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1/11 IN THE HIGH COURT OF KARNATAKA, BENGALURU
DATED THIS THE 16TH DAY OF AUGUST 2018
PRESENT
THE HON’BLE DR.JUSTICE VINEET KOTHARI
AND
THE HON’BLE MRS.JUSTICE S.SUJATHA
I.T.A. No.246/2017
BETWEEN :
Pr. COMMISSIONER OF INCOME TAX-7 C.R. BUILDINGS, QUEENS ROAD BANGALORE-560 001
DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-12(4), BANGALORE
...APPELLANTS
(BY SRI E.I.SANMATHI, ADV.)
AND :
M/s TEXTRON INDIA PVT. LTD., FLOOR-2, BLOCK B (TOWER-2) SEZ CAMPUS, GLOBAL VILLAGE RVCE POST, MYLASANDRA OFF MYSORE ROAD BANGALORE-560059
PAN: AACCT 0118M
…RESPONDENT
THIS ITA IS FILED UNDER SECTION 260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 22.07.2016 PASSED IN C.O. No.1/BANG/2015 IN IT(TP)A NO.477/BANG/2012, FOR THE ASSESSMENT YEAR: 2007-2008 VIDE ANNEXURE-A, PRAYING DECIDE THE FOREGOING QUESTION OF LAW AND/OR SUCH OTHER QUESTIONS OF LAW
Date of Judgment 16-8-2018, ITA No.246/2017 Pr. Commissioner of Income Tax-7 & Another Vs. M/s Textron India Pvt. Ltd.
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AS MAY BE FORMULATED BY THE HON'BLE COURT AS DEEMED FIT AND SET ASIDE THE APPELLATE ORDER DATED 22.07.2016 PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, 'B' BENCH, BANGALORE, IN APPEAL PROCEEDINGS IN C.O. No.1/BANG/2015 IN IT(TP)A NO.477/BANG/2012 FOR ASSESSMENT YEAR 2007-2008 VIDE ANNEXURE-A, AS SOUGHT FOR IN THIS APPEAL.
THIS APPEAL COMING ON FOR ADMISSION, THIS DAY, S. SUJATHA, J., DELIVERED THE FOLLOWING:
J U D G M E N T
Mr. E.I. Sanmathi, Adv. for Appellants – Revenue.
This Appeal is filed by the Revenue purportedly raising the substantial questions of law arising from the Order of the Income Tax Appellate Tribunal, Bangalore Bench ‘B’, Bangalore, in C.O. No.1/Bang/2015 in IT [TP]A No.477/Bang/2012 dated 22.07.2016, relating to the Assessment Year 2007-08.
The substantial questions of law framed by the Revenue in the Memorandum of Appeal are as under:
“1. Whether on the facts and in the circumstances of the case, the Tribunal is right in law in adopting high turnover and brand value
Date of Judgment 16-8-2018, ITA No.246/2017 Pr. Commissioner of Income Tax-7 & Another Vs. M/s Textron India Pvt. Ltd.
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criteria for excluding Infosys Technologies as a comparable in absence of turnover criteria in Rule 10B of the Income Tax Rules and also when the sale of the turnover and profit margins are not linked in the software industry unlike capital intensive companies?
Whether on the facts and in the circumstances of the case, the Tribunal is right in law in holding that Tata Elxsi Limited cannot be taken as comparables on the basis of facts of a different case for different assessee without making any specific FAR analysis vis-à-vis he assesse-company in contrast to the fact that Tata Elxsi Limited satisfy all the qualitative and quantitative filters applied by the TPO?
Whether on the facts and in the circumstances of the case, the Tribunal is right in law in directing the TPO to apply RPT filter of 15% by superimposing the decisions of Tribunal in other cases without going into specific facts of the taxpayer and without adducing the basis for arriving at the 15% cut off RPT filter?
Whether on the facts and in the circumstances of the case, the Tribunal is right in law in rejecting few companies chosen by
Date of Judgment 16-8-2018, ITA No.246/2017 Pr. Commissioner of Income Tax-7 & Another Vs. M/s Textron India Pvt. Ltd.
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Transfer Pricing Officer as comparables on the basis of functional dissimilarity by following its earlier order which has not reached finality even when the same satisfied qualitative and quantitative tests in the case of the assessee.
Whether on the facts and in the circumstances of the case, the Tribunal is right in law in excluding Mega Soft Ltd. has to be included as comparable by placing reliance on its earlier order in case of M/s Triology E-Business even when said order has not reached finality?”
The learned Tribunal, after discussing the rival contentions of both the Appellants-Revenue and Respondent-Assessee, has returned findings as under: Regarding Substantial Question of law No.1: “15. The next company for which exclusion is being requested is M/s Infosys Ltd., In support of his claim for exclusion of this company, it was submitted that in assessee’s own case, in IT(TP)A No.49(Bang)/2012 for AY 2006-07 available on page 882 of case law compendium, it was held by the tribunal in para-16 of this Tribunal order that this company should be excluded from the list of final comparables and apart from this, in so
Date of Judgment 16-8-2018, ITA No.246/2017 Pr. Commissioner of Income Tax-7 & Another Vs. M/s Textron India Pvt. Ltd.
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many cases, the Tribunal has taken consistent view because of various factors such as branding, ownership of intangibles and R&D and software products, this company cannot be considered as a comparable. We therefore, direct the AO/TPO in the present case also to exclude this company from the list of final comparables.”
Regarding Substantial Question of law No.2:
“20. The next company for which exclusion is being requested is M/s Tata Elxsi Ltd.,(Seg.). For this company, reliance has been placed on two Tribunal orders in assessee’s own case for AY: 2005-06 & 2006-07, copy available on pages 854 – 873 of the case law compendium. In addition to this, reliance is also placed on the Tribunal order rendered in the case of M/s Telecordia Tech. India Pvt. Ltd., in ITA No.7821/Mum/2011, copy available on page 830 of case law compendium and this Tribunal order is for the same assessment year i.e. AY: 2007-08. As per this Tribunal order rendered in the case of M/s Telecordia Tech. India Pvt. Ltd., it is noted by the Tribunal that this company is engaged in the development of niche product development and related services, as in the present case.
Date of Judgment 16-8-2018, ITA No.246/2017 Pr. Commissioner of Income Tax-7 & Another Vs. M/s Textron India Pvt. Ltd.
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Therefore, by respectfully following this Tribunal order, we direct the AO/TPO in the present case also to exclude this company i.e. M/s Tata Elxsi Ltd., also from the list of final comparables.”
Regarding Substantial Question of law No.3: “14. The next company for which exclusion is sought for is M/s Geometric Ltd.,(Seg.)(Supra). Exclusion of this company is requested on this basis that RPT percentage in this case is 17% and as per various Tribunal orders, any company having RPT percentage of more than 15% is to be excluded and therefore, we direct the AO/TPO to exclude this company i.e. M/s Geometric Ltd.,(Seg.)(Supra) from the list of final comparables because of higher RPT percentage at 17%.”
Regarding Substantial Question of law No.4: “13. We have considered the rival submissions. We find that in the case of DE Shaw India Pvt. Ltd.,(Supra), it was held by the Tribunal that M/s Flextronics Software Systems Ltd.,(Seg.) cannot be considered as a comparable because this company is into product development. The Tribunal in that case has followed another Tribunal order rendered in the
Date of Judgment 16-8-2018, ITA No.246/2017 Pr. Commissioner of Income Tax-7 & Another Vs. M/s Textron India Pvt. Ltd.
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case of M/s Intoto Software India Pvt. Ltd., and the ld. DR of the revenue could not pint out any difference in facts in the present case and in the case of M/s DE Shaw India Pvt. Ltd.(Supra). Hence, respectfully following these Tribunal orders as well as the judgment of the Hon’ble Telangana & Andhra Pradesh High Court rendered in the case of DE Shaw India Pvt. Ltd.,(Supra), we direct the AO/TPO that in the present case also, this company i.e. M/s Flextronics Software Systems Ltd., (Seg.) (Supra) should be excluded from the list of final comparables.”
Regarding Substantial Question of law No.5: “19. The next company for which the exclusion is requested is M/s Megasoft Ltd., and in this regard, reliance has been placed on the Tribunal order rendered in the case of M/s Trilogy E-Business Software India Pvt. Ltd.,(Supra) and it was pointed out that the relevant discussion is on page no.916 to924 of case law compendium. We find that in this case, as per para-38 of the Tribunal order, it was held by the Tribunal that profit margin of 23.11% which is the margin of software services segment be taken for comparability. Hence, it is seen that regarding
Date of Judgment 16-8-2018, ITA No.246/2017 Pr. Commissioner of Income Tax-7 & Another Vs. M/s Textron India Pvt. Ltd.
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this company i.e. M/s Megasoft Ltd.,(Supra), this is not the decision of the Tribunal that this company should be excluded and in fact, the Tribunal decision is this that this company should not be excluded but the profit margin in this company should be considered in respect of software services segment only and the profit margin of that segment has been noted as 23.11%. Accordingly, in the present case also, we direct the AO/TPO to consider the profit margin of software services segment only of this company i.e. M/s Megasoft Ltd., (Supra) which has been noted at 23.11%.”
However, this Court in a recent judgment in I.T.A. Nos.536/2015 c/w 537/2015 delivered on 25.06.2018 (Prl. Commissioner of Income Tax & Anr. –v- 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
Date of Judgment 16-8-2018, ITA No.246/2017 Pr. Commissioner of Income Tax-7 & Another Vs. M/s Textron India Pvt. Ltd.
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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 (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
Date of Judgment 16-8-2018, ITA No.246/2017 Pr. Commissioner of Income Tax-7 & Another Vs. M/s Textron India Pvt. Ltd.
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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 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.
Date of Judgment 16-8-2018, ITA No.246/2017 Pr. Commissioner of Income Tax-7 & Another Vs. M/s Textron India Pvt. Ltd.
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The appeals filed by the Revenue are therefore dismissed with no order as to costs.”
Having heard the learned Counsel appearing for the Appellants-Revenue, 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.
Copy of this order be sent to the Respondent- Assessee, forthwith.
Sd/- JUDGE
Sd/- JUDGE
AN/-