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1/14 IN THE HIGH COURT OF KARNATAKA, BENGALURU
DATED THIS THE 31ST DAY OF JULY 2018
PRESENT
THE HON’BLE DR.JUSTICE VINEET KOTHARI
AND
THE HON’BLE MRS.JUSTICE S.SUJATHA
I.T.A. No.323/2016
BETWEEN:
THE PR. COMMISSIONER OF INCOME-TAX, 5TH FLOOR, BMTC BUILDING, 80 FEET ROAD, KORAMANGALA, BANGALORE - 560 095.
THE DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE - 3(1) (1), 2ND FLOOR, BMTC BUILDING, 80 FEET ROAD, KORAMANGALA, BANGALORE - 560 095.
... APPELLANTS
(BY SRI.ARAVIND K V, ADV.)
AND:
M/S FLEXTRONICS TECHNOLOGIES (INDIA) PVT. LTD., PLOT NO.3, PHASE II, SIPCOT INDUSTRIAL PARK, SANDAVELLURE C VILLAGE, SRIPERUMBUDUR TALUK, KANCHEEPURAM DISTRICT TAMIL NADU. PAN:AAACF 5248E
... RESPONDENT
(BY SRI.SANDEEP HUILGOL, ADV. FOR SRI. V VINAY GIRI, ADV.)
Date of Judgment 31-07-2018, ITA No.323/2016 The Pr. Commissioner of Income Tax & another Vs. M/s.Flextronics Technologies (India) Pvt. ltd.
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THIS ITA IS FILED UNDER SECTION 260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED:23/11/2015 PASSED IN IT(TP)A NO. 1219/BANG/2011, FOR THE ASSESSMENT YEAR 2007-2008 ANNEXURE –D, PRAYING TO: I. FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED ABOVE. 2. ALLOW THE APPEAL AND SET ASIDE THE ORDERS PASSED BY THE ITAT, BENGALURU IN IT(TP)A NO.1219/BANG/2011 DATED:23/11/2015, ANNEXURE -D AND CONFIRM THE ORDER OF THE DRP CONFIRMING THE ORDER PASSED BY THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-3(1)(1), BENGALURU.
THIS APPEAL COMING ON FOR HEARING, THIS DAY, S. SUJATHA, J., DELIVERED THE FOLLOWING:
J U D G M E N T
Mr.ARAVIND.K.V, Adv. for Appellants – Revenue. Mr.SANDEEP HUILGOL, Adv. for Mr.V.VINAY GIRI, Adv. for Respondent – Assessee.
This Appeal is filed by the Revenue purportedly raising substantial questions of law arising from the Order of the Income Tax Appellate Tribunal, ‘B’ Bench, Bangalore, in IT [TP] A No.1219/Bang/2011 dated 23.11.2015 relating to the Assessment Year 2007-08.
This Appeal has been admitted on 10.10.2017 to consider the following substantial questions of law:
Date of Judgment 31-07-2018, ITA No.323/2016 The Pr. Commissioner of Income Tax & another Vs. M/s.Flextronics Technologies (India) Pvt. ltd.
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“1. Whether on the facts and in the circumstances of the case, the Tribunal is right in law in directing TPO to exclude following comparables from list, M/s.Eclerx Services Ltd, Mold -Teck Technologies Ltd, Infosys BPO Ltd, M/s. Wipro Ltd and Maple E-Solutions and Tricom corporation Ltd by holding that the functions of the said company are not similar to that of assessee when all the qualitative and quantitative filters have been satisfied in the case of assessee and moreover selection of comparables depends on specific FAR analysis?
Whether on the facts and in the circumstances of the case, the Tribunal by relying on its earlier decision in case of First Advantage Offshore services Pvt. Ltd. is right in law in directing the TPO to exclude M/s. Vishal Information Technologies from list of comparable on the ground that employees cost filter is an accepted filter for choosing comparables and in ITES sector also the companies which has less than 25% of the sales as employee cost should not be selected when a search of comparable companies under TNMM for the software service companies was done by the TPO where the above mentioned companies were found to be
Date of Judgment 31-07-2018, ITA No.323/2016 The Pr. Commissioner of Income Tax & another Vs. M/s.Flextronics Technologies (India) Pvt. ltd.
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functionally similar and assessee has not objected to it?”
The learned Tribunal, after discussing the rival contentions of both the Appellant-Revenue and Respondent-Assessee, has returned the findings as under: Regarding Substantial Question of Law Nos.2 & 3 “We will deal with comparability of each of the 8 companies objected by the assessee as under:
8.1 eClerx Services Ltd:
8.1.2 We have considered the rival submissions as well as relevant material on record. We find that the company Eclerx Services Ltd. is engaged in diversified activity of providing services including analytic services and data process solutions to its global clients. The service provided by Eclerx Services Ltd., is in various areas including capital market and therefore, the services are in the nature of consultancy and end to end support through trade centre including trade confirmation, settlement, transaction, maintenance and analytic and reporting. Thus it
Date of Judgment 31-07-2018, ITA No.323/2016 The Pr. Commissioner of Income Tax & another Vs. M/s.Flextronics Technologies (India) Pvt. ltd.
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is apparent from the nature of the activity of this company that it is not providing a simple service of data processing but it is engaged in the activity of providing high-end services involving decision making analysis which requires thought process and evaluation of various facts and factors. Functional comparability of this company with that of simple BPO’s service providing company has been examined by the Special Bench in the case of Maersk Global Services (supra) in paras.82 & 83 as under:
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Thus it is clear that the Special Bench found that this company is not comparable with BPO company which are engaged only in low end services of data procession. Accordingly, we direct the AO/TPO to exclude Eclerx Services Ltd. from the list of comparables for the purpose of determining ALP.
8.1.3 We further note that the Hon’ble Delhi High Court in ITA No.102 of 2015 dated 10/8/2015 has confirmed the view taken by the special bench of the Tribunal in the case of Maerks Centre. Accordingly, we direct the AO/TPO to exclude eClerx Services Ltd. from the
Date of Judgment 31-07-2018, ITA No.323/2016 The Pr. Commissioner of Income Tax & another Vs. M/s.Flextronics Technologies (India) Pvt. ltd.
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list of comparables for the purpose of determining the ALP.
8.3 Infosys Technologies Ltd
8.3.1 We have considered the rival submissions as well as relevant material on record. We note that in para 16.2.15 of the Annual Report of this company, it has been reported that there was amalgamation w.e.f. 1/4/2008. The relevant part of the information provided in the Annual Report reads as under:
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It is clear that there was extraordinary event of amalgamation during the year under consideration.
Therefore, in view of the extraordinary development of amalgamation of another company, this company cannot be considered as a good comparable for the assessment year under consideration. Apart from this, we further note that as per the segment reporting in para.16.2.21 of Annual report this company is providing business process management services as under:
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Date of Judgment 31-07-2018, ITA No.323/2016 The Pr. Commissioner of Income Tax & another Vs. M/s.Flextronics Technologies (India) Pvt. ltd.
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Thus it is clear that the revenue earned by this company is from the activity inclusive of operation primarily relates to providing business process management services to other organization engaged in outsourcing business process. This company is not engaged in direct activity of BPO put it provides service to BPOs and that too management service to BPO. Therefore, in our considered view, this company is engaged in a different nature of activity to that of the assessee provided to its AE. Accordingly we direct the AO/TPO to exclude this company from the list of comparables.
8.4 Mapple e Solutions Ltd:
8.4.1 We have considered the rival submissions as well as the relevant material on record. We find force and substance in the argument of the learned departmental representative that in the absence of any specific allegation that the alleged fraud by the director is in respect of business activity of the company, the said activity of fraud by the director in other business activity not related to the business of the assessee – company cannot be taken as a ground for doubting the financial statement of the assessee and thereby excluding the said
Date of Judgment 31-07-2018, ITA No.323/2016 The Pr. Commissioner of Income Tax & another Vs. M/s.Flextronics Technologies (India) Pvt. ltd.
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company from a list of comparables. However, we find that this Tribunal in a number of cases as relied upon by the assessee, has held that this company cannot be taken as a good comparable because of the reason that the directors of the company were involved in fraud activity and therefore, financial statements of this company cannot be relied upon. In the case of First Advantage Offshore Services Pvt. Ltd., (supra) the Tribunal has held inpara.41 as under:
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Similar view has been taken by this Tribunal in other decisions relied upon by the assessee Accordingly, following the earlier decisions of this Tribunal, we direct the AO/TPO to exclude this company from the list of comparables.
8.5 Mold-Tek Technologies Ltd.
8.5.3 We have considered the rival submissions as well as the material on record. At the outset, we note that functional analysis of the Co. has been examined by the Special Bench in case of M/s Maersk Global India (Supra) in para-81 & 83 as under:
Date of Judgment 31-07-2018, ITA No.323/2016 The Pr. Commissioner of Income Tax & another Vs. M/s.Flextronics Technologies (India) Pvt. ltd.
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8.5.4 In view of the above facts and nature of the functions performed by the Mold Tek which have been examined by the Special Bench and found is not compared with the low end ITES service provider Co. we hold that this Co. is functionally not comparable with that of the assessee. Accordingly, we direct the AO/TPO to exclude Mold Tek from the list of comparables.
8.6 Tricom Corporation Ltd.
8.6.1 We have considered the rival submissions as well as relevant material on record. We note that the comparability of this company has been examined by the Tribunal in the case of First Advantage Offshore Services Pvt. Ltd. (supra) which has already been reproduced in the foregoing paragraphs. This company has merged with Mold-Tek Technologies Ltd. during the year under consideration. In view of the findings in respect of Mold-Teck Technologies Ltd., we are of the opinion that this company cannot be considered as a good comparable company.
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8.7 Vishal Information Technologies Ltd. (Coral Hub Ltd.)
8.7.1 We have considered the rival submissions as well as relevant material on record. We note that the comparability of this company with ITES providing service provider has been examined by the Tribunal in various cases as relied upon by the learned AR of the assessee. In the case of First Advantage Offshore Services Pvt. Ltd. (supra) it has been held in para.35 as under:
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Similar view has been taken by the Tribunal in the other decisions. We further note that the Hon’ble High Court in the case of Rampgreen Solutions Pvt. Ltd. (supra) has also decided this issue in favour of the assessee. Accordingly, we direct the AO to exclude this company from the list of comparable.
8.8 Wipro Ltd. (seg.)
8.8.1 We have considered the rival submissions and relevant material on record. At the outset, we note that an identical issue of comparability of this company has been
Date of Judgment 31-07-2018, ITA No.323/2016 The Pr. Commissioner of Income Tax & another Vs. M/s.Flextronics Technologies (India) Pvt. ltd.
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examined by this Tribunal in the case of GXS India Technology Centre Pvt. Ltd in IT (TP)A No.1444(Bang) 2012 dated 31/07/2015 wherein It has been held in paras.17.2 and 17.3 as under:
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Accordingly, we direct the AO/TPO to re- compute the ALP after exclusion of the above companies from the list of comparables. The assessee claims that mean margin of the comparable after exclusion of the above comes to around 17.85% which is within tolerance range of +/-5%. We direct the TPO to consider the claim of the assessee of granting the benefit of tolerance range +/-5% as raised in ground No.3 of the concise grounds.”
The controversy involved herein is no more res integra in view of the decision of this Court in I.T.A. Nos.536/2015 c/w 537/2015 dated 25.06.2018 (Prl. Commissioner of Income Tax & Anr. –v- M/s Softbrands India Pvt. Ltd.,) wherein it has been observed that unless the finding of the Tribunal is found ex facie perverse, the Appeal u/s. 260-A of the Act, is
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not maintainable. The relevant portion of the Judgment is quoted below for ready reference: “Conclusion: 55.
A substantial quantum of international trade and transactions depends upon the fair and quick judicial dispensation in such cases. Had it been a case of substantial question of interpretation of provisions of Double Taxation Avoidance Treaties (DTAA), interpretation of provisions of the Income Tax Act or Overriding Effect of the Treaties over the Domestic Legislations or the questions like Treaty Shopping, Base Erosion and Profit Shifting (BEPS), Transfer of Shares in Tax Havens (like in the case of Vodafone etc.), if based on relevant facts, such substantial questions of law could be raised before the High Court under Section 260-A of the Act, the Courts could have embarked upon such exercise of framing and answering such substantial question of law. On the other hand, the appeals of the present tenor as to whether the comparables have been rightly picked up or not, Filters for arriving at the correct list of
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comparables have been rightly applied or not, do not in our considered opinion, give rise to any substantial question of law. 56. We are therefore of the considered opinion that the present appeals filed by the Revenue do not give rise to any substantial question of law and the suggested substantial questions of law do not meet the requirements of Section 260-A of the Act and thus the appeals filed by the Revenue are found to be devoid of merit and the same are liable to be dismissed.
We make it clear that the same yardsticks and parameters will have to be applied, even if such appeals are filed by the Assessees, because, there may be cases where the Tribunal giving its own reasons and findings has found certain comparables to be good comparables to arrive at an ‘Arm’s Length Price’ in the case of the assessees with which the assessees may not be satisfied and have filed such appeals before this Court. Therefore we clarify that mere dissatisfaction with the findings of facts arrived at by the learned Tribunal is not at all a sufficient reason
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to invoke Section 260-A of the Act before this Court. 58. The appeals filed by the Revenue are therefore dismissed with no order as to costs.”
In the circumstances, having heard the learned Counsel appearing for both the sides, We are of the considered opinion that no substantial question of law arises for consideration in the present case.
Hence, the Appeal filed by the Appellant-Revenue is liable to be dismissed and is accordingly dismissed. No costs.
Sd/- JUDGE
Sd/- JUDGE
ln.