PR. COMMISSIONER OF vs M/S MERCEDES BENZ RESEARCH

1/13 IN THE HIGH COURT OF KARNATAKA, BENGALURU

DATED THIS THE 28th DAY OF JUNE 2018

PRESENT

THE HON'BLE Dr.JUSTICE VINEET KOTHARI

AND

THE HON’BLE Mrs.JUSTICE S.SUJATHA

I.T.A.No.517/2016 Between:

Pr. Commissioner of Income Tax-IV BMTC Complex Koramangala Bangalore.

The Assistant Commissioner of Income Tax, Circle-12(1), Bangalore.

…Appellants (By Mr. Sanmathi.E.I, Advocate)

And:

M/s. Mercedes-Benz Research & Development India Pvt. Ltd., Augusta. 5th Floor Embassy Golf Links Business Parks Off Intermediate Ring Road, Bangalore-560 071. …Respondent (By Mr. Mallaharao.K & Mr.Sandeep.S.Karhail, Advocates)

Date of Judgment 28-06-2018 I.T.A.No.517/2016

Pr. Commissioner of Income Tax-IV & Anr. Vs. M/s.Mercedes-Benz Research & Development India Pvt.Ltd.,

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This I.T.A. is filed under Section 260-A of Income Tax Act 1961, praying to decide the foregoing question of law and/or such other questions of law as may be formulated by the Hon’ble Court as deemed fit. Set aside the appellate order dated:16/03/2016 passed by the ITAT, ‘A’ Bench, Bengaluru, in appeal proceedings No.IT(TP)A No.1336/ Bang/2012 for the Assessment Year 2008-09 as sought for in this appeal; and to grant such other relief as deemed fit, in the interest of justice and etc.

This I.T.A. coming on for Admission, this day Dr. Vineet Kothari J. delivered the following:-

JUDGMENT

Mr. Sanmathi.E.I. Adv. for Appellants - Revenue Mr. Mallahrao.K & Mr. Sandeep.S.Karhail, Adv. for Respondent-Assessee

The Appellants - Revenue have filed this appeal raising purported substantial questions of law arising from the Order of the learned Income Tax Appellate Tribunal “B” Bench: Bangalore, Annexure A dated 16/03/2016 in IT(TP)A.No.1336/Bang/2012 for AY 2008-09.

Date of Judgment 28-06-2018 I.T.A.No.517/2016

Pr. Commissioner of Income Tax-IV & Anr. Vs. M/s.Mercedes-Benz Research & Development India Pvt.Ltd.,

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The appellants - Revenue have suggested six substantial questions of law which are quoted below for ready reference: -

“(1) Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in seeking extract comparability, while searching for comparable companies of the assessee under Transaction Net Margin Method whereas the requirement of law and international jurisprudence requite seeking similar comparables companies?” (2) Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in imposing conditions beyond law where the requirement of law is to acknowledge only those differences that are likely to materially affect the margin? (3) Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in not

Date of Judgment 28-06-2018 I.T.A.No.517/2016

Pr. Commissioner of Income Tax-IV & Anr. Vs. M/s.Mercedes-Benz Research & Development India Pvt.Ltd.,

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acknowledging that determination of Arms Length Price by carrying out comparability analysis of the companies is an art and not exact science as no two companies are exactly same? (4) Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in demanding comparability standards that may itself defeat the purpose of law relating to determination of ALP under the Income Tax Act? (5) Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in holding that two comparables Aditya Birla Minacs IT Services Ltd and Aditya Birla Minacs Technologies Ltd be checked for RPT filter without giving opportunity to the TPO to check if other comparables from search matrix pass new criteria applied by the Tribunal?” (6) Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in

Date of Judgment 28-06-2018 I.T.A.No.517/2016

Pr. Commissioner of Income Tax-IV & Anr. Vs. M/s.Mercedes-Benz Research & Development India Pvt.Ltd.,

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excluding companies such as Avani Cincom Technologies, Celestial Biolabs, Kals Information System Ltd, Tata Thirdware Solution Ltd, Softsol India Ltd, E-Zest India Ltd as comparables by holding that the said companies are functionally different when all the required tests are satisfied in case of said companies?”

In so far as the purported substantial questions of law raised by the appellants – Revenue in this appeal are concerned, the learned ITAT in its Order dated 16/03/2016 has given the findings, the relevant portion of which is quoted below for ready reference:-

“6.1 The first objection of the assessee is no selection of certain comparable companies and rejection of certain comparables selected by the assessee. TPO in his analysis has finally selected the following 20 companies with OP/Cost of 23.65%. The list of comparables are as under:

Date of Judgment 28-06-2018 I.T.A.No.517/2016

Pr. Commissioner of Income Tax-IV & Anr. Vs. M/s.Mercedes-Benz Research & Development India Pvt.Ltd.,

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Sl.No Name of Company Net Margins as TPO Order (before WCA) 1 Avani Cincom Technologies 25.62% 2 Celestial Biolabs 87.94% 3 Kals Information Systems Ltd.(Seg) 31.29% 4 Lucid Software Ltd. 16.50% 5 Tata Elxsi (Seg) 18.97% 6 Infosys Technologies Ltd. 40.37% 7 Wipro Ltd.(Seg) 28.45% 8 Bodhtree Consulting Ltd. 18.72% 9 Thirdware Solution Ltd. 19.35% 10 Softsol India Ltd. 17.89% 11 e-Zest Solutions Ltd. 29.81% 12 Flextronics (Aricent) 7.86% 13 iGate Global Solutions Ltd. 13.99% 14 LGS Global Ltd. 27.52% 15 Mindtree Ltd. 16.41% 16 Persistent Systems Ltd. 20.31% 17 Quintegra Solutions Ltd. 21.74% 18 R.S. Software (India)Ltd. 7.41%

19 R. Systems International (Seg) 15.30% 20 Sasken Communication Technologies Ltd.(Seg) 7.58%

Arithmetic Mean 23.65%

Date of Judgment 28-06-2018 I.T.A.No.517/2016

Pr. Commissioner of Income Tax-IV & Anr. Vs. M/s.Mercedes-Benz Research & Development India Pvt.Ltd.,

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6.2 Assessee is objecting to the companies listed at Sl.No.s 1 to 11. These companies are elaborately considered by the Coordinate Bench in the case of NXP Semiconductors, IT(TP)A No. 1560/Bang/2012 dated 5.3.2015 as under:- … … … … … … 6.3 Not only in the above case, in other cases given below also the same decision was taken:

(a) 3DPLM Software Solutions LTd. v. DCIT, IT(TP)A No.1303/Bang/2012 dated 28.11.2013.

(b) Curam Software International Pvt. Ltd. v. ITO, ITA No.1280/Bang/2012 dated 31.7.2013.

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Pr. Commissioner of Income Tax-IV & Anr. Vs. M/s.Mercedes-Benz Research & Development India Pvt.Ltd.,

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The objections of assessee are similar to the above and facts being the same, we direct the TPO to exclude them from the list of comparables. The grounds raised by the assessee are allowed accordingly.

Assessee requested for inclusion of the following two companies rejected by the TPO:-

(1) Aditya Birla Minacs IT Services Ltd. (2) Aditya Birla Minacs Technologies Ltd.

7.1 The reason for rejection of the above companies was that they failed RPT filter. The objection of the assessee was that TPO has included the reimbursement cost in operating cost. It is submitted that the reimbursement cost does not have any effect on profitability and if they are excluded, then they are within the filter rang adopted by the TPO. Detailed objections and working as provided in objections to DRP at page 72 to 74 are referred in support of the contentions.

Date of Judgment 28-06-2018 I.T.A.No.517/2016

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7.2 The above companies were considered by the Coordinate Bench in the case of Yodlee Infotech Pvt.Ltd. in IT(TP)A No.1538/Bang/ 2012 dated 30.8.2013 wherein vide para 25 and 26, the Bench directed as under:- … … … … … … … … … 7.3 Even though the assessee contended that the reimbursement costs are included in the working, the actual working of TPO is not verifiable. Therefore, following the above order of Coordinate Bench, we restore the issue to the file of TPO to examine the computation again by excluding the reimbursement cost since it do not have any profit margin and also to consider whether the companies fail the RPT filter or not. Assessee should be given due opportunity and its working should be considered after due examination. The grounds relating to this issue are allowed for statistical purposes.”

Date of Judgment 28-06-2018 I.T.A.No.517/2016

Pr. Commissioner of Income Tax-IV & Anr. Vs. M/s.Mercedes-Benz Research & Development India Pvt.Ltd.,

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However, this Court in a recent judgment in I.T.A.No.536/2015 c/w. I.T.A.No.537/2015 (Pr.Commissioner of Income Tax, Bangalore and Another Vs. M/s. Softbrands India P.Ltd.,) rendered on 25-06-2018, has held that in these type of cases, unless an ex-facie perversity in the findings of the learned Income Tax Appellate Tribunal is established by the appellant, the appeal at the instance of an assessee or the Revenue under Section 260-A of the Act is not maintainable and the relevant portion of the said 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

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Pr. Commissioner of Income Tax-IV & Anr. Vs. M/s.Mercedes-Benz Research & Development India Pvt.Ltd.,

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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 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

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Pr. Commissioner of Income Tax-IV & Anr. Vs. M/s.Mercedes-Benz Research & Development India Pvt.Ltd.,

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found to be devoid of merit and the same are liable to be dismissed.

57.

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.”

Having heard the learned counsel for the parties, this Court is satisfied that no substantial

Date of Judgment 28-06-2018 I.T.A.No.517/2016

Pr. Commissioner of Income Tax-IV & Anr. Vs. M/s.Mercedes-Benz Research & Development India Pvt.Ltd.,

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question of law would arise in the present case and the appeal filed by the Revenue is therefore, liable to be dismissed. Accordingly, it is dismissed. No costs.

Sd/- JUDGE

Sd/-

JUDGE

BMV*

PR. COMMISSIONER OF vs. M/S MERCEDES BENZ RESEARCH