Karnataka High Court
The Pr Commissioner Of Income Tax-4 vs M/S Mphasis Ltd on 20 January, 2021
Bench: Alok Aradhe, Nataraj Rangaswamy
1
IN THE HIGH COURT OF KARNATAKA AT BENGALURU
DATED THIS THE 20TH DAY OF JANUARY 2021
PRESENT
THE HON'BLE MR. JUSTICE ALOK ARADHE
AND
THE HON'BLE MR. JUSTICE NATARAJ RANGASWAMY
I.T.A. NO.918 OF 2017
BETWEEN:
1. THE PR. COMMISSIONER OF INCOME TAX-4
C.R. BUILDINGS, QUEENS ROAD
BANGALORE.
2. THE ASSISTANT COMMISSIONER OF INCOME TAX
CIRCLE 12(1), BANGALORE.
... APPELLANTS
(BY SRI. SANMATHI E.I. ADV.,)
AND:
M/S. MPHASIS LTD.,
ABACUS SQUARE
BAGMANE TECH PARK
C.V. RAMAN NAGAR
BYRASANDRA, BANGALORE
PAN:AAACB6820C.
... RESPONDENT
(BY SRI. T. SURYANARAYANA, ADV.)
---
THIS I.T.A. IS FILED UNDER SEC. 260-A OF INCOME TAX
ACT 1961, ARISING OUT OF ORDER DATED 19.05.2017 PASSED
IN IT(TP)A NO.14/BANG/2012 FOR THE ASSESSMENT YEAR 2007-
08, VIDE ANNEXURE-A, PRAYING TO:
(i) 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.
2
(ii) SET ASIDE THE APPELLATE ORDER DATED 19.05.2017
PASSED IN IT(TP)A NO.14/BANG/2012, FOR ASSESSMENT YEAR:
2007-08, VIDE ANNEXURE-A, BY THE INCOME TAX APPELLATE
TRIBUNAL, 'B' BENCH, BANGALORE, AS SOUGHT FOR, IN THE
ABOVE CASE. GRANT SUCH OTHER RELIEF AS DEEMED FIT,
INTEREST OF JUSTICE.
THIS I.T.A. COMING ON FOR HEARING, THIS DAY,
ALOK ARADHE J., DELIVERED THE FOLLOWING:
JUDGMENT
This appeal under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as the Act for short) has been preferred by the revenue. The subject matter of the appeal pertains to the Assessment year 2007-08. The appeal was admitted by a bench of this Court vide order dated 01.04.2019 on the following substantial questions of law:
"(i) Whether on the facts and circumstances of the case, the Tribunal is right in law in excluding certain comparable-companies on the ground of functional dissimilarity even when the comparable-companies satisfied all the qualitative and quantitative tests applied by Transfer Pricing Officer?
3
(ii) Whether on the facts and circumstances of the case, the Tribunal is right in excluding certain comparable- companies on the ground of RPT filter of these comparables are more than 15% even when the Transfer Pricing Officer had chosen proper comparables and in TP case, the selection of comparables is different from each case and depends on facts of instant cases?
(iii) Whether on the facts and circumstances of the case, the Tribunal is right in law in excluding certain comparable-companies on the ground of Turnover filter of these comparables even when the Transfer Pricing Officer had chosen proper comparables and in TP case, the sales turnover does not have any impact on margins earned?".
2. Facts leading to filing of this appeal briefly stated are that the assessee is a subsidiary of electronic data systems corporation USA and is primarily engaged in rendering software development services (hereinafter 4 referred to as 'the SWD' for short) and Information Technology Enabled Services (hereinafter referred to as 'the ITES' for short) to its associated enterprises. During the Assessment Year 2007-08, the assessee realized net profit margin of 14.22% in SWD services segment and 9.26% in ITES segment. The assessee filed the return of income declaring a total income of Rs.23,92,17,861/-. The return was processed under Section 143(1) of the Act and the Assessing Authority subsequently took up the case for regular assessment under Section 143(3) of the Act. Since, the assessee had international transactions with the associated enterprises, the Assessing Officer referred the matter to Transfer Pricing Officer under Section 92CA of the Act for determination of Arms Length Price (ALP).
3. The Transfer Pricing Officer by an order dated 16.09.2008 determined the Arms Length Price at Rs.72,60,11,903/-. The assessee thereupon filed an application for rectification before the Transfer Pricing 5 Officer who by an order dated 22.02.2011 revised the transfer pricing adjustment to Rs.62,88,161/-. On receipt of the order from the Transfer Pricing Officer the Assessing Authority passed a draft assessment order on 30.12.2010. The assessee thereupon filed objections before the Dispute Resolution Panel. The Dispute Resolution Panel by an order dated 26.09.2011 under Section 144C(5) of the Act upheld the order of assessment and issued directions to the Assessing Authority. Thereafter, the Assessing Authority passed an order of assessment on 30.10.2011 by which the Assessing Authority made transfer pricing adjustment of Rs.62,88,83,161/- on the basis of transfer pricing order and further made certain disallowances. Thereupon the assessee filed an appeal before the Income Tax Appellate Tribunal (hereinafter referred to as 'the tribunal' for short). The tribunal by an order dated 19.05.2017 directed the Transfer Pricing Officer / Assessing Authority to exclude certain comparables from 6 the list of comparables adopted by the Transfer Pricing Officer. Accordingly, the appeal was partly allowed. In the aforesaid factual background, the revenue is in appeal before us.
4. Learned counsel for the revenue submitted that tribunal has directed the Transfer Pricing Officer to exclude comparable without independently considering the facts of the present case and the material brought on record by Transfer Pricing Officer to exclude certain comparable's which are chosen in accordance with Rule 10B and therefore, the findings recorded by the tribunal are perverse. It is further submitted that the tribunal erred in law in directing Transfer Pricing Officer to exclude certain comparable's on the ground of Related Party Transaction filter of those comparables which are more than 15% without considering the fact that Transfer Pricing Officer has adopted Related Party Transaction (RPT) Filter after considering the transactions which do not impact the profitability and 7 related party transaction of such a nature which does not directly affect or insignificantly affects the profit earned from the bare profit producing activity.
5. It is also urged that turnover of the company does not have any impact on the margins and earned and there is co-relation between the size of the company and its profit margin in software development services. It is also argued that when a comparable is functionally similar to that of the assessee, the same cannot be excluded merely because its turnover is lower than that of the assessee and turnover cannot be a relevant criteria in a service sector. It is also pointed out that the tribunal ought to have directed an enquiry under Rule 10B(3) of the Rules to determine as to whether material differences between the assessee and the said entity can be eliminated. It is also urged that while determining the comparability of transactions, multiple year data can only be included in the manner provided in Rule 10B(4) of the Rules. It is further submitted that since the 8 tribunal has failed to take into account the material brought on record by the Transfer Pricing Officer as well as the Dispute Resolution Panel, the matter deserves to be remitted to the tribunal for decision afresh. In support of aforesaid submissions, reliance has been placed on 'CHRYSCAPITAL INVESTMENT ADVISORS (INDIA) PVT. LTD. VS. DEPUTY COMMISSIONER OF INCOME TAX', 93 CCH 0029 DELHI HC.
6. On the other hand, learned counsel for the assessee submitted that the substantial question of law is vague inasmuch as the companies whose exclusion has been challenged is not mentioned in the aforesaid substantial question of law. Therefore, in fact, the aforesaid question of law does not arise for consideration. Alternatively, it is pointed out that the finding of the tribunal that the companies are not comparable to the assessee as they are functionally different is a finding of fact, which has not been challenged by the revenue on the ground of perversity 9 and no material has been brought on record to demonstrate its perversity. Therefore, no substantial question of law arises for consideration in this appeal. It is further submitted that the tribunal has recorded cogent reasons for excluding the companies from the final list of comparables for SWD and ITE service providers placed similar to the assessee. It is also pointed out that the tribunal has not applied Related Party Transaction filter at the rate of 15% and therefore, the second and third substantial question of law does not arise for consideration. Alternatively, it is submitted that turnover is a related criteria for determination of comparability of companies and a company with high turnover cannot be compared with a captive service provider like the assessee who does not undertake any risk. In support of aforesaid submissions, reliance has been placed on decisions in 'CIT VS. PENTAIR WATER INDIA (P.) LTD.', (2016) 381 ITR 216 (BOMBAY), 'CIT VS. AGNITY INDIA TECHNOLOGIES (P.) LTD.', 10 (2013) 36 TAXMANN.COM 289 (DELHI), PCIT VS. SAMSUNG R & D INSTITUTE BANGALORE PVT. LTD. ITA NO.622/2017 DATED 30.11.2020.
7. We have considered the submissions made by learned counsel for the parties and have perused the record. We find sufficient force in the submission made by learned counsel for the assessee that the first substantial question of law framed is vague inasmuch as particulars of the companies whose exclusion was being challenged has not been mentioned in the aforesaid substantial question of law. From perusal of the order passed by the tribunal, it is evident that the tribunal in page 33 of its order has placed reliance on in the case of Thirdware Solutions Ltd., which pertain to the same Assessment Year and thus, the tribunal has followed its own order in the same Assessment Year. From perusal of the order passed by the tribunal and in particular from para 11.1 to 11.8, it is evident that the tribunal has recorded the findings for exclusion of the companies 11 pertaining to ITE services segment by assigning cogent reasons. Similarly, in paragraphs 12 and 13 of the order passed by the tribunal, the tribunal has excluded the companies of SWD services segment by assigning valid and cogent reasons. The revenue has not assailed the reasons assigned by the tribunal to be perverse no any material has been brought on record to indicate the perversity recorded by the tribunal. The aforesaid question is a question of fact and this court cannot interfere with the same in the absence of perversity. Therefore, the first substantial question of law is answered against the revenue and in favour of the assessee.
8. From perusal of the order passed by the tribunal, it is evident that the tribunal did not apply the Related Party Transaction filter and in fact, has rejected the same in para 11.4 of its order. Therefore, the second and third substantial questions of law in fact, do not arise for consideration in the fact situation of the 12 case. Therefore, it is not necessary for us to answer the same.
In view of preceding analysis, we do not find any merit in this appeal, the same fails and is hereby dismissed.
Sd/-
JUDGE Sd/-
JUDGE ss