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1/18 IN THE HIGH COURT OF KARNATAKA, BENGALURU
DATED THIS THE 9TH DAY OF JULY 2018
PRESENT
THE HON’BLE DR.JUSTICE VINEET KOTHARI
AND
THE HON’BLE MRS.JUSTICE S.SUJATHA
I.T.A. No.326/2012
BETWEEN:
COMMISSIONER OF INCOME TAX-III, CENTRAL REVENUE BUILDINGS QUEENS ROAD, BANGALORE - 560 001.
THE INCOME TAX OFFICER WARD 12(1), BANGALORE.
... APPELLANTS
(BY SRI.JEEVAN J NEERALGI, ADV.)
AND:
M/S MERCEDES BENZ RESEARCH & DEVELOPMENT INDIA PVT. LIMITED, PINE VALLEY, 3RD FLOOR, EMBASSY GOLF LINKS, BUSINESS PARKS, OFF INTERMEDIATE RING ROAD, BANGALORE - 560 071.
... RESPONDENT
(BY SMT.D.SUJATHA, ADV. FOR SRI.MALLAHARAO, ADV.)
THIS ITA IS FILED UNDER SECTION 260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 30.04.2012 PASSED IN ITA NO.1369/BANG/2010, FOR THE ASSESSMENT
Date of Judgment 09-07-2018, ITA No.326/2012 Commissioner of Income Tax-III & Another Vs. M/s Mercedes Benz Research & Development India Pvt, Ltd.,
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YEAR 2006-07 ANNEXURE-A, PRAYING TO: I. FORMULATE THE SUBSTANTIAL QUESTION OF LAW AS STATED THEREIN. II. SET ASIDE THE APPELLATE ORDER DATED 30/04/2012 PASSED BY THE ITAT, 'B' BENCH, BANGALORE IN APPEAL PROCEEDINGS ITA NO.1369/BANG/2010, ANNEXURE – A AS SOUGHT FOR IN THIS APPEAL.
THIS APPEAL COMING ON FOR HEARING, THIS DAY, S. SUJATHA, J., DELIVERED THE FOLLOWING:
J U D G M E N T
Mr. K.V.Aravind, Adv. for Appellants – Revenue. Ms. D. Sujatha, Adv., for Sri. Mallaha Rao K., 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 ITA No.1369/Bang/2010 dated 30.04.2012, relating to the Assessment Year 2006-07.
This Appeal has been admitted on 10.01.2013 raising the following substantial questions of law as framed by the Revenue in the Memorandum of Appeal.
Date of Judgment 09-07-2018, ITA No.326/2012 Commissioner of Income Tax-III & Another Vs. M/s Mercedes Benz Research & Development India Pvt, Ltd.,
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1) “Whether the tribunal was right in law in remitting back the issues of comparables used in Transfer Pricing analysis and with regard to risk adjustment, back to the file of assessing authority/Transfer Pricing Officer when there are no fresh facts brought before the tribunal apart from those which are already discussed in the order of assessing authority/Transfer Pricing Officer? 2) Whether the tribunal is right in law by directing the TPO to consider only those uncontrolled comparables which are having turnover between Rs.1 crore to Rs.200 crores?
3) Whether the tribunal is right in directing the TPO to apply turnover filter without any evidence in support of correlation between turnover and the profitability? 4) Whether the direction given by the tribunal to limit turnover range
Date of Judgment 09-07-2018, ITA No.326/2012 Commissioner of Income Tax-III & Another Vs. M/s Mercedes Benz Research & Development India Pvt, Ltd.,
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between Rs.1 Crore to Rs.200 Crores is against the method of Arithmetical average of the PLIs of uncontrolled comparables as per the proviso to section 92C(2) of the Income Tax Act.?
5) Whether the tribunal is right in law by directing cross examination in the case of certain comparables in whose cases information u/s.133(6) was used by the TPO even when the powers under section 133(6) of I.T. Act are limited to the collection of information and no cross examination of parties is permitted or warranted under the Indian Evidence Act as it is a response to a statutory notice under Income tax Act.? 6) Whether tribunal is right in law in holding that the assessee is eligible for a standard deduction of 5% from the Arm’s Length Price under the proviso to section 92C(2) of the Income Tax Act even when the corrigendum dated
Date of Judgment 09-07-2018, ITA No.326/2012 Commissioner of Income Tax-III & Another Vs. M/s Mercedes Benz Research & Development India Pvt, Ltd.,
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30.04.2010 to the circular 5/2010 issued by the Board with regard to the applicability of the amended proviso to section 92C(2) applies to all cases pending before the TPO after 01.04.2009? 7) Whether on the facts and in the circumstances of the case, the tribunal is justified in law in holding that telephone/internet expenses, travelling expenses incurred in foreign currency amounting to Rs.11,45,37,299 are to be excluded from total turnover as well for computation of deduction under section 10A of I.T.Act whereas such exclusion is permitted to arrive at export turnover only as per the definitions given in Section 10A of the I T Act and total turnover has not been defined in the Section and when the decisions relied upon by tribunal are challenged before Apex Court?”
Date of Judgment 09-07-2018, ITA No.326/2012 Commissioner of Income Tax-III & Another Vs. M/s Mercedes Benz Research & Development India Pvt, Ltd.,
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Regarding Substantial Question No.7:
The controversy is no longer res integra and is covered by the decision of the Division Bench of this Court in the case of M/s.Tata Elxsi Ltd., vs. Asst. Commissioner of Income Tax, decided on 20.10.2015 since reported in (2015) 127 DTR 0327 (Kar), which has been affirmed by Hon’ble Supreme Court in the case of Commissioner of Income-tax, Central – III vs. HCL Technologies Ltd., [2018] 93 Taxmann.com 33(SC).
The relevant portion of the judgment of the Hon’ble Supreme Court in the case of HCL Technologies Ltd. (supra), is quoted below for ready reference:- “17. The similar nature of controversy, akin this case, arose before the Karnataka High Court in CIT v. Tata Elxsi Ltd. [2012] 204 Taxman 321/17/taxman.com 100/349 ITR 98. The issue before the Karnataka High Court was whether the Tribunal was correct in holding that while computing relief under Section 10A of the IT Act,
Date of Judgment 09-07-2018, ITA No.326/2012 Commissioner of Income Tax-III & Another Vs. M/s Mercedes Benz Research & Development India Pvt, Ltd.,
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the amount of communication expenses should be excluded from the total turnover if the same are reduced from the export turnover? While giving the answer to the issue, the High Court, inter-alia, held that when a particular word is not defined by the legislature and an ordinary meaning is to be attributed to it, the said ordinary meaning is to be in conformity with the context in which it is used. Hence, what is excluded from ‘export turnover’ must also be excluded from ‘total turnover’, since one of the components of ‘total turnover’ is export turnover.
Any other interpretation would run counter to the legislative intent and would be impermissible.
XXXXXX
In the instant case, if the deductions on freight, telecommunication and insurance attributable to the delivery of computer software under Section 10A of the IT Act are allowed only in Export Turnover but not from the Total Turnover then, it would give rise to inadvertent, unlawful, meaningless and illogical result which would cause grave injustice to the Respondent which could have never been the intention of the legislature.
Date of Judgment 09-07-2018, ITA No.326/2012 Commissioner of Income Tax-III & Another Vs. M/s Mercedes Benz Research & Development India Pvt, Ltd.,
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Even in common parlance, when the object of the formula is to arrive at the profit from export business, expenses excluded from export turnover have to be excluded from total turnover also. Otherwise, any other interpretation makes the formula unworkable and absurd. Hence, we are satisfied that such deduction shall be allowed from the total turnover in same proportion as well”.
Regarding Substantial Question No.1:
The learned Tribunal, after discussing the rival contentions of both the Appellants-Revenue and Respondent-Assessee, has returned a finding as under:
“48. We have considered the submissions of both the parties and carefully gone through the material available on record. It is noticed that a similar issue having identical facts has been adjudicated by this Bench of the Tribunal in the case of M/s. Insilica Semiconductors India Pvt. Ltd. v. ITO, Ward 11(2) in ITA No.1399/Bang/2010 for the A.Y.
Date of Judgment 09-07-2018, ITA No.326/2012 Commissioner of Income Tax-III & Another Vs. M/s Mercedes Benz Research & Development India Pvt, Ltd.,
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2006-07 order dated 29.02.2012, wherein the relevant findings has been given in paras 18 & 19 of the said order, which read as under:- xxxxxxxxxxx”
Regarding Substantial Question Nos.2, 3 & 4: 35. It was stated that the Id. Counsel for the assessee raised several objections on six comparable companies viz., M/s Megasoft Ltd., M/s. KALS Information System Ltd., M/s. Accel Transmatic Ltd., M/s.Tata Elxi Ltd., M/s. Infosys Technologies Ltd. and Floctronics Software System Ltd. and asked for exclusion of these from comparables. In this regard, it was submitted that M/s. Megasoft Ltd. has furnished segmental information in pursuance to notice issued u/s.133(6) of the Act and clarified that Blue Ally Division is an offshore and on limit consulting division and does jobs based on customers requirements and billing done on hourly basis, while XIUS BCCIL was a product which caters the need of mobile software industries and the said product was
Date of Judgment 09-07-2018, ITA No.326/2012 Commissioner of Income Tax-III & Another Vs. M/s Mercedes Benz Research & Development India Pvt, Ltd.,
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to be customized to the requirement of each customer which indicated that the products of the said company i.e., M/s Megasoft Ltd. were in the form of licence from third parties and customized as per requirement of its customers, therefore the said company was a service provider akin to software development services. It was further stated that the revenues of software development services of M/s. Megasoft Ltd. constituted 76% of overall revenue for the financial year 2005-06, thus it satisfied the TPO’s filter and hence could not be rejected merely because extra-ordinary or super normal profits, hence may be retained as comparable.
Regarding the case of KALS Info Systems Ltd., the Id. CIT (DR) submitted that the revenues from software development services in the said company constituted almost 99% of the total operating revenues and it qualifies 75% revenues filter from software development, accordingly considered as comparable. It was further
Date of Judgment 09-07-2018, ITA No.326/2012 Commissioner of Income Tax-III & Another Vs. M/s Mercedes Benz Research & Development India Pvt, Ltd.,
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submitted that KALS itself had confirmed being a software development service provider, as such there was no question of major revenue from software products and the TPO rightly considered that company as a comparable.
As regards to the submission of the Id. Counsel for the assessee that M/s ACCEL Transmaitc Ltd. should have been rejected on account of significant related party transactions, the Id CIT (DR) submitted that the services rendered by the said company to the related parties were alleged to be approximately 31% of the total services revenue, however no information appears towards software developments services, even though the said company has given segmental information, therefore M/s. Accel Transmatic Ltd. has rightly been retained as a comparable.
As regards to M/s. Tata Elxsi Ltd., it was stated that the said company had furnished segmental revenues and instances
Date of Judgment 09-07-2018, ITA No.326/2012 Commissioner of Income Tax-III & Another Vs. M/s Mercedes Benz Research & Development India Pvt, Ltd.,
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and merely because expenses from cash of the sub-activities were not available, did not tantamount for rejection. It was further stated that financial statements furnished by the said company were segmental information and TPO computed operating profit on the basis of the said data, therefore M/s. Tata Elexsi Ltd. was rightly retained as comparable.
As regards to M/s.Infosys Technologies Ltd., the Id.CIT(DR stated that the products revenue of the said company was only 3.95% to the total operating revenues, thus more than 96% of its revenues were from software development services and accordingly it qualifies filter of 75% from software development services. Therefore getting higher turnover did not necessarily mean that it would generate higher margin. It was further stated that the assessee had not demonstrated as to how the difference in turnover has influenced the result of the comparables. The Id. CIT(DR) contended that
Date of Judgment 09-07-2018, ITA No.326/2012 Commissioner of Income Tax-III & Another Vs. M/s Mercedes Benz Research & Development India Pvt, Ltd.,
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it is accepted economic principle and commercial practice that in highly competitive market conditions one can survive and sustain only be keeping low margin but high turnover. Reliance was placed on the decision of ITAT Mumbai “E” Bench in the case of M/s.Symantec Software Solution Pvt. Ltd. V. ACIT, ITA No.7814/MUM/2010. It was further submitted that a mere higher profit margin cannot be a reason for elimination as a comparable.
Similarly for M/s. Flextronics Software System Ltd., the Id. CIT(DR) stated that its products revenue constitutes only 16.6% of the segmental revenue, therefore the software development services revenue in segment ‘products and services’ was 83.4% which was more than 75% and thus qualifies the TPO’s filter for revenues from software development services, accordingly rightly considered as comparable.
Date of Judgment 09-07-2018, ITA No.326/2012 Commissioner of Income Tax-III & Another Vs. M/s Mercedes Benz Research & Development India Pvt, Ltd.,
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Regarding Substantial Question No.5: 49. Since the facts of the present case are similar to the facts involved in the aforesaid referred to order dated 29.022012 of the Tribunal in the case of M/s. Insilica Semiconductors India Pvt. Ltd. V. ITO, so respectfully following the said order, we remand this issue back to the file of the AO/TPO to be decided afresh in accordance with law, after providing due and reasonable opportunity of being heard to the assessee.”
Regarding Substantial Question No.6: 57. After considering the submissions of both the parties and material on record, it is noticed that a similar issue has been adjudicated by the ITAT ‘A’ Bench Bangalore having the same constitution in the case of M/s. Tatra Vectra Motors Ltd. V. DCIT, ITA No.1284/Bang/2010 for the A.Y. 2006-07 wherein the relevant finding has been given in paras 12 to 17 of the order dated 31.01.2012, which read as under: xxxxxxxxxxxxx”
Date of Judgment 09-07-2018, ITA No.326/2012 Commissioner of Income Tax-III & Another Vs. M/s Mercedes Benz Research & Development India Pvt, Ltd.,
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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/s. 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 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
Date of Judgment 09-07-2018, ITA No.326/2012 Commissioner of Income Tax-III & Another Vs. M/s Mercedes Benz Research & Development India Pvt, Ltd.,
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(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 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.
Date of Judgment 09-07-2018, ITA No.326/2012 Commissioner of Income Tax-III & Another Vs. M/s Mercedes Benz Research & Development India Pvt, Ltd.,
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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 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.
Date of Judgment 09-07-2018, ITA No.326/2012 Commissioner of Income Tax-III & Another Vs. M/s Mercedes Benz Research & Development India Pvt, Ltd.,
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Hence, the Appeal filed by the Appellants- Revenue is liable to be dismissed and is accordingly dismissed. No costs.
Sd/- JUDGE
Sd/- JUDGE
AN/-