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1/10 IN THE HIGH COURT OF KARNATAKA, BENGALURU
DATED THIS THE 29TH DAY OF AUGUST 2018
PRESENT
THE HON'BLE Dr.JUSTICE VINEET KOTHARI
AND
THE HON’BLE Mrs.JUSTICE S.SUJATHA
I.T.A.No.39/2018
BETWEEN:
PR. COMMISSIONER OF INCOME TAX-4 BMTC COMPLEX, KORMANGALA BANGALORE.
ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE-4(1)(2), BANGALORE.
…APPELLANTS
(By Mr. SANMATHI E.I. ADV.)
AND:
M/S. MICROSOFT RESEARCH LAB INDIA PVT. LTD., No.196/36, SCIENTIA, 2ND MAIN SADASHIVANAGAR, BANGALORE-560 080. PAN:AAECM2252R
…RESPONDENT (By Mr. MALLAHA RAO K, ADV., FOR Mr. NAGESWAR RAO, ADV.,)
THIS I.T.A. IS FILED UNDER SECTION 260-A OF THE IT ACT, 1961, PRAYING TO DECIDE THE FOREGOING QUESTION OF LAW AND/OR SUCH OTHER QUESTIONS OF LAW AS MAY BE
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FORMULATED BY THE HON’BLE COURT AS DEEMED FIT AND SET ASIDE THE APPELLATE ORDER DATED: 16-08-2017 PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, ‘C’ BENCH, BANGALORE, AS SOUGHT FOR IN THE RESPONDENT- ASSESSEE’S CASE, IN APPEAL PROCEEDINGS IN IT(TP)A No.115/BANG/2016 FOR A.Y.2011-12 VIDE ANNEXURE-A & GRANT SUCH OTHER RELIEF AS DEEMED FIT, IN THE INTEREST OF JUSTICE.
THIS I.T.A. COMING ON FOR ADMISSION THIS DAY, S. SUJATHA J. DELIVERED THE FOLLOWING:-
JUDGMENT
Mr. Sanmathi E.I. Adv. for Appellants- Revenue Mr. Mallaha Rao K, Adv. for Mr. Nageswar Rao, Adv. for Respondent - Assessee
The Appellants-Revenue have filed this appeal u/s.260A of the Income Tax Act, 1961, raising purportedly one substantial question of law arising from the order of the ITAT, ‘C’ Bench, Bangalore, dated 16.08.2017 passed in IT(TP)A No.115/Bang/2016 for the A.Y.2011-12.
The proposed substantial question of law framed in the Memorandum of appeal by the
Date of Judgment 29-08-2018 I.T.A.No.39/2018 Pr. Commissioner of Income Tax-4 & Anr. Vs. M/s. Microsoft Research Lab India Pvt. Ltd.,
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Appellants-Revenue are quoted below for ready reference:- “Whether on the facts and in the circumstances of the case, the Tribunal was right in directing the assessing authority/Transfer Pricing Officer to allow actual adjustment towards the differences in working capital position between the assessee and the companies in the final set of comparables without appreciating that upper limit would result into abnormal adjustment and would make the profit earned within the permitted range even if no operating profit is earned”.
Learned counsel for the appellants-Revenue has placed additional substantial question of law today and the same is quoted hereunder: “Whether on the facts and in the circumstances of the case, the Tribunal is right in law in excluding certain comparable’s on the ground of functional dissimilarity?”
The learned Tribunal, after discussing the rival contentions of both the Appellants-Revenue and
Date of Judgment 29-08-2018 I.T.A.No.39/2018 Pr. Commissioner of Income Tax-4 & Anr. Vs. M/s. Microsoft Research Lab India Pvt. Ltd.,
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the Respondent-Assessee, has given the following findings:- Regarding proposed substantial question of law: “9.3.1 We have heard the rival contentions and perused and carefully considered the material on record. On the appreciation of the facts on record on this issue, it is seen that the TPO has restricted the working capital adjustment to 1.63%. - According to the assessee such a restriction is not justified as the adjustment seeks to remove the differences in working capital position between the assessee and the comparable companies. We find that this issue of restriction of working capital adjustment was considered by a co-ordinate bench of this Tribunal in the case of Moog Controls (India) Pvt. Ltd. in IT(TP)A No. 551/Bang/2015 dated 27.11.2015 and the co-ordinate bench directed the AO / TPO to allow actual adjustments towards the differences in working capital position between the assessee and the companies selected as comparables. At paras 24 to 29 thereof, the coordinate bench held as under:-
Date of Judgment 29-08-2018 I.T.A.No.39/2018 Pr. Commissioner of Income Tax-4 & Anr. Vs. M/s. Microsoft Research Lab India Pvt. Ltd.,
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9.3.2 Following the decision of the co-ordinate bench of this Tribunal in the case of Moog Controls (India) Pvt. Ltd. in IT(TP)A No. 551/Bang/2015 dated 27.11.2015, we direct the TPO / AO to allow the actual adjustment towards the differences in working capital position between the assessee and the companies in the final set of comparables.”
Regarding additional substantial question of law: “7.3 We have heard both parties and perused and carefully considered the material on record including the judicial pronouncement cited. We find that as per the segmental reporting at page 53 of the Annual report of this company, the income from Information Technology Services is Rs.81.40 crores out of total income of Rs.141.65 crores. Therefore, it is amply clear that the income from software development services is less than 75% of total revenues and consequently this company does not satisfy the filter of
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software development services revenue being more than 75% of total revenues, applied by the TPO himself. We find that on similar facts for the year under consideration i.e., Assessment Year 2011-12, a coordinate bench in the case of GT Nexus Software Pvt. Ltd., in IT(TP)A No. 31 and 409/Bang/2016 for Assessment Year 2011-12 has upheld the DRP’s exclusion of this company from the list of comparables on account of it failing to satisfy the filter of 75% revenues to be from software development services revenue. In the said order the co-ordinate bench has also held this company to be functionally not comparable to a provider of pure software development services to its AE's. Following the decision of the co-ordinate bench in the case of GT Nexus Software Pvt. Ltd. for Assessment Year 2011-12 (supra), we direct the TPO I AO to exclude this company, M/s. Acropetal Technologies Ltd. from the list of comparables.
xxxx xxxx
8.3.1 We have heard the rival contentions and perused and carefully considered the material on
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record; including the judicial pronouncement cited. We find from a perusal of the order of the co-ordinate bench in the case of GT Nexus Software Pvt. Ltd. in IT(TP)A Nos. 409 & 31/Bang/2016 dated 18.04.2017 for Assessment Year 2011-12, that the co-ordinate bench has excluded this company from the list of comparables on grounds of it being not functionally comparable to a company engaged in provision of software development services to its AE's. In doing so, the co-ordinate bench followed the decision of the Delhi Bench of the ITAT in the case of Saxo India Pvt. Ltd. v ACIT for Assessment Year 2011-12 in ITA No. 6148/De1/2016. In its order in the case of GT Nexus Software Pvt. Ltd. (supra) at para 12 thereof has held as under:-
xxxx
8.3.2 Following the decisions of the co-ordinate bench in the case of GT Nexus Software Pvt. Ltd., for Assessment Year 2011-12 (supra) and the decision of the ITAT, Delhi Bench in the case of Saxo India Pvt. Ltd. for Assessment Year 2011- 12 (supra), we direct the TPO/AO to exclude this company from the final set of comparables.”
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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 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
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(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 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
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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.”
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.
Sd/- JUDGE
Sd/-
JUDGE TL