Date Of Judgment 17-07-2018, Ita v. M/S Mindteck (India) Limited

IN THE HIGH COURT OF KARNATAKA, BENGALURU DATED THIS THE 1/ DAY OF JULY 2O18| PRESENT THR HON’BLEK DR.JUSTICE VINBBT KOTHARI ANT) THR HON’BLE MRS..JUSTICK S.SUJATHA I.T.A.No.332/2015 BETWEEN : 1.THERE COMMISSIONER OF [INCOME TC.R. BUILDINGS, QUEENS ROAD,BANGALORBE-560001C.R. BUILDINGS, QUEENS ROAD,BANGALORBE-560001 «|THE INCOME TAX OFFICERWARD-12(1), BANGALORE.WARD-12(1), BANGALORE. . APPELLANTS| (BY SRI E.I.SANMATHI, ADV.) AND ; M/s MINDTECK (INDIA) LIMITED, 16/3, CAMBRIDGE ROAD, ULSOOR, BANGALORE-560 OO9, PAN: AAACH 10720 | _. RESPONDENT. (BY SRI S.SANKARA NARAYANAN, ADV.) THIS INCOMB TAX APPBAL IS FILED UNDER SECTION|2600-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDERDATED 09/01/2015 PASSED IN ITA NO.1948/BANG/2010, FOR:THERE ASSESSMENT YKEAR 2006-2007 ANNBEXURE-A. PRAYING 1.DECIDE THE FOREGOING QUESTION OF LAW AND/OR SUCHOTHER OUESTIONS OF LAW AS MAY BE FORMULATED BY THEHON BLE COURITL AS DEEMED H#HII. 2. SEI ASIDE APPELLATE ORDER DATED: 09/01/2015 PASSED BY THE ITAT, Date of Judgment 17-07-2018, ITA No.332/2015 The Commissioner of Income Tax & Another Vs. M/s Mindteck (India) Limited 2/13 ‘AC!BENCH,BANGALORE,AS|SOUGHTFOR, IN|THERESPONDENT-ASSESSEE'S CASE, IN APPEAL PROCEEDINGS IN|ITA NO.1548/BANG/2010 FOR A.Y. 2006-2007 ANNEXURE-A.| THIS APPEAL COMING ON FOR HEARING, THIS DAY,|S. SUATHA, J., DELIVERED THE FOLLOWING: JU DGMENT Mr. E.I.Sanmathi, Adv. for Appellants — Revenue.Mr. S.Sankara Narayanan,Adv. for Respondent —ASS@ESSEE. This Appeal is filed by the Revenue purportedlyraising substantial questions of law arising from theOrder of the Income Tax Appellate Tribunal, BangaloreBench ‘A’, Bangalore, inIT[TP|A No.1548/Bang/2010dated09.01.2015, relating to the Assessment Year 2006-07. 2.TheappealhasbeenadmittedOTL17.03.2016 to consider the substantial questions of lawNo.3 to 5 as indicated in the memorandum of appeal.However, learned counsel for the Revenue seeks to.consider all the substantial questions of law framed inthe memorandum of appeal, which reads as under: Date of Judgment 17-07-2018, ITA No.332/2015 The Commissioner of Income Tax & Another Vs. M/s Mindteck (India) Limited 3/13 aWhetherOnlthe factsandin|thecircumstances of the case, the Tribunal ts right in|law in directing the AO to allow deduction undersection 1OA without setting off the losses of non-IOA units against the profit of STP units when asper the amended provisions of section 10A w.e.f.1/4/2001, the deduction under section 1OA has'to be finally allowed from the total income of theassessee and total income is computed afteraggregation of the profits/losses of various unitsandaftersettingoff|ofbroughtforwardlosses/unabsorbed depreciation relation to theearlier assessment year? D2 WhetherOnlthe factsandin|thecircumstances of the case, the Tribunal ts right in|law in directing the AO to exclude the expenditureincurredinforeignCUFrEerlctowardscommunication charges and travel expenses bothfrom the export turnover and the total turnoverwhen there is no provision in section 1OA whichrequires the concerned expenses which arerequired to be reduced from the export turnoveras per clause (iv) of the Explanation to sectionIOA to be reduced from the total turnover also?| 3.|WhetherOF|the factsandin|the circumstances of the case, the Tribunal is right in Date of Judgment 17-07-2018, ITA No.332/2015 The Commissioner of Income Tax & Another Vs. M/s Mindteck (India) Limited 4/13 law in holding that the size and turnover of thecompany are deciding factors for treating acompany as a comparable and accordingly erred|in excluding the comparables, Flextronics, InfosysLtd., tGate Solutions Ltd., Mindtree ConsultingLtd., Sasken Communication Technologies Ltd.,Tata Elxsi, Persistant Systems in_ softwaredevelopment segment?| 3.|WhetherOF|the factsandin|the circumstances of the case, the Tribunal is right in Date of Judgment 17-07-2018, ITA No.332/2015 The Commissioner of Income Tax & Another Vs. M/s Mindteck (India) Limited 4/13 law in holding that the size and turnover of thecompany are deciding factors for treating acompany as a comparable and accordingly erred|in excluding the comparables, Flextronics, InfosysLtd., tGate Solutions Ltd., Mindtree ConsultingLtd., Sasken Communication Technologies Ltd.,Tata Elxsi, Persistant Systems in_ softwaredevelopment segment?| 4 |WhetherOnlthe factsandin|thecircumstances of the case, the Tribunal ts right in|law in excluding uncontrolled comparables havingturnover more than Rs.20O0O crores in the absencof turnover criterion prescribed in Rule 1IOB of..T.Rules and also there being no correlationbetween turnover and profit margin? 5.|WhetherOnlthe factsandin|thecircumstances of the case, the Tribunal ts right in|law in holding that Tata Elxsi, M/s AccelTransmatics Ltd., and KALS Information SystemsLtd., being functionally different, cannot be taken|as comparables when the said comparablessatisfied all the qualitative and quantitative filters|applied by the TPO and super imposing thedecision in the case of different assessee to rejectthesecomparables when.the|selectionofcomparables in a case depends in transfer pricing Date of Judgment 17-07-2018, ITA No.332/2015 The Commissioner of Income Tax & Another Vs. M/s Mindteck (India) Limited 5/13 on assessee specific FAR analysis and withoutconsidering the comparability of these companieson the basis of specific facts brought on record by|the TPO in the case of the assessee?P Regarding Substantial Question of law No.1: 3.Learned counsel for the appellants-Revenue|Mr.K.V.Aravind|has.submitted that|theHon'bleSupreme Court has settled the controversy in the case ot Commissioner of Income-tax V/s. Yokogawa India| Ltd., (2017) 77 taxmann.com 41 (SC)‘and thereforethe said controversy is covered by the decision of theHon'ble Supreme Court. The question is accordinglyanswered in the same terms. Regarding Substantial Question of law No.2: 4The issue is covered by the decision of theHon’ble Supreme Court in the case ofCommissioner of Income-tax, Central - III vs. HCL Technologies Ltd.,[2018] 93 Taxmann.com 33(SC). Date of Judgment 17-07-2018, ITA No.332/2015 The Commissioner of Income Tax & Another Vs. M/s Mindteck (India) Limited 6/13 5.The relevant portion of the judgment of the Hon'blesupremeCourtin.theCaSE€oT|HCL|Technologies Ltd. (supra),is quoted below for readyreference:-. “17. The similar nature of controversy, akinthis case, arose before the Karnataka High CourtinCIT v. Tata Elxsi Ltd. [2012] 204 Taxman|3S21/17/taxman.com 100/349 ITR 98. The issuebefore the Karnataka High Court was whetherthe Tribunal was correct in holding that whilecomputing relief under Section IOA of the IT Act,the amount of communication expenses should beexcluded from the total turnover tf the same are.reduced from the export turnoverPr While givingthe answer to the issue, the High Court, inter-alia,held that when a particular word is not definedby the legislature and an ordinary meaning is tobe attributed to it, the said ordinary meaning is tobe in conformity with the context in which it is.used. Hence, what is excluded from ‘export|turnover’ must also be excluded from ‘totalturnover’, since one of the components of ‘total|turnover’1Sexportturnover.Anyotherinterpretation would run counter to the legislativeintent and would be impermissible. | 7/13 1S. XXXXXX 19. In the instant case, if the deductions on|freight,telecommunicationand|insuranceattributable to the delivery of computer softwareunder Section 10A of the IT Act are allowed onlyin Export Turnover but not from the TotalTurnover then, it would give rise to inadvertent,unlawful, meaningless and wulogical result whichwould cause grave injustice to the Respondentwhich could have never been the intention of thelegislature. 7/13 1S. XXXXXX 19. In the instant case, if the deductions on|freight,telecommunicationand|insuranceattributable to the delivery of computer softwareunder Section 10A of the IT Act are allowed onlyin Export Turnover but not from the TotalTurnover then, it would give rise to inadvertent,unlawful, meaningless and wulogical result whichwould cause grave injustice to the Respondentwhich could have never been the intention of thelegislature. 20. Even in common parlance, when the|object of the formula is to arrive at the profit fromexport business, expenses excluded from exportturnover have to be excluded from total turnoveralso. Otherwise, any other interpretation makesthe formula unworkable and absurd. Hence, weare satisfied that such deduction shall be allowedfrom the total turnover in same proportion aswell”. 6.The learned Tribunal, after discussing the rival contentions of both the Appellants-Revenue and Respondent-Assessee, has returned the findings as under: Regarding Substantial Question of law Nos.3 and 4: “12. We have considered the submissionsof the learned counsel for the Assessee and thelearned DR. We are of the that the additionalgrounds sought to be raised have to be admittedfor adjudication as held by the Special Bench inthe case of Quark Systems Ltd. (supra). We arealso of the view that the entire exercise to becarried out u/s.92 of the Act is determination ofALP and in doing so, the revenue should not be)allowed to plead admission by the Assessee,though erroneous or was made under particularcircumstances and therefore are not final andbinding, as conclusive. We therefore admit theadditional grounds raised by the Assessee foradjudication. 13. On the application of turnover filter in|the case of Trilogy E-Business Software India (P)Ltd. (supra), this Tribunal held that whileselecting comparable companies for comparabilityanalysis held as follows: Myer” 9/13 14, Respectfully following the aforesaiddecision of the Tribunal in the case of Trilogy E-Business Software India Put.Ltd. (supra), we holdthat the following companies should be excludedfrom the list of comparable companies’- Myer” TheAO|1sdirected|to.computetheArithmetic mean by excluding the aforesaidcompanies from the list of comparable.’ Regarding Substantial Question of law No.5: “17. The facts and circumstances under|which the aforesaid companies were consideredas comparable is identical in the case of theAssessee as well as in the case of Trilogy E-BusinesssoftwareIndiaPot. Ltd.(Supra).Respectfully following the decision of the Tribunalreferred to above in the case of Trilogy E-Business Software India Pvut.Ltd.(supra), wedirect that the following companies be excludedfrom the list of 26 comparable arrived at by theTPO. a) KALS Information Systems Limited | b) Accel Transmission Limited. Date of Judgment 17-07-2018, ITA No.332/2015 The Commissioner of Income Tax & Another Vs. M/s Mindteck (India) Limited 18. As far as the comparable chosen by the|TPO viz., TATA Elxsi ts concerned, this Tribunal inthe case of Yodlee Infotech Put. Ltd. Vs. ITO in ITANo. 1538/7 Bang/ 2byItsorder.dated390.8.2013, held that this company is_ nofunctionallycomparablewithasoftwaredevelopment service provider. The following werethe relevant observations of the Tribunal in thisregard.” T The controversy involved herein is no moreres integrain view of the decision of this Court in 1.T.A.Nos.536/2015 c/w 537/201508:6025.06.2018 [Prl. |Commissioner.of|Income.TaxOQAnr.V/s.M/s.Softbrands India Pvt. Ltd.,]2wherein it has beenobserved that unless the finding of the Tribunal is foundex facie perverse, the Appeal u/s. 260-A of the Act, isnot maintainable. The relevant portion of the Judgmentis quoted below for ready reference: “Conclusion: 55.ASubstantialquantumof|international trade and transactions depends Date of Judgment 17-07-2018, ITA No.332/2015 The Commissioner of Income Tax & Another Vs. M/s Mindteck (India) Limited 11/13 T The controversy involved herein is no moreres integrain view of the decision of this Court in 1.T.A.Nos.536/2015 c/w 537/201508:6025.06.2018 [Prl. |Commissioner.of|Income.TaxOQAnr.V/s.M/s.Softbrands India Pvt. Ltd.,]2wherein it has beenobserved that unless the finding of the Tribunal is foundex facie perverse, the Appeal u/s. 260-A of the Act, isnot maintainable. The relevant portion of the Judgmentis quoted below for ready reference: “Conclusion: 55.ASubstantialquantumof|international trade and transactions depends Date of Judgment 17-07-2018, ITA No.332/2015 The Commissioner of Income Tax & Another Vs. M/s Mindteck (India) Limited 11/13 upon the fair and quick judicial dispensation|in such cases. Had it been a case oOf|substantial questionof|interpretationof|provisions of Double Taxation AvoidanceTreaties (DTAA), interpretation ofprovisions ofthe Income Tax Act or Overriding Effect of the|Treaties over the Domestic Legislations or the |questions like Treaty Shopping, Base Erosionand Profit Shifting (BEPS), Transfer of Shares|in Tax Havens (like in the case of Vodafone|etc.), tf based on relevant facts, such|substantial questions of law could beraised before the High Court underSection260-Aof the Act, the Courts could have|embarked upon such exercise offraming 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|consideredopinion,|giverisetO arysubstantial question of law. Date of Judgment 17-07-2018, ITA No.332/2015 The Commissioner of Income Tax & Another Vs. M/s Mindteck (India) Limited 12/13 06. Weare therefore of the consideredopinion that the present appeals filed by the|Revenue do not give rise to any substantialquestionof|law.andthe|Suggested|substantial questions of law do not meet therequirements ofSection 260-A|of the Act andthus 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 cleqr that the sameyardsticks and parameters will have to beapplied, even tf 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|7s “Arm Length Price“ in the case of the assesseeswith which the assessees may not be|satisfied and have filed such appeals beforethis Court. Therefore we clarify that mere|dissatisfaction with the findings of facts|arrived at by the learned Tribunal ts not at all|a sufficient reason to invoke.Section 260-Aof the Act before this Court. o8. The appeals filed by the Revenueare therefore dismissed with no order as to|costs.” 8.In the circumstances, having heard the learned Counsel appearing for both the sides, we are of the considered opinion that no substantial question oflaw arises for consideration in the present case. QOHence, the Appeal filed by the Appellants- Revenue is liable to be dismissed and is accordinglydismissed. No costs. | NC. Sd/-.JUDGE. Sd/-.JU DGE