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1/12 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.993/2017
BETWEEN
THE PR. COMMISSIONER OF INCOME TAX 5TH FLOOR, BMTC BUILDING 80 FEET ROAD, KORAMANGALA BENGALURU - 560095
THE INCOME-TAX OFFICER WARD-11(1) PRESENT ADDRESS WARD – 2 (1) (1) 2ND FLOOR, BMTC BUILDING 80 FEET ROAD, KORMANGALA BENGALURU – 560 095
...APPELLANTS
(BY SRI.ARAVIND K V, ADV.)
AND:
M/S. CITRIX R & D INDIA PVT. LTD. NO 33, PRESTIGE DYNASTY , ULSOOR ROAD, BENGALURU – 560 042 PAN: AABCN 3639C
... RESPONDENT
THIS INCOME TAX APPEAL IS FILED UNDER SEC.260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED: 24.03.2017 PASSED IN IT(TP)A NO.1245/BANG/2011, FOR THE ASSESSMENT YEAR-2007-2008 VIDE ANNEXURE – D ,
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PRAYING TO: I. FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED ABOVE. II. ALLOW THE APPEAL AND SET ASIDE THE ORDERS PASSED BY THE INCOME-TAX APPELLATE TRIBUNAL, BENGALURU IN IT(TP)A NO. 1245/BANG/2011 DATED: 24.03.2017 VIDE ANNEXURE D AND CONFIRM THE ORDER OF THE DRP CONFIRMING THE ORDER PASSED BY THE INCOME TAX OFFICER, WARD-2(1)(1), BENGALURU.
THIS APPEAL COMING ON FOR ORDERS, THIS DAY, S. SUJATHA, J., DELIVERED THE FOLLOWING:
J U D G M E N T
Mr. K.V. Aravind, 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, ‘A’ Bench, Bengaluru, in IT [TP]A No.1245/Bang/2011 dated 24.03.2017, relating to the Assessment Year 2007-08.
The substantial questions of law framed by the Revenue in the Memorandum of Appeal are as under:
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“1. Whether on the facts and circumstances of the case, the Tribunal is correct in directing the assessing officer to exclude expenses incurred in foreign currency and other expenses that has been excluded from ETO, from the total turnover also and accordingly recomputed the deduction under section 10A without appreciating the fact that there is no provision in sec. 10A that such expenses should be reduced from the total turnover also as clause (iv) of the Explanation 2 to Sec. 10A provides that such expenses are to be reduced only from the export turnover?
Whether on the facts and in the circumstances of the case, the Tribunal is right in law in excluding comparables namely, Bodhtree Consulting Ltd, Tata Elxsi Ltd and Infosys Technology Ltd on the ground of functional dissimilarity even when Transfer Pricing Officer has rightly chosen the same considering its functions which are similar to assessee’s and has
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satisfied all the required tests and without doing an FAR analysis of the taxpayer with those other cases?”
Regarding Substantial Question of law No.1: 3. The issue is covered by the decision of 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 computing relief under Section 10A of the IT Act, the amount of communication expenses should be excluded from the total turnover if the
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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. 18. XXXXXX
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.
Even in common parlance, when the object of the formula is to arrive at the profit
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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 Appellants-Revenue and Respondent-Assessee, has returned findings as under:
Regarding Substantial Question of law No.2:
“9. We heard rival submissions and perused material on record. The comparability of the abovementioned companies had come up for consideration before the co-ordinate bench of this Tribunal in the case of Tesco Hindustan Service Centre (P) Ltd. (supra) in which one of us, viz., the Judicial Member is the author. The relevant findings of the Tribunal are as under:
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The ld.CIT(DR) has not brought on record anything controverting the above findings of the tribunal. In the circumstances, we direct the AO/TPO to exclude the abovementioned cases from the list of comparables on the ground of functionality.”
As regards Quintegra Solutions Ltd., as comparable, it is the contention of the learned counsel for the assessee that this company was not functionally comparable with that of the assessee-company as it is engaged in product engineering services, development of proprietary software products and it has got substantial R & D activity resulting in creation of IPRs. Our attention was also drawn to page 12 of Annual Report. Reliance was placed on the following decisions:
i. NXP Semiconductors India Pvt. Ltd. (IT(TP) A No.1174/Bang/2011) ii. LSI Technologies India Pvt. Ltd. Vs. ITO (59 taxmann.com 434) (Bang. Trib.)
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From a perusal of the Annual Report it is clear that the company is engaged in product engineering services and software products. Now, the law is quite settled to the extent that software development services company cannot be compared with that of a company engaged in software products company. This reasoning was also followed by co-ordinate bench in the cases cited and relied on by the learned counsel for the assessee. In the circumstances, we direct the AO/TPO to exclude those companies form the list of comparables.
Sasken Communication Technologies Ltd.,:
It is contended that during the financial year 2006-07, it acquired Botnia Higtech which resulted in significant restructuring. It is further contended that the company owns IPRs. Hence, it is claimed that this company cannot be compared with the company which is engaged in software service provider. Reliance was placed on the decision in the case of Meritor LVS India (P) Ltd. vs. ACIT (64
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taxmann.com 136 (Bang) (Trib) and Motorola Solutions India Pvt. Ltd. vs. ACIT (ITA No.5637/Del/2011).”
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 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
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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 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
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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. 58. The appeals filed by the Revenue are therefore dismissed with no order as to costs.”
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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/-