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1/15 IN THE HIGH COURT OF KARNATAKA, BENGALURU
DATED THIS THE 10TH DAY OF JULY 2018
PRESENT
THE HON’BLE DR.JUSTICE VINEET KOTHARI
AND
THE HON’BLE MRS.JUSTICE S.SUJATHA
I.T.A. Nos.390 – 391/2013
BETWEEN :
COMMISSIONER OF INCOME TAX-III CENTRAL REVENUE BUILDINGS QUEENS ROAD, BANGALORE-560001
THE INCOME TAX OFFICER WARD-12(2), BANGALORE
...APPELLANTS
(BY SRI JEEVAN J. NEERALGI, ADV.)
AND :
M/s SUPPORTSOFT INDIA PVT. LTD., NO.0003, CLASSIQUE, 6TH CROSS, OFF AIRPORT ROAD, HAL II STAGE BANGALORE-560008
…RESPONDENT
(BY SRI S.SHARATH, ADV. FOR SRI CHYTHANYA K.K., ADV.)
THESE ITAs ARE FILED UNDER SECTION 260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 28.03.2013 PASSED IN IT(TP)A Nos.1372/BANG/2011 & 20/BANG/2012, FOR THE ASSESSMENT YEAR 2005-06, ANNEXURE-A PRAYING TO: I. FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN, II. SET ASIDE THE COMMON APPELLATE ORDER PASSED BY THE ITAT, 'B' BENCH, BANGALORE IN IT(TP)A Nos.1372/BANG/2011 &
Date of Judgment 10-07-2018, ITA Nos.390-391/2013 Commissioner of Income Tax-III & another Vs. M/s Supportsoft India Pvt. Ltd.
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20/BANG/2012, ANNEXURE-A AS SOUGHT FOR IN THESE APPEALS.
THESE APPEALS COMING ON FOR HEARING, THIS DAY, S. SUJATHA, J., DELIVERED THE FOLLOWING:
J U D G M E N T
Mr. Jeevan J. Neeralgi, Adv. for Appellants – Revenue. Mr. S.Sharath, Adv. for Mr. Chythanya K.K., Adv. Respondent – Assessee.
These Appeals are filed by the Revenue purportedly raising substantial questions of law arising from the Order of the Income Tax Appellate Tribunal, ‘B’ Bench, Bangalore, in IT [TP] A Nos.1372/Bang/2011 and 20/Bang/2012 dated 28-03-2013 relating to the Assessment Year 2005-06.
These Appeals have been admitted on 27.06.2014 to consider the following substantial questions of law as framed by the Revenue in the Memorandum of Appeal:
“1. Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the size and
Date of Judgment 10-07-2018, ITA Nos.390-391/2013 Commissioner of Income Tax-III & another Vs. M/s Supportsoft India Pvt. Ltd.
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turnover of the company are deciding of actors for treating a company as a comparable and accordingly directing the assessing authority/TPO not to include cases of M/s Flextronics Software Systems Ltd., M/s iGate Global Solutions Ltd., M/s L&T Infotech Ltd., M/s Satyam Software Services Ltd., and M/s Infosys Ltd., as comparables for determining ALP in the case of the assessee?
Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in treating the comparable company, M/s Sankhya Infotech Ltd. as a product company on the basis of the Directors report in the absence of any entry to that effect in the P&L account and balance sheet?
Whether on the facts and in the circumstances of the case, the Tribunal is right in law in categorizing the risk as anticipated risk and existing risk?
Whether on the facts and in the circumstances of the case, the was right in law in setting aside the issue of risk adjustment on the ground that the risk faced by the assessee is an anticipated one whereas the comparables are having risk which is certain?
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Whether on the facts and in the circumstances of the case, the risk faced by the assessee and the comparable can be measured in a reasonably accurate manner and the risk adjustment may be made?
Whether on the facts and circumstances of the case, the Tribunal was justified in law in holding that the reimbursement of telecommunication expenses & expenses incurred in foreign currency are to be excluded both from total turnover as well as from export turnover for computation of deduction u/s 10A whereas such exclusion is permitted to arrive at export turnover only as per the definition given in Section 10A of the I.T.Act and total turnover has not been defined in the Section?
Whether the Tribunal is correct in law in holding that the deduction u/s 10A should be computed in the above manner following the judgment of jurisdictional High Court in the case of CIT vs. Tata Elxsi Ltd. which has not become final since the same has not been accepted by the Department and SLPs filed by the Revenue on this issue are pending before the Hon’ble Supreme Court?”
Date of Judgment 10-07-2018, ITA Nos.390-391/2013 Commissioner of Income Tax-III & another Vs. M/s Supportsoft India Pvt. Ltd.
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Regarding Substantial Question Nos. 6 and 7 : 3. The controversy is no longer res integra and is covered by the decision of the Division Bench of this Court in the case of M/s.Tata Elxsi Ltd., vs. Asst.Commissioner of Income Tax, decided on 20.10.2015 since reported in (2015) 127 DTR 0327 (Kar), which has been affirmed by the Hon’ble Supreme Court in the case of Commissioner of Income-tax, Central – III vs. HCL Technologies Ltd., [2018] 93 Taxmann.com 33(SC).
The relevant portion of the judgment of the Hon’ble Supreme Court in the case of HCL Technologies Ltd. (supra), is quoted below for ready reference:- “17. The similar nature of controversy, akin this case, arose before the Karnataka High Court in CIT v. Tata Elxsi Ltd. [2012] 204 Taxman 321/17/taxman.com 100/349 ITR 98. The issue before the Karnataka High Court was whether the Tribunal was correct in holding that while
Date of Judgment 10-07-2018, ITA Nos.390-391/2013 Commissioner of Income Tax-III & another Vs. M/s Supportsoft India Pvt. Ltd.
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computing relief under Section 10A of the IT Act, the amount of communication expenses should be excluded from the total turnover if the same are reduced from the export turnover? While giving the answer to the issue, the High Court, inter-alia, held that when a particular word is not defined by the legislature and an ordinary meaning is to be attributed to it, the said ordinary meaning is to be in conformity with the context in which it is used. Hence, what is excluded from ‘export turnover’ must also be excluded from ‘total turnover’, since one of the components of ‘total turnover’ is export turnover.
Any other interpretation would run counter to the legislative intent and would be impermissible.
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In the instant case, if the deductions on freight, telecommunication and insurance attributable to the delivery of computer software under Section 10A of the IT Act are allowed only in Export Turnover but not from the Total Turnover then, it would give rise to inadvertent, unlawful, meaningless and illogical result which would cause grave injustice to the Respondent which could have never been the intention of the legislature.
Date of Judgment 10-07-2018, ITA Nos.390-391/2013 Commissioner of Income Tax-III & another Vs. M/s Supportsoft India Pvt. Ltd.
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Even in common parlance, when the object of the formula is to arrive at the profit from export business, expenses excluded from export turnover have to be excluded from total turnover also. Otherwise, any other interpretation makes the formula unworkable and absurd. Hence, we are satisfied that such deduction shall be allowed from the total turnover in same proportion as well”.
The learned Tribunal, after discussing the rival contentions of both the Appellant-Revenue and Respondent-Assessee, has returned a finding as under: Regarding Substantial Question No.1:
“12. As regards ground No.5, the revenue is aggrieved by the order of the CIT(A) in excluding the comparable on the ground that the turnover of these companies is more than Rs.200 crore. We find that the CIT(A) has followed the decision of this Tribunal (to which one of us i.e., Judicial Member is the signatory), in applying the principle of turnover filter. Hence, as we are taking a consistent view on this issue, we find no reason to interfere with the order of the CIT(A). This ground of appeal is rejected.”
Date of Judgment 10-07-2018, ITA Nos.390-391/2013 Commissioner of Income Tax-III & another Vs. M/s Supportsoft India Pvt. Ltd.
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Regarding Substantial Question No.2:
“22. Having heard both the parties and having considered the rival contentions, we find that the main functional difference brought out by the learned counsel for the assessee and objected to by the assessee before the TPO as well as the CIT(A) is that the assessee is also into product development. Further, as seen from the annexure 1 to the written submissions, Sankya Infotech Ltd., had replied that the revenues for the financial year 2005-06 are mainly from the sale of products. It is on the basis that the TPO has rejected this company as a comparable for the assessment year 2006-07. the same cannot be said for the assessment year 2005-06 to which the relevant previous year is 2004-05. The TPO has reproduced the letter of the Vice President of Sankya Infotech Ltd., wherein it is clearly stated that there is no revenue from the sale of its products and the products are used internally by the said company. This according to the assessee is the information which is at variance with the information available under public domain. Where there is variance between information available in the public domain and the information gathered u/s 133(6) of the Act, the assessee has referred
Date of Judgment 10-07-2018, ITA Nos.390-391/2013 Commissioner of Income Tax-III & another Vs. M/s Supportsoft India Pvt. Ltd.
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to the Management Discusssion and analysis available in the Annual Report of Sankya Infotech Ltd., for the F.Y. 2004-05 wherein at page 32 under ‘Notes to Accounts under Activities’, it is mentioned that the “The company is engaged in the business of development of Software Products and Services and Training”. This appears to be in variance with the information furnished u/s 133(6) of the Act. In view of the same, we deem fit and proper to remit this issue to the file of the AO/TPO with a direction to furnish the information required by the assessee and allow the assessee to rebut the said information obtained u/s 133(6) of the Act. If necessary, the TPO may call for explanation of Sankya Infotech Ltd., on its activities as mentioned in the Director’s Report enclosed to the Annual Report for the relevant assessment year. This issue is accordingly remitted to the file of the AO for re- consideration in accordance with law after giving the assessee a fair opportunity of hearing.”
Regarding Substantial Question Nos.3 to 5:
“25. The assessee is also aggrieved by the TPO’s order rejecting the claim of risk adjustment by the assessee. According to the assessee, the assessee is working in a risk-free
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atmosphere while the comparables are encumbering various risks regarding the product marketing etc. According to him, adjustment to the margin of the comparable should be made of the risk encountered by them before comparing them with the assessee. The learned counsel for the assessee has drawn our attention to the Agreement with its AE wherein the parent company is bearing all he risks and this being the first year of project, the assessee’s marginal cost plus 8% whereas for the assessment year 2007- 08, the margin is cost plus 12% and for the assessment year 2011-12, the margins are cost plus 15%. He submitted that the lower margin for this year is to provide for the possible inefficient functioning of the assessee in the first year of its operation.
The learned DR, however refuted the contentions of the assessee by stating that the assessee is also encountering single customer risk and in the case of risk adjustment neither any reasonable estimate can be made for want of a method to do so or has it been established by the assessee that there is any material that is affecting the comparison due to risk level. He further submitted that the tax payer has adopted 20% as the risk adjustment without establishing
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or bringing out any basis for adopting the same. Therefore no adjustment on account of risk should be allowed to the tax-payer.
Having heard both the parties and having considered the rival contentions, we find that the Tribunal in the case of M/s.Intellinet Technologies India Pvt. Ltd. –v- ITO in ITA 1237/Bang/2007 dated 30-3-2012 has considered this contention of the assessee and has held that the single customer risk attributable to the assessee is only an anticipated risk whereas the risk attributed by the assessee to the comparables is existing risk and in such situation the TPO ought to have given the risk adjustment to the net margin of the comparable for bringing them on par with the assesee- company. In the said case also, the assessee had claimed risk adjustment at 5.5% and the Tribunal has directed the TPO to consider the contention of the assessee and decide the percentage on risk adjustment on risk adjustment to be made in accordance with law. As both of us are signatories to the said order, we respectfully following the decision in the case of M/s.Intellinet Technologies India Pvt. Ltd (supra) remit this issue also to the file of the AP/TPO for re-
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consideration of the issue in accordance with law and in the light of our observations above.”
The controversy involved herein is no more res integra in view of the decision of this Court in I.T.A. Nos.536/2015 c/w 537/2015 dated 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 found ex facie perverse, the Appeals u/s. 260-A of the Act, is not maintainable. The relevant portion of the 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
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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 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
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found to be devoid of merit and the same are liable to be dismissed.
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. 58. The appeals filed by the Revenue are therefore dismissed with no order as to costs.”
In the circumstances, having heard the learned Counsel appearing for both the sides, We are of the
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considered opinion that no substantial question of law arises for consideration in the present cases. Hence, the Appeals filed by the Appellant-Revenue are liable to be dismissed and are accordingly dismissed. No costs.
Sd/- JUDGE
Sd/- JUDGE
ln.