Revenue has not demonstrated any such infirmity.
14. The next issue is the working-capital adjustment. The Tribunal noticed that the assessee had not initially furnished sufficient details to demonstrate the precise impact of differences in working capital upon the margins. Nevertheless, instead of either allowing the claim mechanically or rejecting it finally, the Tribunal directed the assessee to furnish the requisite details and remanded the matter to the Assessing Officer/Transfer Pricing Officer for consideration in accordance with the principles stated in Huawei Technologies India (P.) Ltd. v. JCIT reported in (2019) 101 taxmann.com 313.
15. The grievance of the Revenue is that the Tribunal directed grant of working-capital adjustment without prescribing an upper limit and that the assessee had not demonstrated the impact of the difference in working capital.
16. The submission overlooks the nature of the direction actually issued by the Tribunal. The Tribunal has not granted a quantified or unconditional adjustment. It has remanded the issue for examination by the Assessing Officer/Transfer Pricing Officer after requiring the assessee to furnish the relevant details. The very question whether an adjustment is warranted and, if so, the extent to which it can be computed in a reasonably accurate manner has been left open for determination by the competent authority.
17. Such a direction cannot be regarded as either perverse or contrary to law. The Tribunal has preserved the statutory requirement that the adjustment must be founded upon relevant material and reasonable accuracy. Therefore, the question sought to be raised by the Revenue does not give rise to a substantial question of law warranting interference under Section 260-A.
Re: ITA No.575/2023
18. The first issue in this appeal relates to the foreign-exchange revenue filter. The assessee had contended that a filter of 25 per cent was appropriate having regard to its predominantly domestic operations, whereas the CIT(A) had proceeded on the basis of a 40 per cent filter. The Tribunal found no proper basis for adopting the 40 per cent figure and, instead of deciding the matter conclusively in favour of either side, remanded the issue to the Assessing Officer/Transfer Pricing Officer to adopt a consistent approach in selecting the range of the filter, after affording due opportunity to the assessee.
19. The Revenue contends that the assessee and the Transfer Pricing Officer had not applied such a filter in the manufacturing segment and that the Tribunal therefore erred in directing exclusion of certain comparables.
20. Again, the contention does not take into account the actual nature of the Tribunal’s order. The Tribunal has not finally determined that a particular filter must invariably be applied. It has found the adoption of 40 per cent by the CIT(A) to lack a proper basis and has directed the Assessing Officer/Transfer Pricing Officer to reconsider the issue consistently and in accordance with law. The Revenue will have full opportunity before the competent authority in the remanded proceedings to establish the appropriate filter on the basis of the material available.
21. The direction of remand, in the circumstances, is essentially a factual and procedural direction intended to ensure a proper comparability analysis. No question of law of the nature contemplated by Section 260-A arises therefrom.
22. The second issue concerns restriction of the transfer-pricing adjustment to the relevant international transactions. The Tribunal considered the assessee’s contention in the light of the decisions relied upon before it and, following those decisions, directed the Assessing Officer/Transfer Pricing Officer to restrict the transfer-pricing adjustment to the international transactions relating to import of raw materials.
23. The Revenue submits that the Tribunal ought not to have so restricted the adjustment. However, the Tribunal’s direction proceeds on the principle that the transfer-pricing provisions are concerned with determining the arm’s-length price of international transactions with Associated Enterprises. The Tribunal has applied that principle to the facts before it and has issued a consequential direction in respect of the international transactions forming the subject matter of the transfer-pricing exercise.
24. The Revenue has not demonstrated that the Tribunal’s conclusion suffers from perversity or that it has proceeded on an interpretation of the Act which is patently unsustainable. A mere disagreement with the conclusion reached by the Tribunal, particularly when the conclusion is founded upon the material and the legal principles considered by it, is insufficient to attract the jurisdiction under Section 260-A.
25. It is also significant that several of the directions issued by the Tribunal are remand directions. The Tribunal has not finally foreclosed the Revenue from examining the relevant issues. In respect of working capital, the assessee has been directed to furnish the requisite details; in respect of the foreign-exchange filter, the Assessing Officer/Transfer Pricing Officer has been directed to adopt a consistent approach in accordance with law.
26. The Revenue has, therefore, failed to establish that the findings of the Tribunal are perverse or that the impugned order gives rise to any substantial question of law requiring interference by this Court. The questions proposed in both appeals essentially seek reconsideration of factual determinations made in the course of the transfer-pricing exercise. Such re-appreciation is outside the limited jurisdiction of this Court under Section 260-A.
27. For the foregoing reasons, we are of the considered view that the questions raised by the Revenue do not warrant interference with the impugned order of the Tribunal.
ORDER
i) Income Tax Appeal No.580 of 2023 and Income Tax Appeal No.575 of 2023 are dismissed.
ii) The common order dated 29.09.2022 passed by the Income Tax Appellate Tribunal, ‘B’ Bench, Bengaluru in ITA No.2611/Bang/2018 and ITA No.2732/Bang/2018 stands confirmed.
iii) No order as to costs.
