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1/20 IN THE HIGH COURT OF KARNATAKA, BENGALURU
DATED THIS THE 10TH DAY OF JULY 2018
PRESENT
THE HON’BLE DR.JUSTICE VINEET KOTHARI
AND
THE HON’BLE MRS.JUSTICE S.SUJATHA
I.T.A. No.350/2013
BETWEEN:
COMMISSIONER OF INCOME TAX-III CENTRAL REVENUE BUILDINGS, QUEENS ROAD, BANGALORE – 560 001
THE DEPUTY COMMISSIONER OF INCOME TAX CIRCLE-11(2) BANGALORE
... APPELLANTS
(BY SRI.SANMATHI E I, ADV.)
AND:
M/S MERCEDES BENZ RESEARCH & DEVELOPMENT INDIA PVT. LTD. (FORMERLY DAIMLER CHRYSLER RESEARCH & TECHNOLOGY INDIA PVT. LTD.) PINE VALLY, 3RD FLOOR, EMBASSY GOLD LINKS BUSINESS PAR, OFF INTERMEDIATE RING ROAD, BANGALORE – 560 087
... RESPONDENT
(BY SRI.SANKEERTH VITTAL, ADV. FOR SRI.NAGESWAR RAO, ADV.)
Date of Judgment 10-07-2018, ITA No.350/2013 Commissioner of Income Tax-III & Another vs.
M/s Mercedes Benz research & Development 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 22/02/2013 PASSED IN ITA NO.1222/BANG/2011 ANNEXURE - A, PRAYING TO: I. FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN, II. SET ASIDE THE APPELLATE ORDER OF THE ITAT, 'A' BENCH, BANGALORE IN APPEAL PROCEEDINGS ITA NO.1222/BANG/2011 DATED 22/02/2013 ANNEXURE – A.
THIS APPEAL COMING ON FOR HEARING, THIS DAY, S. SUJATHA, J., DELIVERED THE FOLLOWING:
J U D G M E N T
Mr. E.I. Sanmathi, Adv. for Appellants – Revenue. Mr. Sankeerth Vittal, Adv. for Mr. Nageswar Rao - 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, Bangalore Bench ‘A’, in ITA No.1222/Bang/2011 dated 22.02.2013, relating to the Assessment Year 2007-08.
This Appeal has been admitted on 13.08.2013 to consider the following substantial questions of law as framed by the Revenue in the Memorandum of Appeal.
Date of Judgment 10-07-2018, ITA No.350/2013 Commissioner of Income Tax-III & Another vs.
M/s Mercedes Benz research & Development India Pvt. Ltd
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(1) “Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the size and turnover of the company are deciding factors for treating a company as a comparable and accordingly directing the AO/TPO not to include cases of M/s.Flextronics Software Systems Ltd., M/s iGate Global Solutions Ltd, M/s Mindtree Ltd., M/s Persistent Systems Ltd., M/s Sasken Communcation Technologies Ltd., M/s. Tata Elxsi Ltd., M/s Wipro Ltd., and M/s Infosys Ltd, as comparable for determining ALP in the case of the assessee?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal in the case of the assessee to reject the six cases of comparable namely, M/s Megasoft Ltd., M/s.Avani Cimcon Technology Ltd., M/s. Kals Information Systems Ltd., M/s. Accel Transmatics Ltd., M/s. Celestial Labs Ltd and M/s. Lucid Software Ltd., when selection of comparables in a case for
Date of Judgment 10-07-2018, ITA No.350/2013 Commissioner of Income Tax-III & Another vs.
M/s Mercedes Benz research & Development India Pvt. Ltd
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determining ALP depends on assessee specific FAR analysis?
(3) Whether on the facts and in the circumstances of the case, the Tribunal was right in law in relying on the decision of other benches of the Tribunal to reject the six cases of comparables namely, M/s.Megasoft Ltd., M/s.Avani Cimcon technology Ltd., M/s.Kals Information Systems Ltd., M/s Accel Transmatics Ltd., M/s Celestial Labs Ltd and M/s Lucid Software Ltd. without considering the specific facts brought on record by the TPO in the case of assessee for deciding the comparability of the above companies?
(4) Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the cost incurred for professional fees was not akin to the cost incurred under the head salary when the purposes of payment in both condition was to obtain IT services and therefore have erred
Date of Judgment 10-07-2018, ITA No.350/2013 Commissioner of Income Tax-III & Another vs.
M/s Mercedes Benz research & Development India Pvt. Ltd
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in excluding professional fee from the employee cost filter?
(5) Whether on the facts and in the circumstances of the case, the Tribunal was right in law in remitting back the issue of CPM/CUP as the most appropriate method to determine the ALP in view of the detailed finding of the TPO regarding the TNMM being the most appropriate method?
(6) Whether on the facts and in the circumstances of the case, the tribunal was right in law in holding that foreign exchange loss/gain is operating in nature when, such loss/gain though attributable to the operating activity, is not derived form the operating activity?
(7) Whether on the facts and in the circumstances of the case, the Tribunal was right in law in allowing risk adjustment benefit to the taxpayer ignoring the detailed analysis of the TPO that the assessee is not operating in a risk mitigated environment
Date of Judgment 10-07-2018, ITA No.350/2013 Commissioner of Income Tax-III & Another vs.
M/s Mercedes Benz research & Development India Pvt. Ltd
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and therefore the exposure to risk is a condition that affects both the assessee and the comparables?
(8) Whether on the facts and in the circumstances of the case, the Tribunal was right in law in concluding that the risk adjustment benefit will improve comparability for the purposes of determination of arm’s length price especially in the absence of accurate data available for determining the quantification of risk and in may cases the existence itself, as has been concluded for the comparable companies.?
(9) Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the reimbursement of telecommunication expenses & insurance charges incurred in foreign currency are to be excluded both from total turnover as well as from export turnover for computation of deduction u/s.10A whereas such exclusion is permitted to arrive
Date of Judgment 10-07-2018, ITA No.350/2013 Commissioner of Income Tax-III & Another vs.
M/s Mercedes Benz research & Development India Pvt. Ltd
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at export turnover only as per the definitions given in Sec 10A of the IT Act and total turnover has not been defined in the Section?
(10) Whether the Tribunal is correct in law in holding that the deduction u/s.10A should be computed in the above manner following the judgment of jurisdictional High Court in the case of CIT vs Tata Elxsi Ltd., which has not become final since the same has not been accepted by the Department and SLPs filed by the revenue on this issue are pending before the Hon’ble Supreme Court?”
Learned Counsel for the Appellants-Revenue does not press substantial question No.4.
Submission is taken on record. Regarding Substantial Question Nos. 9 & 10:
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
Date of Judgment 10-07-2018, ITA No.350/2013 Commissioner of Income Tax-III & Another vs.
M/s Mercedes Benz research & Development India Pvt. Ltd
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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, 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
Date of Judgment 10-07-2018, ITA No.350/2013 Commissioner of Income Tax-III & Another vs.
M/s Mercedes Benz research & Development India Pvt. Ltd
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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.
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
Date of Judgment 10-07-2018, ITA No.350/2013 Commissioner of Income Tax-III & Another vs.
M/s Mercedes Benz research & Development India Pvt. Ltd
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from the total turnover in same proportion as well”.
Regarding Substantial Question No.1: 7. The learned Tribunal, after discussing the rival contentions of both the Appellants-Revenue and Respondent-Assessee, has returned a finding as under:
“ (i) Turnover Filter 5.6.2 The TPO had, while selecting the above 26 comparables, applied a lower turnover filter of Rs.1 crore but preferred not to apply any upper turnover limit. The size of the comparable is an important factor in comparability. The ICAI TP guidance note has observed that the transaction entered into by a Rs.1000 cores company cannot be compared with the transaction entered into by a Rs.10 crores company and the two most obvious reasons are the size of the two companies and related economies of scale under which they operate. The TPO’s range had resulted in selection of companies as comparable such as Infosys
Date of Judgment 10-07-2018, ITA No.350/2013 Commissioner of Income Tax-III & Another vs.
M/s Mercedes Benz research & Development India Pvt. Ltd
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which was 277 times bigger than that of the assessee. The Bangalore Bench of the Tribunal in the case of M/s. Genisys Integrating Systems (India)Pvt. Ltd. V. DCIT- ITA No.1231/Bang/2010 relying on Dun and Bradstreet’s analysis had held that turnover range of Rs.1 crore to 200 crores is appropriate. The said proposition has followed by the earlier benches of this Tribunal in the flowing cases:
(i) M/s Kodiak Networks (I) Pvt. Ltd v. ACIT-ITA No.1413/Bang/2010;
(ii) M/s Genesis Microchip (I) Pvt. Ltd.DCIT-ITA No.1254/Bang/2010;
(iii) Electronic for Imaging India Pvt. Ltd. – ITA No.1171/Bang/2010; &
(iv) M/s.Trilogy E-Business Software India Private Ltd. V.DCIT-ITA No.1054/Bang/2011 dated 23.11.2012.
5.6.3 In the case of M/s. Genisys Integrating Systems (India)Pvt. Ltd. V. DCIT
Date of Judgment 10-07-2018, ITA No.350/2013 Commissioner of Income Tax-III & Another vs.
M/s Mercedes Benz research & Development India Pvt. Ltd
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(supra), relying on Dun and Bradstreet’, has observed as under: xxxxxxxxxxx 5.6.4 The above view has been followed in the recent order of the Tribunal in the case of Trilogy E-Business (supra). The relevant findings of the Tribunal are extracted as under: xxxxxxxxxxxxx
5.6.5 In view of the above said reasoning and the orders of the Benches of Bangalore Tribunal cited supra, the following 8 companies will have to be eliminated from the list of comparables selected by the TPO, namely: xxxxxxxxxx It is ordered accordingly”.
Regarding Substantial Question Nos.2 & 3: “We have heard the rival submissions and perused the materials on record. The Bangalore Tribunal in the case of 24x7 Customer.com Pvt. Ltd. (supra) excluded vishal information technologies from the list of
Date of Judgment 10-07-2018, ITA No.350/2013 Commissioner of Income Tax-III & Another vs.
M/s Mercedes Benz research & Development India Pvt. Ltd
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comparables for the reason that the company was outsourcing most of its work (page 22 of 24/7 Cusomer.com Pvt. Ltd.). In the light of above order of the Tribunal, the issue is restored to the file of the Assessing Officer/TPO to examine whether professional fees said amounting to Rs.3,41,09,398/- in the case of Ishir Info Tech is for the work outsourced. If the said amount is paid for the work outsourced, Ishir Infotech will not qualify 25% employee cost filter as salary paid, excluding the professional fee plaid is only Rs.17,48,310/- compared to operating revenue of Rs.7,42,09,887/-. It is ordered accordingly.”
Regarding Substantial Question No.5: “5.3.3 We have heard the rival submissions and perused the materials on record. The assessee had adopted CPM/CUP method by comparing the man hour rates charged by major software companies in India with the rates charged by the assessee, whereas the TPO adopted the TNMM. At this point of time, we would like to recall that an identical issue
Date of Judgment 10-07-2018, ITA No.350/2013 Commissioner of Income Tax-III & Another vs.
M/s Mercedes Benz research & Development India Pvt. Ltd
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to that of the present one had cropped up in the assessee’s own case for the AY 2006-07 before the earlier Bench wherein the Bench vide its order in M.P.60/Bang/2012 dated 21.12.2012, after due consideration of the issue in detail, directed the assessing officer/TPO to consider (1) whether CPM/CUP is the most appropriate method to determine the ALP of the assessee’s international transaction; and (ii) whether the foreign exchange gain/loss is arising in the normal course of the business and whether it should be considered as part of operating in nature for both the assessee as well as for the comparable companies. (Refer: Para 6 of M.P. Order). In conformity with the finding of the earlier Bench (Supra), this issue is restored on the files of AO/TPO for fresh consideration. It is ordered accordingly.” Regarding Substantial Question No.6: “II) Foreign Exchange gains/Loss impact (ground No.12) 5.8 The Tribunal in the case of Trilogy E-Business had directed that the foreign
Date of Judgment 10-07-2018, ITA No.350/2013 Commissioner of Income Tax-III & Another vs.
M/s Mercedes Benz research & Development India Pvt. Ltd
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exchange gain or loss should be considered as operating revenue or cost while computing the operating margin of the assessee as well as the comparable. The relevant finding of the Tribunal read as follows: xxxxxxxxxxx 5.8.1 In conformity with the above finding, we direct the AO/TPO to consider the foreign exchange gain or loss as part of the operating cost or revenue, as the case may be, for both the assessee as well for the comparable companies. ” Regarding Substantial Question Nos.7 & 8: “ V) Risk adjustment (ground No.15)
5.11 It was the case of the assessee that the AO/TPO erred in not making suitable adjustments on account of differences in the risk profile of the assessee vis-à-vis the comparables. At this juncture, we would like to recall that a similar issue raised by the assessee in the immediately preceding assessment year has been remanded back to the files of AO/TPO by the earlier Bench to decide the issue afresh. The above direction
Date of Judgment 10-07-2018, ITA No.350/2013 Commissioner of Income Tax-III & Another vs.
M/s Mercedes Benz research & Development India Pvt. Ltd
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was in conformity with the findings recorded in the case of M/s. Insilica Semiconductors India Pvt. Ltd. v. ITO (ITA No.1399/Bang/2010 for the AY 2006-07 dated 29.2.2012). We are, therefore, of the view that the findings of the earlier Bench (supra)hold good for this AY also. It is ordered accordingly.
In conclusion, the Assessing Officer/TPO is directed to work out the ALP of the assessee in accordance with the directions of this Bench (supra) and if found that the differential in the margin of the assessee and the comparables is beyond 5% bandwidth recognized in proviso to section 92C(2) of the Act, then adjustment is required to be made to the reported value of the assessee’s transaction with its AE. It is ordered accordingly.
In the result, the appeal filed by the assessee is partly allowed as indicated above.”
Date of Judgment 10-07-2018, ITA No.350/2013 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 10-07-2018, ITA No.350/2013 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 10-07-2018, ITA No.350/2013 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 10-07-2018, ITA No.350/2013 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/-