COMMISSIONER OF INCOME TAX-III vs. M/S MERCEDES-BENZ

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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.230/2013

BETWEEN:

... APPELLANTS

(BY SRI.JEEVAN J NEERALGI, ADV.) AND:

M/S MERCEDES-BENZ RESEARCH & DEVELOPMENT INDIA PVT. LTD., PINE VALLEY, 3RD FLOOR, EMBASSY GOLF LINKS, BUSINESS PARKS, OFF INTERMEDIATE RING ROAD, BANGALORE - 560 071.

... RESPONDENT

(BY SRI.SANKEERTH VITTAL, ADV. FOR SRI. ARUN SRI KUMAR, ADV.)

THIS ITA IS FILED UNDER SECTION 260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED, ARISING OUT OF

Date of Judgment 10-07-2018, ITA No.230/2013 Commissioner of Income Tax-III & Another Vs. M/s Mercedes-Benz Research & Development India Pvt. Ltd.,

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ORDER DATED 21/12/2012 PASSED IN M.P.60/BANG/2012 IN ITA NO.1369/BANG/2010, FOR THE ASSESSMENT YEAR 2006-07 ANNEXURE - A, PRAYING TO: I. FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN. II. SET ASIDE THE APPELLATE ORDER DATED 21/12/2012 PASSED BY THE ITAT, 'B' BENCH, BANGALORE IN APPEAL PROCEEDINGS IN M.P.60/BANG/2012 IN ITA NO.1369/BANG/2010, 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.Jeevan J. Neeralgi, Adv. for Appellants – Revenue. Mr. Sankeerth Vittal, Adv. for Mr. Arun Srikumar - 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 ‘B’, in M.P. No.60/Bang/2012 in ITA No.1369/Bang/2010 dated 21.12.2012, relating to the Assessment Year 2006-07.

Date of Judgment 10-07-2018, ITA No.230/2013 Commissioner of Income Tax-III & Another Vs. M/s Mercedes-Benz Research & Development India Pvt. Ltd.,

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law as framed by the Revenue in the Memorandum of Appeal. 1) “Whether the Tribunal was right in law in remitting back the issue of loss/gain as operating in nature when no new facts have been brought on records by the assessee?

2) Whether the Tribunal is right in law by 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 in the facts and circumstances of the case?

3) Whether the Tribunal is right in law in entertaining the miscellaneous petition filed by assessee when original order passed by it has been subject matter before this Hon’ble Court in ITA No.362 of 2012?”

Regarding Substantial Question No.1:

Date of Judgment 10-07-2018, ITA No.230/2013 Commissioner of Income Tax-III & Another Vs. M/s Mercedes-Benz Research & Development India Pvt. Ltd.,

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“(2) Treatment of foreign exchange gain/loss as operating in nature. As per ground No.12 raised by the assessee in the grounds of appeal, the assessee had submitted that, while arriving at the net margin, foreign exchange loss of Rs.4,95,079/- incurred by the assessee and foreign exchange fluctuations (gain/loss) of the comparable companies should be considered as operating in nature. However, the TPO has treated the foreign exchange gain/loss as non operating in nature while computing the operating margin of the assessee as well as comparable companies. The assessee had filed its detailed contentions/arguments before the Hon’ble Tribunal vide submission filed on 13th July, 2011 on treatment of foreign exchange gain/loss as operating in nature. The assessee had also submitted the following rulings which have held that the foreign exchange gain/loss arise in the normal course of business and therefore should be considered as operating in nature:-

Date of Judgment 10-07-2018, ITA No.230/2013 Commissioner of Income Tax-III & Another Vs. M/s Mercedes-Benz Research & Development India Pvt. Ltd.,

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• M/s SAP Labs India Private Limited v. ACIT (44 SOT 156 (BANG)} • Gem Plus Jewellery India Limited V. CIT (330 ITR 175) (Bom.) xxx xxx xxx

Date of Judgment 10-07-2018, ITA No.230/2013 Commissioner of Income Tax-III & Another Vs. M/s Mercedes-Benz Research & Development India Pvt. Ltd.,

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transaction (2) 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.

It is ordered accordingly.

Regarding Substantial Question No.2:

(1) CPM/CUP is the most appropriate method to determine the ALP of the assessee’s international transaction As per the ground No.6 raised by the assessee in the grounds of appeal, the assessee had submitted that the CPM/CUP is the most appropriate method in order to determine the arm’s length nature of the international transaction entered by the assessee. However, in place of cPM/CUP adopted by the assessee, the TPO adopted Transactional Net Margin Method (“TNMM”) as the most appropriate method to determine the arm’s length nature of the international transaction and the same was upheld by the DRP. The assessee prays that in

Date of Judgment 10-07-2018, ITA No.230/2013 Commissioner of Income Tax-III & Another Vs. M/s Mercedes-Benz Research & Development India Pvt. Ltd.,

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the order, the Hon’ble Tribunal, even after sufficient discussion, has not given any findings/ directions (para 48-50m page No.36 to 38) on the appropriateness and applicability of CPM/CUP method in the case of assessee while determining the ALP of the international transaction.”

Date of Judgment 10-07-2018, ITA No.230/2013 Commissioner of Income Tax-III & Another Vs. M/s Mercedes-Benz Research & Development India Pvt. Ltd.,

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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

Date of Judgment 10-07-2018, ITA No.230/2013 Commissioner of Income Tax-III & Another Vs. M/s Mercedes-Benz Research & Development India Pvt. Ltd.,

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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.230/2013 Commissioner of Income Tax-III & Another Vs. M/s Mercedes-Benz Research & Development India Pvt. Ltd.,

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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.”

Sd/- JUDGE

Sd/- JUDGE AN/-