Gujarat High Court
Mastek Ltd vs Deputy Commissioner Of Income Tax on 13 August, 2024
Author: Bhargav D. Karia
Bench: Bhargav D. Karia
NEUTRAL CITATION
C/SCA/2046/2022 ORDER DATED: 13/08/2024
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IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/SPECIAL CIVIL APPLICATION NO. 2046 of 2022
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MASTEK LTD
Versus
DEPUTY COMMISSIONER OF INCOME TAX
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Appearance:
MR B S SOPARKAR(6851) for the Petitioner(s) No. 1
MR.VARUN K.PATEL(3802) for the Respondent(s) No. 1
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CORAM:HONOURABLE MR. JUSTICE BHARGAV D. KARIA
and
HONOURABLE MR. JUSTICE NIRAL R. MEHTA
Date : 13/08/2024
ORAL ORDER
(PER : HONOURABLE MR. JUSTICE BHARGAV D. KARIA) [1] Heard learned advocate Mr. B. S. Soparkar for the petitioner and learned Senior Standing Counsel Mr. Varun Patel for the respondent.
[2] Rule returnable forthwith. Learned advocate Mr. Patel waives service of notice of Rule for the respondent. [3] Having regard to the controversy in narrow compass and with the consent of learned advocates for the parties, the matter is taken up for hearing.
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NEUTRAL CITATION C/SCA/2046/2022 ORDER DATED: 13/08/2024 undefined [4] By this petition under Article 226 of the Constitution of India, the petitioner has challenged the notice dated 27 th March 2021 issued under Section 148 of the Income Tax Act, 1961 (for short, "the Act") for the Assessment Year 2013-14. [5] The brief facts of the case are that the petitioner filed its original return of income declaring total income of Rs.17,93,76,980/- under normal provisions and Book Profit of Rs.49,64,29,959/- and claiming Long Term Capital Loss of Rs.1,73,77,183/- on account of capital reduction of shares in Mastek Asia Pacific Pte. Ltd (MAP).
[5.1] The petitioner thereafter filed a revised return for the year under consideration. In view of the assessment order for the Assessment Year 2011-12, the petitioner had withdrawn the Long Term Capital Loss of Rs.1,73,77,183/- claimed on account of capital reduction in MAP as same was in nature of Long Term Capital loss and instead thereof, claimed Long Term Capital Loss of Rs.2,01,32,777/- incurred on actual Page 2 of 15 Uploaded by CHANDRESH N. SIDDHAPURA(HC01109) on Thu Aug 29 2024 Downloaded on : Fri Aug 30 21:47:45 IST 2024 NEUTRAL CITATION C/SCA/2046/2022 ORDER DATED: 13/08/2024 undefined sale of shares of Mastek GmbH for the year under consideration which was disallowed in Assessment Year 2011- 12. [5.2] It was also disclosed by the assessee that the capital gain was inclusive of foreign exchange fluctuation gain of Rs.1,88,72,839/- which was reduced from the total income of the petitioner.
[5.3] The petitioner has also filed return of income for the Assessment Year 2016-17 on 30 th November, 2016 where the foreign exchange fluctuation gain of Rs.1,88,72,839/- was given effect in computing the capital gain on sale of investment in MAP.
[5.4] The case of the petitioner was selected for scrutiny for the Assessment Year 2013-14 and a detailed scrutiny was undertaken on both the issues of Transfer of Pricing as well as other issues under the Income Tax Act. The transactions of the petitioner with Mastek UK (MUK) were scrutinized in the Page 3 of 15 Uploaded by CHANDRESH N. SIDDHAPURA(HC01109) on Thu Aug 29 2024 Downloaded on : Fri Aug 30 21:47:45 IST 2024 NEUTRAL CITATION C/SCA/2046/2022 ORDER DATED: 13/08/2024 undefined Transfer Pricing Assessment thoroughly after the notice dated 9th September, 2016 was issued with regard to transaction of software services distributed by MUK as marketing support services and taking MUK as tested party and risk adjusted margin comparable on cost (VAE) at 11.99% as the Arm's Length Return for MUK. The petitioner filed reply dated 30 th September 2016. However, disregarding the submissions of the petitioner, the Transfer Pricing Officer (TPO) made upward adjustment in relation to transactions with MUK at Rs.9,46,41,120/- vide order dated 25 th October, 2016 passed under Section 92CA(3) of the Act.
[5.5] The Assessing Officer during the course of regular assessment proceedings issued notice under Section 142(1) of the Act on 29th July 2016 asking details relating to debits / credits in profit and loss account on account of foreign exchange fluctuations. The petitioner filed detailed submissions on 16th September, 2016, 7th October, 2016 and 22nd November, 2016. Thereafter, the assessment order under Page 4 of 15 Uploaded by CHANDRESH N. SIDDHAPURA(HC01109) on Thu Aug 29 2024 Downloaded on : Fri Aug 30 21:47:45 IST 2024 NEUTRAL CITATION C/SCA/2046/2022 ORDER DATED: 13/08/2024 undefined Section 143(3) of the Act was passed on 30 th December, 2016 assessing the income of the petitioner at Rs.54,73,25,590/- inter alia making Transfer Pricing addition of Rs.9,50,69,182/-. [5.6] The petitioner thereafter received notice under Section 133(6) dated 14th August, 2018 asking explanation and necessary details with documentary evidence regarding foreign exchange gain of Rs.1,88,72,839/- relating to shares of MAP which was reduced from computation of income. The petitioner filed detailed reply on 20th August, 2018 with explanation and necessary details and documentary evidence. It appears that being not satisfied with the reply of the petitioner, impugned notice dated 27th March, 2021 under Section 148 of the Act was issued asking the petitioner to file return of income for the Assessment Year 2013-14 for reassessment.
[5.7] The petitioner filed its return of income and sought for reasons recorded which was provided by the respondent on Page 5 of 15 Uploaded by CHANDRESH N. SIDDHAPURA(HC01109) on Thu Aug 29 2024 Downloaded on : Fri Aug 30 21:47:45 IST 2024 NEUTRAL CITATION C/SCA/2046/2022 ORDER DATED: 13/08/2024 undefined 11th May, 2021. The reasons recorded mainly contained the two issues for reopening of the assessment. The reasons recorded were based upon the audit objections raised by the internal audit party of the respondent department and on the basis of such objections, analysis was done by the Assessing Officer and arrived at the following findings for reopening of assessment:
"5. Findings of the AO : In this case, on the basis of above mentioned facts and after proper investigation from the materials on records, it is seen that the TPO had concluded that the guarantee fee has to be determined on the basis of total value of performance guarantee. Accordingly, all contentions raised by the assessee- company was rejected and a guarantee fee @ 2% was determined without prejudice basis at Rs.3.136 crore in relation to performance guarantee extended by the assessee-company on behalf of MSUK. However, no separate adjustment was made as mark-up has been suggested as enterprise level taking value added expenses (VAE) as the basis for mark-up. However, the detailed benchmarking of the VAE in r/o, the provision of marketing support service by the AE-MUK to the assessee- company revealed that the assessee had selected return on sales as the PLI. Whereas, the TPO concluded that in light of the categorization of MUK, being risk free entity engaged in marketing support to the assessee-company, the comparable selected by the company should be risk free entities and should be remunerated on cost incurred by them. Accordingly, the correct PLI to benchmark MUK should have been return on cost (VAE) incurred by MUK on is operation Page 6 of 15 Uploaded by CHANDRESH N. SIDDHAPURA(HC01109) on Thu Aug 29 2024 Downloaded on : Fri Aug 30 21:47:45 IST 2024 NEUTRAL CITATION C/SCA/2046/2022 ORDER DATED: 13/08/2024 undefined and not return on sales. Therefore, the PLI was altered from margin on sales adopted by the assessee- company to margin on VAE. The comparable company selected by the TPO (hocomm Ltd. And Touchstone Group PLC) were entrepreneurs carrying associated risks like financial, Inventory and capital risk and hence the comparison with the AE was made, after risk adjustment The arithmetic mean of the, PLI (Le return on VAE) of the comparables identified was computes at 22.78% However, these companies were carrying out their work as full risk entrepreneur in marketing business whereas MUK was a captive marketing support company, Accordingly, the margins of the comparable companies were required to be recomputed after conducting the risk assessment. For the purpose of carrying out a risk adjustment, TPO relied upon the decision of the Banglore ITAT in the case of Philips Software Centre Private Limited (26 SOT 226) Bangalore. In the said case, the ITAT held that the difference between the Prime lending Rate of the bank could be considered as a normal risk bearing return, the Bank rate was considered as a risk free return and accordingly, the difference between the two was attributed to the additional risk and accordingly the requisite PLI was computed at 11.99 %. However, during such deliberation only risk associated in UK only was considered, the effect of the volatility of foreign exchange was not taken into. As we saw above the assessee had given performance guarantee to the customers on behalf of MSUK for the future non-performance of the contacted support services. Though, the work out above included the related risk accruing on this count on foreign soil but failed to accommodate the risk attributable to futuristic foreign exchange fluctuation assumed by the assessee. This risk is generally covered by the top-up 100 point equivalent to 1%. Based on the above, working of the risk premium can be carried out as below:
Particulars Sources Department Audit Computation Computation Risk Bearing Average of A 3.25% 3.25% Rate bank of Page 7 of 15 Uploaded by CHANDRESH N. SIDDHAPURA(HC01109) on Thu Aug 29 2024 Downloaded on : Fri Aug 30 21:47:45 IST 2024 NEUTRAL CITATION C/SCA/2046/2022 ORDER DATED: 13/08/2024 undefined America and City Bank rates sourced from Bloomberg Forex Risk B 0% 1% Rate Total Risk C 3.25% 4.25% [A+B] Risk Free Rate D 1.71% 1.71% Difference E[C-D] 1.54% 2.54% Risk Premium F [E/C] 47.38% 59.76% Arithmetic G 22.78% 22.78% mean of PLI of comparable companies before risk adjustment Arithmetic H [G-(G*F)] 11.99% 9.17% mean of PLI of comparable companies after risk adjustment As the entire sales consideration was routed through the books of account of the AE and had no role to play in determining the ALP of the marketing support services rendered by the AE to the assessee-company. Thus the ALP in relation to provisions of marketing support service by the AE- MUK to the assessee-company can be determined as under:
Particulars Actual ALP as per ALP as per Audit
Department
Revenue 8884 7736 7541
Direct cost 6908 6908 6908
Operating Profit 1976 828 633
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NEUTRAL CITATION
C/SCA/2046/2022 ORDER DATED: 13/08/2024
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Accordingly, the TPO made upward adjustment of GBP 11,48,000 (8884000 -7736000) to the total income of the assessee-company on this issue involving Rs.9.46,41,120 82.44 per GBP, However, the correct upward adjustment of GBP 13,43,000 (8884000-7541000) to the total income of the assessee-company was required to be made on this issue involving Rs.11.07,16,920 82.44 per GBP. Thus, there was short upward adjustment of Rs.1,60,75,800 (11,07,16,920-
9,46,41,120) on account of the performance guarantee instead the TPO had forgone entire adjustment of Rs.3.136 crore arrived in the TPO process. This has resulted into underassessment of income of Rs.1,60,75,800/- It is further seen from the case records that assessee-company had reduced exchange gain on sale of MAP shares of Rs.1,88,72,839/- from the net profit under the head "Profit and Gains of Business or Profession" stating that the same is being shown separately. Further, it was seen from the profit and loss a/c, that the said item was not found credited. However, in computation of income said item was not shown separately. This has resulted into underassessment of income of Rs.92,37,424/-.
[5.8] The petitioner filed objection on 26 th May 2021 which was disposed of by the respondent vide order dated 11 th November 2021.
[6] Being aggrieved, the petitioner has preferred this petition.
[7] Learned advocate Mr. B. S. Soparkar for the Page 9 of 15 Uploaded by CHANDRESH N. SIDDHAPURA(HC01109) on Thu Aug 29 2024 Downloaded on : Fri Aug 30 21:47:45 IST 2024 NEUTRAL CITATION C/SCA/2046/2022 ORDER DATED: 13/08/2024 undefined petitioner submitted that so far as the issue based upon the mark up on direct cost of MUK to be made at 9.17% after accounting for foreign exchange risk of 1% instead of 12% mark up was made by the Transfer Pricing Officer (TPO), is nothing but mere change of opinion on the part of the respondent for reopening of the assessment. It was submitted that the Arm's Length Price (ALP) in relation to provisions of marketing support service provided by the associated enterprise (AE) Mastek (UK) Limited (AE-MUK) to the petitioner cannot be said to have been underassessed by Rs.1,60,75,800/-.
[7.1] With regard to second reason of reduced exchange gain on sale of shares of MAP of Rs.1,88,72,839/- from computation of income, it was pointed by learned advocate Mr. Soparkar that the same was offered to tax when the actual sale of shares took place in the Assessment Year 2016-17 in order to maintain the consistency with regard to the similar transactions took place in the Assessment Year 2011-12 in case Page 10 of 15 Uploaded by CHANDRESH N. SIDDHAPURA(HC01109) on Thu Aug 29 2024 Downloaded on : Fri Aug 30 21:47:45 IST 2024 NEUTRAL CITATION C/SCA/2046/2022 ORDER DATED: 13/08/2024 undefined of reduction of capital of Mastek GmbH and the actual sale of shares took place in the year under consideration where the petitioner claimed the actual loss of sale of shares of Mastek GmbH. It was therefore submitted that there is no failure on the part of the petitioner to disclose fully and truly all material facts relevant for the assessment and accordingly, proviso to Section 147 of the Act would apply in the facts of the case as the impugned notice is issued beyond the four years from the end of the relevant assessment year.
[7.2] It was further submitted that on both the counts i.e. the petitioner has made full and true disclosure as well as on change of opinion so far as the first reason recorded by the respondent - Assessing Officer, the impugned notice is not tenable and the respondent could not assume the jurisdiction for reopening the assessment for the year under consideration. [7.3] It was further submitted by learned advocate Mr. Soparkar that there is complete non application of mind on the Page 11 of 15 Uploaded by CHANDRESH N. SIDDHAPURA(HC01109) on Thu Aug 29 2024 Downloaded on : Fri Aug 30 21:47:45 IST 2024 NEUTRAL CITATION C/SCA/2046/2022 ORDER DATED: 13/08/2024 undefined part of the respondent - Assessing Officer inasmuch as the issue of exchange gain on sale of MAP shares of Rs.1,88,72,839/-, notice under Section 133(6) dated 14 th August 2018 was issued asking for details regarding the same and the petitioner filed a detailed reply on 20 th August 2018 and even after filing the detailed explanation and all the necessary details with documentary evidence for the second time, the respondent - Assessing Officer failed to apply its mind to the issue on hand. It was therefore submitted that the impugned notice is liable to be quashed and set aside. [8] On the other hand, learned advocate Mr. Patel for the respondent - Assessing Officer submitted that after considering the audit objection, the respondent - Assessing Officer has analyzed the information and thereafter has prima facie formed a reason to believe that income has escaped assessment inasmuch as with regard to the issue of mark up while calculating the Arms' Length Price (ALP), the TPO has failed to consider foreign exchange risk of 1% which was Page 12 of 15 Uploaded by CHANDRESH N. SIDDHAPURA(HC01109) on Thu Aug 29 2024 Downloaded on : Fri Aug 30 21:47:45 IST 2024 NEUTRAL CITATION C/SCA/2046/2022 ORDER DATED: 13/08/2024 undefined considered by the audit objection party and therefore when there was no consideration for foreign exchange risk by the TPO, it cannot be said to mere change of opinion resulting into under assessment of Rs.1,60,75,800/-. It was further submitted that similarly, the exchange gain on sale of MAP shares of Rs.1,88,72,839/- from the net profit under the head "Profit and Gains of Business or Profession" stating that the same is being shown separately has also resulted into under assessment of income of Rs.92,37,424/-. It was therefore submitted that the contentions raised by the petitioner are contrary to the facts on record and no interference be made in the impugned notice as the respondent - Assessing Officer had assumed the jurisdiction to reopen the assessment after application of mind and after thorough analysis of the record available with the department.
[9] Considering the submissions made by the learned advocates for the respective parties, the facts which emerge from the record are to the effect that the TPO, while Page 13 of 15 Uploaded by CHANDRESH N. SIDDHAPURA(HC01109) on Thu Aug 29 2024 Downloaded on : Fri Aug 30 21:47:45 IST 2024 NEUTRAL CITATION C/SCA/2046/2022 ORDER DATED: 13/08/2024 undefined determining the ALP and making upward adjustment, has passed a detailed order wherein all aspects are taken into consideration for rendering the services by the MUK to the petitioner and thereafter, the mark up of 12% is determined. The audit objection, which has been raised with regard to foreign exchange risk by adding 1% and reducing mark up to 9.27% resulting into the upward escapement of income of more than Rs.1.60 Crore, is nothing, but a mere change of opinion as there is no failure on the part of the petitioner to make full and true disclosure of all the material facts. As the impugned notice is issued beyond the period of four years, the respondent could not have assumed the jurisdiction on the basis of the audit objections.
[10] Similarly, with regard to the second reason, the assessee has made full disclosure in computation of income as well as in the revised return of income during the course of regular assessment.
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NEUTRAL CITATION C/SCA/2046/2022 ORDER DATED: 13/08/2024 undefined [11] The petitioner has explained in detail in the objections with regard to issue of transaction with MAP which has been allowed to have not been disclosed but the respondent failed to consider the same while disposing of such objection. On perusal of the material available on record, we are of the opinion that there is no failure on the part of the petitioner to disclose fully and truly all material facts at the time of original assessment and therefore, as per proviso to Section 147 of the Act, the respondent could not have assumed the jurisdiction for reopening the assessment. [12] In view of the foregoing reasons, the impugned notice dated 27th March, 2011 issued under Section 148 of the Act is not tenable and is hereby quashed and set aside. Rule is made absolute to the aforesaid extent with no order as to costs.
(BHARGAV D. KARIA, J) (NIRAL R. MEHTA,J) CHANDRESH Page 15 of 15 Uploaded by CHANDRESH N. SIDDHAPURA(HC01109) on Thu Aug 29 2024 Downloaded on : Fri Aug 30 21:47:45 IST 2024