Ita/680/2015 Of The Pr. Commissioner Of Income Tax v. M/S Eds Electronics Data Systems India Pvt.ltd

IN THE HIGH COURT OF KARNATAKA AT BENGALURUDATED THIS THE 15 DAY OF JANUARY 2071PRESENT| THE HON’BLE MR. JUSTICE ALOK ARADHE AND| THE HON’‘’BLE MR. JUSTICE NATARAJ RANGASW ALT.A. NCO.680 OF 2015 BETWEEN: 1.|THE PR. COMMISSIONER OF INCOME TAX C.R. BUILDING, QUEENS ROAD BANGALORE-560001. 2.|THE DEPUTY COMMISSIONER OF INCOME TAX CIRCLE-11(1), NEW DELHI. .., APPELLANTS~ (BY SRI. T.N.C. SRIDHAR, ADV.,) AND* M/S. EDS ELECTRONICS DATA|SYSTEMS INDIA PVT. LTD.,[NOW MERGED WITH MPHASIS LIMITED]ABACUS SQUARE, 6TH FLOOR|BLOCK-A, BAGMANE PARIN.BAGMANE TECHNOLOGY PARK|C.V. RAMAN NAGAR|BANGALORE-560093.PAN: AAACB 68720C. ~. RESPONDENT (BY SRI. SURYANARAYANA T, ADV.) THIS I.T.A. IS FILED UNDER SEC. J6O0-A OF INCOME TAXACT 1961, ARISING OUT OF ORDER DATED 23.06.2015 PASSEDIN ITA NO.1050/DEL/2009 FOR THE ASSESSMENT YEAR 2004-05,PRAYING TO DECIDE THE FOREGOING QUESTION OF LAW AND/OR_ SUCH OTHER QUESTIONS OF LAW AS MAY BE FORMULATED BYTHE HON'BLE COURT AS DEEMED FIT. SET ASIDE THE APPELLATEORDER DATED 23.06.2015 PASSED BY THE ITAT, C BENCH,BENGALURU, AS SOUGHT FOR, IN THE RESPONDENT-ASSESSEE'S|CASE, IN APPEAL PROCEEDINGS IN ITA NO.1050/DEL/2009 FORA.Y.2004-05. THIS I.7T.A. COMING ON FOR’ HEARING, THIS’ DAY, | ALOK ARADHE J.,DELIVERED THE FOLLOWING: | JUDGMENT This appeal under Section 260A of the Income TaxAct, 1961 (nereinafter referred to as the Act for short)nas been preferred by the revenue. The subject matterof the appeal pertains to the Assessment year 2004-05.The appeal was admitted by a bench of this Court videorder dated 24.08.2016 on the following substantialquestion of law: "Whether the Tribunal Is correct [n|law.and|facts|In.upholdingtheCommissioner of Income Tax (Appeals)sorder ignoring tne basic mistake thereinthat naving accepted Transaction NetMarginMetnodand|theProfitLevel|Indicator as OP/TC when the application ofthe Profit Level Indicator on the total costis proper and not on the payments made to the Associated enterprises?’. 2 |Facts leading to filing of this appeal brieflystated are that the respondent provides its technicalconsultancy services to third parties and operate asentrepreneur. The business of providing technical|consultancyServicesIS|an)independent|buUSINeESsegment. The parent company of the assessee is EDS.Sweden and another Swedisn company t.e., SKF AB had.entered into a Master Service Agreement. As per the|aforesaid agreement, EDS entities across the globe Nad|to provide IT services to SKF entities in their respectiveregions. In pursuance of the Master Service Agreement, the assessee entered into a local / domestic contract)with SKF India for providing IT services. The assesseebears all the entrepreneurial risks associated with the.contract with SKF India. 3.)Apart from SKF India, the assessee alsoentered into various other contracts with other third| parties for rendering technical services. The revenue|from the technical consultancy services segment of theassessee is thus derived from a number of contracts|including SKF India, which have been entered by the.respondent globally and locally. Although, the technical|consultancy services segment made a loss of 14.76%,|the respondent was able to bifurcate the revenues andcosts on the basis of SKF and non SKF contracts and|profitability of the tecnnical consultancy segment from.SKF contract and non SKF contract was -103% and 36%respectively. Thus, the technical consultancy servicesegment was profitable segment, whereas, SKF contractwas loss making contract. The respondent also availed.of certain assistance of its group entities across tneglobe and one such entity was EDS Singapore, for wnicn.assessee had paid cost plus 10% mark-up, which was.used by non Indian EDS entities globally. The aforesaid|payment was made by EDS India to EDS Singapore,which includes the cost of services of ali other segments. of EDS India as well and does not pertain to technicalconsultancy segment alone. of EDS India as well and does not pertain to technicalconsultancy segment alone. 4The assessee claimed the benefit of deductionunder Section 10A of the Act in respect of profits derivedfrom export of software STP Units and claimed deductionunder Section 8QOHHE in respect of profits derived fromexport of computer software available to any entity.However, the Transfer Pricing Officer by order dated -06.05.2006 considered the loss of 14.76% in the entire|technical consultancy services agreement and was of |the view that since, independent parties had an average|margin of 17.02% therefore, there ought to be anadjustment. Thus, an adjustment of Rs.7,91,44,777/-.was made. Thereafter, the Assessing Officer by an orderdated 26.12.2006 under Section 143(3) of the Actassessed the income at Rs.33,98,/72,603/- after makingdisallowances with regard to addition on account of.income from otner sources, addition on account of)foreign excnange !oss and addition on account of Arms. Length Price (ALP). | 5.|The assessee thereupon filed an appealbefore the Commissioner of Income Tax (Appeals) who.by an order dated 21.01.2009|inter aliaheld thatrespondent has earned a profit in technical servicesegment in contracts other than contracts with SKFIndia, the Transfer Pricing Officer (TPO) should not Nave|loaded the mark-up on the costs / expenses in meeting|the obligations other than the contracts with SKF India,on which the assessee had earned 36%_ profits.Accordingly, the Commissioner of Income Tax (Appeals)reaqucedtneTransferPricingAdjustmentfromRs.7,91,44,777/- to Rs.1,29,43,3/76/- by meeting theadjustment to SKF contract. Being aggrieved, theassessee as well as the revenue filed appeals before theIncome Tax Appellate Tribunal (hereinafter referred to.as the tribunal’ for short). In order to bring the quietus.to the controversy, the assessee did not prosecute its.appeal, whereas, the tribunal Dy an order dated 23.06.2015 dismissed the appeal preferred by therevenue. In the aforesaid factual background, this.appeal has been filed. 6.|Learned counsel for the revenue submittedthat|theTransferPricingOfficer/has.adoptedtransaction net method or bench marking cost as the|profit level indicator and the Commissioner of Income.Tax (Appeals) has confirmed the aforesaid finding of the|Transfer Pricing Officer. It is submitted that having|concurred with the finding recorded by the Transfer|Pricing Officer on the method adopted by him, the|Commissioner of Income Tax (Appeals) ought to have.held that the adjustment has to be restricted to SKF.contracts, which has made losses and by adoptingtransaction net margin method, the profit margin of.17.02% ought to have been applied on the total cost of|Rs.17,11,64,696/-.andtherefore,|mistake.In|computation of the adjustment in the order of theCommissioner of Income Tax needs to be corrected. It Is also submitted that the Transfer Pricing Officer had.adopted a method in accordance with Section 92 readwith Rule 10B of the Act and therefore, re-computation|of Arms Length Price made by Commissioner of Income|Tax (Appeals) and the tribunal is not correct. It isfurther submitted that the tribunal has failed to assign|any reasons for disturbing the findings of Transfer|Pricing Officer that arithmetic mean of 17.02% of the|comparabiesdetermined.for.ArmsLengtnPricecomputation Is erroneous. 7On the other hand, learned counsel for theassessee submitted that only the revenues from tnecontract entered into between tne assessee and SKE|India if at all could be subjected to Arms Length Pricetest which has been held by the Commissioner of.Income Tax (Appeals) as well as by the tribunal. It isfurther submitted that making an adjustment to theentire segment merely because transactional net margin.method|IsappliedwouldleadCO.unintended 7On the other hand, learned counsel for theassessee submitted that only the revenues from tnecontract entered into between tne assessee and SKE|India if at all could be subjected to Arms Length Pricetest which has been held by the Commissioner of.Income Tax (Appeals) as well as by the tribunal. It isfurther submitted that making an adjustment to theentire segment merely because transactional net margin.method|IsappliedwouldleadCO.unintended consequences which would give rise to unnecessary loadbeing created on a segment which is_ otherwiseprofitable. It is further submitted that where there are.no international transactions or where the price ofinternational transaction is already at arms length no/adjustment can be made. It is further submitted that therevenue has neither challenged the findings of the|tribunal as being perverse nor has brought any materialon record to demonstrate perversity. Tnerefore, in view.of concurrent findings of fact recorded by the tribunal nosubstantial question of law arises for consideration. In.Support of aforesaid submissions, reliance has been.placedON|decisions.oftheSupremeCourtIn|"‘SUDARSHAN SILKS & SAREES VS, COMMISSIONEROF INCOME-TAX, (2008) 169 TAXMAN 321 (SC)and a decision of this court InPCIT AND ANOTHER|VS, SAMSUNG R & DINSTITUTE BANGALORE PVT.LTD. I.7T.A.NO.622/2017 DATED 30.11.2020. 8 _We have considered the submissions made.by learned counsel for the parties and have perused therecord. Section 92(1) of the Act provides that anyincome arising from an international transaction shall be computed Naving regard to Arms Length Price. Section.92B(1) deals with meaning of international transaction,|which means a transaction between two or more'associated enterprises either or both of whom are non.residents in the nature of purchase, sale or lease oftangible or intangible property or provisions of services|or rendering or borrowing money. Section 92C of the Act|deals with computation of Arms Length Price. The|Commissioner of Income Tax (Appeals) has recorded afinding that since the assessee nad earned profit in atecnnical service segment in contracts other thancontracts with SKF and therefore, the Transfer Pricing|Officer should not have loaded the mark-up on the costs./ expenses incurred in meeting the obligations undercontracts otner than the contracts with SKF on which tne assessee Nad earned a profit of 36% on operating cost.The aforesaid finding of fact has been affirmed in appealby the tribunal. The aforesaid findings are findings of fact, which have been arrived at by the Commissioner of.Income Tax (Appeals) as well as the tribunal on thebasis of meticulous appreciation of evidence on record. oiIt is the cardinal principle of law that tribunalis fact finding authority and a decision on facts on the|tribunal can be gone into by the High Court only if a.question has been referred to it, which says the finding|of the tribunal is perverse.[SEE: "SUDARSHAN SILKS|& SAREES VS. CIT’, 300 ITR 205 SCC @ 211 and“MANGALORE GANESH BEEDI WORKS VS. CIT’, 378|ITR 640 (SC) @ 648].It is pertinent to note that even |in the substantial question of law, no element of.perversity is either pleaded or demonstrated before this.court. In view of preceding analysis, the substantialquestion of law framed by a bench of this court is.answered against the revenue and in favour of the.assessee. In the result, we do not find any merit in thisappeal, the same fails and is hereby dismissed. Sd/-JUDGE. SS| Sd/-JUDGE.