Date Of Judgment 31-07-2018, Ita v. M/S.flextronics Technologies (India) Pvt. Ltd

IN THE HIGH COURT OF KARNATAKA, BENGALURU DATED THIS THE 31 DAY OF JULY 2O18| PRESENT THR HON’BLEK DR.JUSTICE VINBBT KOTHARI ANT) THR HON’BLE MRS..JUSTICK S.SUJATHA I.T.A. No.323/2016 BETWEEN: 1.THE PR. COMMISSIONER OF INCOME-TAX,"[‘T]FLOOR, BMTC BUILDING,"[‘T]FLOOR, BMTC BUILDING, 80 FEET ROAD, KORAMANGALA, BANGALORE - 560 095. 2.THE DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE - 3(1) (1),.CIRCLE - 3(1) (1),. 2 FLOOR, BMTC BUILDING,80 FEET ROAD, KORAMANGALA,BANGALORE - 560 O95.80 FEET ROAD, KORAMANGALA,BANGALORE - 560 O95. .. APPELLANTS| (BY SRI.ARAVIND K V, ADV.) AND: M/S FLEXTRONICS TECHNOLOGIES|(INDIA) PVT. LTD.,PLOT NO.3, PHASE II, SIPCOT INDUSTRIAL PARK, SANDAVELLURE C VILLAGE,SRIPERUMBUDUR TALUK,KANCHBRBPURAM DISTRICTTAMIL NADU.PAN: AAACH S248E.. RESPONDENT (BY SRI.SANDEEP HUILGOL, ADV. FOR SRI. V VINAY GIRI, ADV.) Date of Judgment 31-07-2018, ITA No.323/2016 The Pr. Commissioner of Income Tax & another Vs. M/s.Flextronics Technologies (India) Pvt. ltd. 2/14 THIS [TA IS FILED UNDER SECTION 260-A OF INCOME|TAX ACT 1961, ARISING OUT OF ORDER DATED:23/11/20195PASSEDLN|IT(TP)ANO.|1219/BANG/2011,KHORTHERASSESSMENT YEAR 2007-2008 ANNEXURE —-D, PRAYING TO: I.FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED|ABOVE. 2. ALLOW THER APPEAL AND SET ASIDE THE ORDERSPASSEDBY|THREITAT,BENGALURUINIT(TP)ANO.1219/BANG/2011 DATED:23/11/2015, ANNEXURE -D AND.CONFIRM THR ORDER OF THR DRP CONFIRMING THR ORDER|PASSED BY THE DEPUTY COMMISSIONER OF INCOME TAX,|CIRCLE-3(1)(1), BENGALURU. THIS APPEAL COMING ON FOR HEARING, THIS DAY,|S. SUJATHA, J., DELIVERED THE FOLLOWING: JU DBiGMENT Mr.ARAVIND.K.V,Adv. for Appellants — Revenue.Mr.SANDEEP HUILGOL,Adv. torMr.V.VINAY GIRI,Adv. for Respondent — Assessee. This Appeal is filed by the Revenue purportedlyraising substantial questions of law arising from theOrder of the Income Tax Appellate Tribunal,‘PpBench, Bangalore, inIT A No.1219/Bang/2011dated23.11.2015|relating to the Assessment Year2007-08. ?)ThisAppealhasbeenadmittedOTL10.10.2017to consider the following substantialquestions of law: Date of Judgment 31-07-2018, ITA No.323/2016 The Pr. Commissioner of Income Tax & another Vs. M/s.Flextronics Technologies (India) Pvt. ltd. 3/14 “1. Whether on the facts and in thecircumstances of the case, the Tribunal ts right in|law in directing TPO to exclude followingcomparables from list, M/s.Eclerx Services Ltd,Mold -Teck Technologies Ltd, Infosys BPO Ltd,M/s. Wipro Ltd and Maple E-Solutions and Tricomcorporation Ltd by holding that the functions ofthe said company are not similar to that ofaSSCSSCEwhenallthequalitativeandquantitative filters have been satisfied in the caseofaSSCSSCECandMmoOoreovselectionOf|comparables depends on specific FAR analysis?| 2. Whether on the facts and in_ thecircumstances of the case, the Tribunal by relyingon its earlier decision in case of First AdvantageOffshore services Put. Ltd. is right in law indirectingthe TPOto exclude M/s. VishalInformation Technologies from list of comparableon the ground that employees cost filter is anaccepted filter for choosing comparables and inITES sector also the companies which has lessthan 25% of the sales as employee cost shouldnot be selected when a search of comparablecompanies under TNMM for the software servicecompanies was done by the TPO where the abovementionedcompanieswerefoundto|be. Date of Judgment 31-07-2018, ITA No.323/2016 The Pr. Commissioner of Income Tax & another Vs. M/s.Flextronics Technologies (India) Pvt. ltd. 4/14 functionallySimilarandasSSCSSCChasNot|objected to it?” 3. The learned Tribunal, after discussing the rival contentionsoT|boththeAppellant-RevenueandRespondent-Assessee, has returned the findings as.under: Regarding Substantial Question of Law Nos.2 & 3 “We wil deal with comparability of each ofthe 8 companies objected by the assessee asunder: 8.1 eClerx Services Ltd Date of Judgment 31-07-2018, ITA No.323/2016 The Pr. Commissioner of Income Tax & another Vs. M/s.Flextronics Technologies (India) Pvt. ltd. 4/14 functionallySimilarandasSSCSSCChasNot|objected to it?” 3. The learned Tribunal, after discussing the rival contentionsoT|boththeAppellant-RevenueandRespondent-Assessee, has returned the findings as.under: Regarding Substantial Question of Law Nos.2 & 3 “We wil deal with comparability of each ofthe 8 companies objected by the assessee asunder: 8.1 eClerx Services Ltd 58.1.2We have considered the rivalSubmissions as well as relevant material onrecord. We find that the company Eclerx ServicesLtd. is engaged in diversified activity ofproviding|services including analytic services and dataprocess solutions to its global clients. The service|provided by Eclerx Services Ltd., is in variousareas including capital market and therefore, theservices are in the nature of consultancy and endto end support through trade centre includingtradeconfirmation,settlement,transaction,maintenance and analytic and reporting. Thus it Date of Judgment 31-07-2018, ITA No.323/2016 The Pr. Commissioner of Income Tax & another Vs. M/s.Flextronics Technologies (India) Pvt. ltd. 5/14 is apparent from the nature of the activity of thiscompany that it is not providing a simple serviceof data processing but it is engaged in the activity|of providing high-end services involving decisionmaking analysis which requires thought processand evaluation of various facts and factors.Functional comparabuity of this company withthat of simple BPO’s service providing companyhas been examined by the Special Bench in thecase of Maersk Global Services (supra) inparas.82 & 83 as under: NXXXXKXXXX Thus it ts clear that the Special Bench)found that this company is not comparable withBPO company which are engaged only in low endservices of data procession. Accordingly, wedirect the AO/ TPO to exclude Eclerx Services Ltd.from the list of comparables for the purpose ofdetermining ALP. 8.1.3 We further note that the Hon'ble DelhiHigh Court in ITA No.102 of 2015 dated10/8/2015 has confirmed the view taken by thespecial bench of the Tribunal in the case ofMaerks Centre. Accordingly, we direct theAO/TPO to exclude eClerx Services Ltd. from the lust of comparables for the purpose of determiningthe ALP. 8.3|Infosys Technologies Ltd 38.3.1We|have|consideredthe|rivalSubmissions as well as relevant material onrecord. We note that in para 16.2.15 of theAnnual Report of this company, it has beenreported that there was amalgamation w.e.f.1/4/2008. The relevant part of the informationprovided in the Annual Report reads as under: XXXXXXXXXX It is clear that there was extraordinary|event of amalgamation during the year underconsideration.Therefore,in|VIELofthe extraordinary development of amalgamation ofanother company, this company cannot beconsidered as a good comparable for theassessment year under consideration. Apart fromthis, we further note that as per the segmentreporting in para.16.2.21 of Annual report thisCOTILDQr1S providingbDuSInNeSPFOCEsSsmanagement services as under: XXXXXXXXXXNX Date of Judgment 31-07-2018, ITA No.323/2016 The Pr. Commissioner of Income Tax & another Vs. M/s.Flextronics Technologies (India) Pvt. ltd. 7/14 Thus it is clear that the revenue earned bythis company is from the actwity inclusive ofoperation primarily relates to providing businessPTOocesSmanagementSCYLVICESToother|organization engaged in outsourcing business|process. This company is not engaged in directactivity of BPO put it provides service to BPOsand that too management service to BPO.Therefore, in our considered view, this companyis engaged in a different nature of activity to thatof the assessee provided to its AE. Accordinglywe direct the AO/TPO to exclude this companyfrom the list of comparables. 8.4|Mapple e Solutions Ltd6 XXXXXXXXXXNX Date of Judgment 31-07-2018, ITA No.323/2016 The Pr. Commissioner of Income Tax & another Vs. M/s.Flextronics Technologies (India) Pvt. ltd. 7/14 Thus it is clear that the revenue earned bythis company is from the actwity inclusive ofoperation primarily relates to providing businessPTOocesSmanagementSCYLVICESToother|organization engaged in outsourcing business|process. This company is not engaged in directactivity of BPO put it provides service to BPOsand that too management service to BPO.Therefore, in our considered view, this companyis engaged in a different nature of activity to thatof the assessee provided to its AE. Accordinglywe direct the AO/TPO to exclude this companyfrom the list of comparables. 8.4|Mapple e Solutions Ltd6 8.4. ] We have considered the rivalSubmissions as well as the relevant material on|record. We find force and substance in theargumentofthe.learneddepartmentalrepresentative that in the absence of any specific.allegation that the alleged fraud by the director isin respect of business activity of the company, thesaid activity of fraud by the director in otherbusiness activity not related to the business of.the assessee — company cannot be taken as aground for doubting the financial statement of theasSSCSSCCandthereby|excludingthe.Said Date of Judgment 31-07-2018, ITA No.323/2016 The Pr. Commissioner of Income Tax & another Vs. M/s.Flextronics Technologies (India) Pvt. ltd. 8/14 company from a list of comparables. However,we find that this Tribunal in a number of cases asrelied upon by the assessee, has held that thiscompany cannot be taken as a good comparable|because of the reason that the directors of thecompany were involved in fraud activity andtherefore, financial statements of this companycannot be relied upon. In the case of FirstAdvantage Offshore Services Put. Ltd., (supra) theTribunal has held inpara.41 as under: NXXXXKXKXXX similar view has been taken by thisTribunal in other decisions relied upon by theassessee Accordingly, following the earlierdecisions of this Tribunal, we direct the AO/TPOto exclude this company from the list ofcomparables. 8.5 Mold&Tek Technologies Ltd. 8.5.3We have considered the rival|Submissions as well as the material on record. Atthe outset, we note that functional analysis of theCo. has been examined by the Special Bench incase of M/s Maersk Global India (Supra) inpara-81 & 83 as under:| Date of Judgment 31-07-2018, ITA No.323/2016 The Pr. Commissioner of Income Tax & another Vs. M/s.Flextronics Technologies (India) Pvt. ltd. NXXXXKXXKXX 8.5.4 In view of the above facts and nature|of the functions performed by the Mold Tek whichhave been examined by the Special Bench andfound is not compared with the low end ITESservice provider Co. we hold that this Co. tsfunctionally not comparable with that of theassessee. Accordingly, we direct the AO/TPO toexclude Mold Tekfrom the list of comparables. 8.6Tricom Corporation Ltd 5.6.1]We have considered the rival|Submissions as well as relevant material onrecord. We note that the comparability of thiscompany has been examined by the Tribunal inthe case of First Advantage Offshore ServicesPut. Ltd. (supra) which has already beenreproduced in the foregoing paragraphs. Thiscompany has merged with Mold-Tek TechnologiesLtd. during the year under consideration. In viewofthefindingsin|respectofMold-Teck.Technologies Ltd., we are of the opinion that thiscompany cannot be considered as a _ goocomparable company. Date of Judgment 31-07-2018, ITA No.323/2016 The Pr. Commissioner of Income Tax & another Vs. M/s.Flextronics Technologies (India) Pvt. ltd. 10/14 fomAVishal Information Technologies|Ltd. (CoralHub Ltd.) 8.6Tricom Corporation Ltd 5.6.1]We have considered the rival|Submissions as well as relevant material onrecord. We note that the comparability of thiscompany has been examined by the Tribunal inthe case of First Advantage Offshore ServicesPut. Ltd. (supra) which has already beenreproduced in the foregoing paragraphs. Thiscompany has merged with Mold-Tek TechnologiesLtd. during the year under consideration. In viewofthefindingsin|respectofMold-Teck.Technologies Ltd., we are of the opinion that thiscompany cannot be considered as a _ goocomparable company. Date of Judgment 31-07-2018, ITA No.323/2016 The Pr. Commissioner of Income Tax & another Vs. M/s.Flextronics Technologies (India) Pvt. ltd. 10/14 fomAVishal Information Technologies|Ltd. (CoralHub Ltd.) 8.7.1We|have consideredtherivalSubmissions as well as relevant material onrecord. We note that the comparability of thiscompany with ITES providing service provider hasbeen examined by the Tribunal in various casesas relied upon by the learned AR of the assessee.In the case of First Advantage Offshore ServicesPut. Ltd. (supra) it has been held in para.35 asunder: NXXXXKXXXX similar view has been taken by theTribunal in the other decisions. We further notethat the Hon’ble High Court in the case ofRampgreen Solutions Put. Ltd. (supra) has alsodecided this issue in favour of the assessee. |Accordingly, we direct the AO to exclude thiscompany from the list of comparable. 8.8|Wipro Ltd. (seg.} 5.58.1 Wehave.consideredtherivalSubmissions and relevant material on record. At'|the outset, we note that an identical issue of|comparabilityOf|thisCOTTLDAEhas|been. Date of Judgment 31-07-2018, ITA No.323/2016 The Pr. Commissioner of Income Tax & another Vs. M/s.Flextronics Technologies (India) Pvt. ltd. 11/14 examined by this Tribunal in the case of GXSIndia Technology Centre Put. Ltd in IT (TPANo. 1444(Bang) 2012 dated 31/07/2015 whereinIt has been held in paras.17.2 and 17.3 as under: NXXXXKXXKXX Accordingly, we direct the AO/TPO to re-compute the ALP after exclusion of the abovecompanies from the list of comparables. Theassessee claims that mean margin of thecomparable after exclusion of the above comes toaround 17.85% which ts within tolerance range of+/-5%. We direct the TPO to consider the claim ofthe assessee of granting the benefit of tolerancerange +/-5% as raised in ground No.3 of theconcise grounds.” 4. The controversy involved herein is no moreTeS integrain view of the decision of this Court in1.T.A. Nos.536/2015 c/w 537/2015dated.25.06.2018 (Prl. Commissioner of Income Tax & Anr. -v- M/s’Softbrands India Pvt. Ltd.,) Wherein it has been|observed that unless the finding of the Tribunal is foundex facie perverse, the Appeal u/s. 260-A of the Act, is Date of Judgment 31-07-2018, ITA No.323/2016 The Pr. Commissioner of Income Tax & another Vs. M/s.Flextronics Technologies (India) Pvt. ltd. 12/14 not maintainable. The relevant portion of the Judgment is quoted below for ready reference: “Conclusion: 55.|Asubstantialquantumof)international trade and transactions dependsupon the fair and quick judicial dispensation insuch cases. Had it been a case of substantialquestion of interpretation of provisions ofDouble Taxation Avoidance Treaties (DTAA),interpretation of provisions of the Income TaxAct or Overriding Effect of the Treaties over theDomestic Legislations or the questions likeTreaty Shopping, Base Erosion and _ Profishifting (BEPS), Transfer of Shares in TaxHavens (like in the case of Vodafone etc.), tfbased on relevant facts, such substantialquestions of law could be raised before theHigh Court underSection 260-A of the Act, theCourtscouldhave|embarkedUPOFrsuchexercise of framing and answering suchsubstantial question of law. On the other hand,the appeals of the present tenor as to whetherthe comparables have been rightly picked up ornot, Filters for arriving at the correct list of Date of Judgment 31-07-2018, ITA No.323/2016 The Pr. Commissioner of Income Tax & another Vs. M/s.Flextronics Technologies (India) Pvt. ltd. 13/14 comparables have been rightly applied or not,do not in our considered opinion, give rise toany substantial question of law. 56. We are therefore of the considered|opinion that the present appeals filed by theRevenue do not give rise to any substantialquestion of law and the suggested substantialquestions of law do not meet the requirementsofSection 260-Aof the Act and thus theappeals filed by the Revenue are found to bedevoid of merit and the same are liable to bedismissed. 57. We make it clear that the same'|yardsticks and parameters will have to beapplied, even tf such appeals are filed by theAssessees, because, there may be cases wherethe Tribunal giving its own reasons andfindings has found certain comparables to be.good comparables to arrive at an'7s| “ArLength Price’ in the case of the assessees|with which the assessees may not be satisfiedand have filed such appeals before this Court.Therefore we clarify that mere dissatisfactionwith the findings of facts arrived at by thelearned Tribunal is not at all a sufficient reason Date of Judgment 31-07-2018, ITA No.323/2016 The Pr. Commissioner of Income Tax & another Vs. M/s.Flextronics Technologies (India) Pvt. ltd. 14/14 to invokeSection 260-Aof the Act before this|Court. 58. The appeals filed by the Revenue are|therefore dismissed with no order as to costs.” o. In the circumstances, having heard the learned Counsel appearing for both the sides, We are of theconsidered opinion that no substantial question of lawarises for consideration in the present case. Hence, the Appeal filed by the Appellant-Revenueis liable to be dismissed and is accordingly dismissed. —No costs. Sd/-.JUDGE. Sd/-.JU DGE