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1/10 IN THE HIGH COURT OF KARNATAKA, BENGALURU
DATED THIS THE 10th DAY OF AUGUST 2018
PRESENT
THE HON'BLE Dr.JUSTICE VINEET KOTHARI
AND
THE HON’BLE Mrs.JUSTICE S.SUJATHA
I.T.A.No.894/2017
BETWEEN:
THE PR. COMMISSIONER OF INCOME-TAX, 5TH FLOOR, BMTC BUILDING, 80 FEET ROAD, KORMANGALA, BENGALURU-560 095.
THE INCOME-TAX OFFICER, WARD-11(2), PRESENT ADDRESS,
ACIT, C-3(1)(2), 2ND FLOOR, BMTC BUILDING, 80 FEET ROAD, KORMANGALA, BENGALURU-560 095.
…APPELLANTS (By Mr. ARAVIND K.V. ADV.)
AND:
M/S. GXS INDIA TECHNOLOGY CENTRE PVT. LTD., 841/1, BINNAMANGALA, 100 FT ROAD, INDIRANAGAR, BENGALURU-560 038. PAN:AABCG 7972P.
…RESPONDENT (By Mr. K.R.VASUDEVAN, ADV.)
THIS I.T.A. IS FILED UNDER SECTION 260-A OF THE IT ACT, PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED. ALLOW THE APPEAL AND SET ASIDE THE ORDERS PASSED BY THE INCOME-TAX APPELLATE TRIBUNAL,
Date of Judgment 10-08-2018 I.T.A.No.894./2017 The Pr.Commissioner of Income-tax & Anr. Vs. M/s. GXS India Technology Centre Pvt. Ltd.,
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BENGALURU IN IT (TP)A NO.1388/BANG/2010 DATED 18-04- 2017 ANNEXURE-D AND CONFIRM THE ORDER OF THE DRP CONFIRMING THE ORDER PASSED BY THE ASST.COMMISSIONER OF INCOME TAX, CIRCLE-3(1)(2), BENGALURU.
THIS I.T.A. COMING ON FOR HEARING THIS DAY, S. SUJATHA J. DELIVERED THE FOLLOWING:-
JUDGMENT
Mr. K.V. Aravind, Adv. for Appellant- Revenue Mr. K.R.Vasudevan, Adv. for Respondent - Assessee
The Appellants-Revenue have filed this appeal u/s.260A of the Income Tax Act, 1961, raising purportedly certain substantial questions of law arising from the order of the ITAT, Bangalore Bench ‘A’, Bangalore, dated 18-04-2017 passed in IT(TP)A No.1388/Bang/2010 (GXS India Technology Centre Pvt. Ltd., vs. Income Tax Officer ) for A.Y.2006-07.
This appeal has been admitted on 05.01.2018 to consider the following substantial questions of law framed by the learned counsel for the Appellants- Revenue:-
Date of Judgment 10-08-2018 I.T.A.No.894./2017 The Pr.Commissioner of Income-tax & Anr. Vs. M/s. GXS India Technology Centre Pvt. Ltd.,
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“1. Whether, on the facts and in the circumstances of the case, the Tribunal is right in Directing assessing authority/Transfer Pricing Officer to exclude certain comparable based on functional dissimilarity even when the TPO has chosen the said comparable by applying qualitative and quantitative filters when culling out comparable companies?
Whether on the facts and in the circumstances in the case in directing Transfer Pricing Officer to exclude certain comparable having RPT transactions more than 15% ignoring the TPO’s observation that the basis of determining the threshold limit for eliminating companies having RPT transactions more than 25% was through the determination of Indian Companies with foreign shareholding greater than 26% and therefore had its basis in the provisions of the Act and accounting?.”
The learned Tribunal, after discussing the rival contentions of both the Appellants-Revenue and the Respondent-Assessee, has given the following findings:- “ 6. We have considered the rival submissions as well as the relevant material on record. First we will deal with the objections
Date of Judgment 10-08-2018 I.T.A.No.894./2017 The Pr.Commissioner of Income-tax & Anr. Vs. M/s. GXS India Technology Centre Pvt. Ltd.,
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raised by the learned Departmental Representative in respect of the applicability of the precedence on the issue of comparability in the subsequent case or not. The learned Departmental Representative has mainly relied upon the decisions of the Delhi Benches of Tribunal in the case of Virage Logic international-India Branch Office Vs. JDIT in ITA No.6918/Del/2014 Dt.13.7.2016 and Sony Mobile Communications India Pvt. Ltd. vs. ACIT (supra) as well as Mumbai Bench of Tribunal decision dt.14.9.2016 in the case of ECI Telecom India Pvt. Ltd. Vs. ACIT in ITA No.7552/Mum/2012. The Tribunal in those cases has discussed the basic criteria of selection of comparable companies for determining the Arm’s Length Price (ALP) in respect of international transactions of the assessee. There is no quarrel that for selection of comparable prices, FAR analysis is a must. The FAR analysis comprises of 3 aspects viz. Functional, Asset employed and Risk assumed by the comparable companies as well as the assessee. Therefore all three aspects are taken into consideration while considering the comparable price for the purpose of determining the ALP. However if a company which is taken for FAR analysis for the purpose of comparable price
Date of Judgment 10-08-2018 I.T.A.No.894./2017 The Pr.Commissioner of Income-tax & Anr. Vs. M/s. GXS India Technology Centre Pvt. Ltd.,
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of the international transaction is found to be functionally not similar then the said company cannot be considered as functionally comparable to the tested party. Once a company is rejected on the ground of functional comparability then the other two aspects viz. assets employed and risk assumed becomes irrelevant. The asset employed and risk assumed are considered only when a company is found to be functionally comparable to the tested party but if there is difference in the asset employed and risk assumed between the such selected company and the tested party then an appropriate adjustment on account of working capital and risk level is allowable in the operating margin of the comparables so selected. Hence the functional comparability is a pre-requisite for selection of a comparable price and the other two aspects i.e., assets employed and risk involved are considered only for appropriate adjustment in the operating margins of the comparables. Therefore the functional comparability is a primary factor and if a company is functionally not comparable then the other two aspects of the FAR analysis becomes irrelevant. 7. We further note that in the case of LSI Technologies India Pvt. Ltd. Vs. ITO (supra) the TPO has selected a set of 20 comparables
Date of Judgment 10-08-2018 I.T.A.No.894./2017 The Pr.Commissioner of Income-tax & Anr. Vs. M/s. GXS India Technology Centre Pvt. Ltd.,
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which are identical to the first 20 companies in the set of 22 comparables selected by the TPO in the case of assessee before us. Thus it is clear that the TPO himself found same set of 20 companies as comparable to the tested party in the case of LSI Technologies India Pvt. Ltd. Vs. ITO (supra) as well as in the case of the assessee. Hence in view of the TPO, the functional profile of the assessee before us and LSI Technologies India Pvt. Ltd. Vs. ITO are at parity. The case of the assessee the functional profile has been recorded by the TPO at para 2.1 as under.
xxxxxxxxxxxxxxxxxxxx
Thus, it is clear that the TPO has recorded that the assessee if providing software development services to its parent company. Therefore, in view of the fact that the TPO himself has selected as much as 20 companies in both the cases which are common as comparable then in the absence of any specific fact or functions of showing any dissimilarity the decision in the case of LSI Technologies India Pvt. Ltd., vs. ITO (supra) in respect of the same set of 20 comparables is applicable in the case of the assessee. The co-
Date of Judgment 10-08-2018 I.T.A.No.894./2017 The Pr.Commissioner of Income-tax & Anr. Vs. M/s. GXS India Technology Centre Pvt. Ltd.,
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ordinate bench of the Tribunal in the case of LSI Technologies India Pvt. Ltd. vs. ITO (supra) has dealt with all the issues relevant for functional comparability of these companies in paras 19 to 30 as under: xxxxxxxxxxxxxxx Hence in view of the decision of the co- ordinate bench (supra), we direct the Assessing Officer/TPO to exclude 8 companies from the set of comparables which are as under: 1. Aztech Software Limited. 2. Geometric Software Solutions Co. Ltd.(Seg) 3. Infosys Ltd. 4. Kals Information Systems Ltd. (Seg.) 5. Tata Elxsi Ltd. (Seg.) 6. Accel Transmatics (Seg.) 7. Flextronics Ltd. (Seg.) 8. Mega Soft Ltd.
As we have directed the A.O./TPO to exclude the above 8 companies therefore, the ALP has to be recomputed on the basis of the remaining companies in the set of comparables. Needless to say the benefit of proviso to Section 92C (2) be considered”.
Date of Judgment 10-08-2018 I.T.A.No.894./2017 The Pr.Commissioner of Income-tax & Anr. Vs. M/s. GXS India Technology Centre Pvt. Ltd.,
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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
Date of Judgment 10-08-2018 I.T.A.No.894./2017 The Pr.Commissioner of Income-tax & Anr. Vs. M/s. GXS India Technology Centre Pvt. Ltd.,
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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
Date of Judgment 10-08-2018 I.T.A.No.894./2017 The Pr.Commissioner of Income-tax & Anr. Vs. M/s. GXS India Technology Centre Pvt. Ltd.,
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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
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JUDGE Srl.