Karnataka High Court
The Commissioner Of Income Tax vs M/S Mindteck (India) Ltd on 13 July, 2018
Bench: Vineet Kothari, S.Sujatha
1/14
IN THE HIGH COURT OF KARNATAKA, BENGALURU
DATED THIS THE 13TH DAY OF JULY 2018
PRESENT
THE HON'BLE Dr.JUSTICE VINEET KOTHARI
AND
THE HON'BLE Mrs.JUSTICE S.SUJATHA
I.T.A.No.35/2015
BETWEEN:
1. THE COMMISSIONER OF INCOME TAX
C.R. BUILDING, QUEENS ROAD
BANGALORE.
2. THE Dy. COMMISSIONER OF INCOME-TAX
CIRCLE-12(1), RASHTROTHANA BHAVAN
NRUPATHUNGA ROAD, BANGALORE-560 001.
...APPELLANTS
(By Mr. K.V. ARAVIND, ADV.)
AND:
M/S. MINDTECH (INDIA) LTD.,
PRESTIGE ATLANTA, No.10
INDUSTRIAL LAYOUT
7TH MAIN, 80 FT ROAD
3RD BLOCK, BANGALORE-560034
PAN: AJNPK2426N.
...RESPONDENT
(By Mr. S. SANKARA NARAYAN, ADV.)
THIS I.T.A. IS FILED UNDER SECTION 260-A OF I.T. ACT,
1961, PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS
OF LAW STATED ABOVE. ALLOW THE APPEAL AND SET ASIDE
THE ORDERS PASSED BY THE INCOME-TAX APPELLATE
TRIBUNAL, BANGALORE IN IT(TP)A No.70/Bang/2014 DATED
21/08/2014 ANNEXURE-D AND CONFIRM THE ORDER OF THE
Date of Judgment 13-07-2018 I.T.A.No.35/2015
The Commissioner of Income-tax & Anr.
Vs. M/s. Mindteck (India) Ltd.,
2/14
DRP CONFIRMING THE ORDER PASSED BY THE Dy.
COMMISSIONER OF INCOME TAX, CIRCLE-12(1), BANGALORE.
THIS I.T.A. COMING ON FOR HEARING, THIS DAY
S. SUJATHA J. DELIVERED THE FOLLOWING:-
JUDGMENT
Mr. K.V. Aravind, Adv. for Appellants- Revenue Mr. Sankara Narayan, Adv. for Respondent - Assessee
1. The Appellants-Revenue have filed this appeal u/s.260A of the Income Tax Act, 1961, raising purportedly certain substantial questions of law arising from the order of the ITAT, Bangalore Bench 'B', Bangalore, dated 21.08.2014 passed in IT(TP)A No.70/Bang/2014 (M/s.Mindteck (India) Ltd., vs. Dy.Commissioner of Income-tax ) for A.Y.2009-10.
2. The proposed substantial questions of law framed in the Memorandum of appeal by the Appellants-Revenue are quoted below for ready reference:-
" 1. Whether on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the foreign exchange Date of Judgment 13-07-2018 I.T.A.No.35/2015 The Commissioner of Income-tax & Anr.
Vs. M/s. Mindteck (India) Ltd., 3/14 loss/gain is to be treated as part of the operating expenses or operating income, as the case may be even when the Foreign exchange loss/gain to the extent the same is attributable to the hedging policy of the company against payables/receivables may constitute operational income and even though during the proceedings before the TPO this aspect in case of the assessee is verifiable, the same does not hold true in respect of all comparables, data of which may not be available in the public domain, moreover, once the foreign exchange loss/gain has been excluded from the financial data of the comparables, uniformity of the data ensures fair comparability?
2. Whether on the facts and in the circumstances of the case, the Tribunal is right in law in holding Bodhtree Consulting Ltd., cannot be considered as comparable even when the same is rightly considered as comparable since the said company's functions are similar to that of assessee?
3. Whether on the facts and circumstances of the case, the Tribunal is right in law in applying the upper limit of 200 crorers for the turnover filter applied by the TPO by placing Date of Judgment 13-07-2018 I.T.A.No.35/2015 The Commissioner of Income-tax & Anr.
Vs. M/s. Mindteck (India) Ltd., 4/14 reliance on the decision in the case of Genesys Integrating Systems (India) Pvt.Ltd., wherein it was erroneously held that when there was a limit for the lower end for identifying the comparables, there was no reason why there should not be an upper limit also, as size mattered in business even when the said decision has been challenged before this Hon'ble Court?
4. Whether on the facts and in the circumstances of the case, the Tribunal is right in law in directing TOP that M/s. Tata Elxsi Ltd., Sasken Communication Technologies Ltd., Persistent Systems Ltd., Zylog Systems Ltd., Mindtree Ltd., L&T Infotech & Infosys Technologies Ltd., to be excluded on application of the upper limit of turnover filter even when the turnover has no linkage with the margins and in fact the TPO in order demonstrated that when turnover is high of around Rs.2000-2600 crores its margin was about 50% while it decreased to about 40-44% when its sales were more than Rs.20,000 crores and as such the application of the upper limit of Rs.200 crores by the Tribunal is erroneous?
5. Whether on the facts and in the circumstances of the case, the Tribunal is right Date of Judgment 13-07-2018 I.T.A.No.35/2015 The Commissioner of Income-tax & Anr.
Vs. M/s. Mindteck (India) Ltd., 5/14 in excluding Infosys BPO Ltd., Ascentia Technologies Ltd. And Eclerx Ltd., on the basis of the decisions in a different case for different financial year while the said comparables qualify in respect of all qualitative and quantitative filters applied by the TPO"?
3. This Appeal was admitted on 25.01.2016 to consider the aforesaid substantial questions of law framed by the learned counsel for the Appellants- Revenue.
4. In so far as the first substantial question of law raised by the Revenue is concerned, learned counsel for the Revenue submitted that the learned ITAT in its Order dated 21.08.2014 has given the findings, the relevant portion of which is quoted below for ready reference:-
" 28. The aforesaid addition made by the TPO was confirmed by the DRP. The submissions made with regard to not including foreign exchange fluctuation gain as part of the operating revenue and not excluding the reimbursement of expenses from the operating cost as raised by the Date of Judgment 13-07-2018 I.T.A.No.35/2015 The Commissioner of Income-tax & Anr.
Vs. M/s. Mindteck (India) Ltd., 6/14 assessee in the software development services segment while determining ALP were also raised in respect of the computation of ALP of ITES segment. For the reasons stated while deciding identical issues in the case of the assessee in its software development services segment, we direct the TPO to include the gain on account of foreign exchange fluctuation as part of the operating revenue and exclude the reimbursement of expenses after verification subject to the directions of the DRP given in this regard".
5. In so far as the second substantial question of law raised by the Revenue is concerned, learned counsel for the Revenue submitted that the learned ITAT in its Order dated 21.08.2014 has given the findings, the relevant portion of which is quoted below for ready reference:-
" 16. We have considered the rival submissions. The Special Bench of the ITAT in the case of Maersk Global Centres (supra) had an occasion to deal with the question as to whether high profit margin making companies should be excluded as a comparable. The Special Bench after considering several aspects held in para 88 Date of Judgment 13-07-2018 I.T.A.No.35/2015 The Commissioner of Income-tax & Anr.
Vs. M/s. Mindteck (India) Ltd., 7/14 of its order that the potential comparable companies cannot be excluded merely on the ground that their profit is abnormally high. The Special bench held that in such cases it would require further investigation to ascertain the reasons for unusually high profit and in order to establish whether the entities with such high profits can be taken as comparable or not. In the light of the aforesaid decision of the Special Bench and in view of the admitted position that the assessee follows Fixed Price Project model where revenues from software development is recognized based on software developed and billed to clients, there is a possibility of the expenditure in relation to the revenue being booked in the earlier year. The results of Bodhtree from FY 2003 to 2008 excluding FY 2007 as given by the learned counsel for the assessee were also perused. Perusal of the same shows, that there has been a consistent change in the operating margins. The chart filed by the assessee in this regard is given as an annexure to this order. It appears to us that the revenue recognition method followed by the assessee is the reason for the drastic variation in the profit margins of this company. In the given circumstances, we are of the view that it would Date of Judgment 13-07-2018 I.T.A.No.35/2015 The Commissioner of Income-tax & Anr.
Vs. M/s. Mindteck (India) Ltd., 8/14 be safe to exclude Bodhtree Consulting from the final list of comparables chosen by the assessee. We hold and direct accordingly".
6. In so far as the third and fourth substantial questions of law raised by the Revenue are concerned, learned counsel for the Revenue submitted that the learned ITAT in its Order dated 21.08.2014 has given the findings, the relevant portion of which is quoted below for ready reference:-
"17. The next aspect which was highlighted by the learned counsel for the assessee is the application of turnover filter. The assessee's turnover is admittedly less than Rs.50 crores. The companies listed at sl.nos.5 to 11 of the final list of comparables chosen by the TPO have turnover above Rs.200 crores. This Tribunal in ITA No.1054/Bang/2011 for AY 07-08 in M/S.Triology E-Business Software India Pvt.Ltd. Vs. DCIT, Circle 12(4), Bangalore had held on the application of the turnover filter as follows :
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18. Respectfully following the decision of the Tribunal referred to above, we hold that the Date of Judgment 13-07-2018 I.T.A.No.35/2015 The Commissioner of Income-tax & Anr.
Vs. M/s. Mindteck (India) Ltd., 9/14 comparables chosen by the TPO at Sl. Nos. 5 to 11 of the final list of comparable companies have to be excluded as comparables for the purpose of determining the ALP of the impugned transaction in this appeal".
7. In so far as the fifth substantial question of law raised by the Revenue is concerned, learned counsel for the Revenue submitted that the learned ITAT in its Order dated 21.08.2014 has given the findings, the relevant portion of which is quoted below for ready reference:-
" 29. The next aspect which was sought to be challenged before us is the exclusion of certain companies from the list of comparables chosen by the TPO. The learned counsel for the assessee sought to exclude the following companies from the list of 8 comparable companies finally chosen by the TPO.
30. Infosys BPO Ltd :
The comparability of this company with an ITES company was considered by this Tribunal in the case of Symphony Marketing Solutions India P. Ltd v. ITO (IT (TP)a no.1316/Bang/2012 for AY 2008-09 order dt 14.08.2013. This Tribunal in Date of Judgment 13-07-2018 I.T.A.No.35/2015 The Commissioner of Income-tax & Anr.
Vs. M/s. Mindteck (India) Ltd., 10/14 para 24 of its order, on considering this company as a comparable held as follows :
xxxxxxxxxxxxxxxxxx
31. Following the aforesaid decision of the Tribunal and taking note of the fact that the facts and circumstances in the case of the assessee for the current assessment year are identical, we direct that Infosys BPO be excluded as a comparable.
32. Accentia Technologies Ltd., :
The comparability of this company was again considered by the Bangalore Bench of the Tribunal in the case of Symphony Marketing Solutions (supra) and it was held by this Tribunal as follows :
xxxxxxxxxxxxx
34. It appears to us that the decision rendered by the Tribunal in the case of Symphony Marketing Solutions would be applicable in the present assessment year also. Accordingly, Accentia Technology Ltd is directed to be excluded from the list of comparables.
36. Eclerx Services Ltd., :
The comparability of this company in ITES segment was considered by the Special bench Date of Judgment 13-07-2018 I.T.A.No.35/2015 The Commissioner of Income-tax & Anr.
Vs. M/s. Mindteck (India) Ltd., 11/14 decision of the ITAT in the case of Maerks Global (supra) and the Special Bench in para 82 and 83 of its order came to the conclusion that this company was functionally different and was accordingly engaged in providing high end services involving specialized knowledge and domain expertise in its field. Following the aforesaid decision we are of the view that this company should be excluded from the final list of comparables. The TPO is accordingly directed to compute the ALP in the ITES segment in the light of the directions given above".
8. For other comparable companies, the learned Tribunal has given the similar findings.
9. However, this Court in a recent judgment in ITA No.536/2015 C/w ITA No.537/2015 delivered on 25.06.2018 (Prl. Commissioner of Income Tax & Anr. Vs. M/s. Softbrands India Pvt. Ltd.,) 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 Date of Judgment 13-07-2018 I.T.A.No.35/2015 The Commissioner of Income-tax & Anr.
Vs. M/s. Mindteck (India) Ltd., 12/14 the instance of an assessee or the Revenue under Section 260-A of the Act is not maintainable.
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 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 Date of Judgment 13-07-2018 I.T.A.No.35/2015 The Commissioner of Income-tax & Anr.
Vs. M/s. Mindteck (India) Ltd., 13/14 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.
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.
Date of Judgment 13-07-2018 I.T.A.No.35/2015 The Commissioner of Income-tax & Anr.
Vs. M/s. Mindteck (India) Ltd., 14/14
58. The appeals filed by the Revenue are therefore dismissed with no order as to costs."
10. Having heard the learned counsels for the parties, we are therefore of the opinion that no substantial question of law arises in the present case also. The appeal filed by the Appellants-Revenue is liable to be dismissed and it is dismissed accordingly. No costs.
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JUDGE Sd/-
JUDGE Srl.