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Income Tax Appellate Tribunal, BENGALURU IN
1/12 IN THE HIGH COURT OF KARNATAKA, BENGALURU
DATED THIS THE 8TH DAY OF AUGUST 2018
PRESENT
THE HON’BLE DR.JUSTICE VINEET KOTHARI
AND
THE HON’BLE MRS.JUSTICE S.SUJATHA
I.T.A. No.497/2017
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, CIRCLE-3(1) 2ND FLOOR, BMTC BUILDING, 80 FET ROAD, KORMANGALA, BENGALURU-560 095.
...APPELLANTS
(BY SRI K.V.ARAVIND, ADV.)
AND :
M/s IDS SOFTWARE SOLUTIONS INDIA PVT. LTD., 6TH FLOOR, TOWER D, DIAMOND DISTRICT, AIRPORT ROAD, BENGALURU-560 066 PAN: AABCI 2430G
…RESPONDENT
(BY SRI ANKUR PAI, ADV. FOR SRI K.V.VASUDEVAN, ADV.)
THIS ITA IS FILED UNDER SECTION 260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 28/11/2016
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PASSED IN C.O.NO.107/BANG/2015, FOR THE ASSESSMENT YEAR 2010-2011 ANNEXURE-D. PRAYING TO: 1. FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED ABOVE. 2. ALLOW THE APPEAL AND SET ASIDE THE ORDERS PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, BENGALURU IN C.O.NO. 107/BANG/2015 DATED 28/11/2016 ANNEXURE-D CONFIRMING THE ORDER OF THE APPELLATE COMMISSIONER AND CONFIRM THE ORDER PASSED BY THE ASST. COMMISSIONER OF INCOME TAX, CIRCLE-3(1)(1), BENGALURU.
THIS APPEAL COMING ON FOR ADMISSION, THIS DAY, S. SUJATHA, J., DELIVERED THE FOLLOWING:
J U D G M E N T
Mr. K.V.Aravind, Adv. for Appellants – Revenue. Mr. Ankur Pai, Adv. for Mr. K.R.Vasudevan, Adv. Respondent – Assessee.
This Appeal is 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 No.154/Bang/2015 dated 28.11.2016 relating to the Assessment Year 2010-11.
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 setting aside the re-computation of 10A
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deduction made by the assessing authority by following the decision of this Hon’ble High Court in the case of CIT v/s M/s Tata Elxy (349 ITR page 98) even when the said decision has not reached the finality? 2. Whether on the facts and in the circumstances of the case, the Tribunal is right in law in allowing the claim of write off of rental deposits of Rs.20 lakhs by holding that the loss of money is in the course of business even when the ingredients of section 37(1) of the Act are not satisfied as the nature of expenditure is capital in nature? 3. Whether on the facts and in the circumstances of the case, the Tribunal is right in law in holding that certain comparables are functionally different and liable to be excluded from the list of comparables by following its earlier orders which has not reached finality and even when the Transfer Pricing Officer has chosen the comparables as qualitative and quantitative filters are fully satisfied in the case of each comparables? 4. Whether on the facts and in the circumstances of the case, the Tribunal is right in law in directing the Transfer Pricing Officer to grant Market Risk Adjustment without
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appreciating that risk adjustment involves two vital pre-conditions i.e., with regard to difference in risk level exist between tested party and the uncontrolled comparables which is possible to calculate in terms of numbers and the adjustment can be made in such circumstances only and in the present case both the aspects were not established by the assessee?”
Regarding Substantial Question 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
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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 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.
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
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which could have never been the intention of the legislature. 20. 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”.
Learned counsel for the appellants does not press substantial question No.2. Submission is taken on record.
The learned Tribunal, after discussing the rival contentions of both the Appellant-Revenue and Respondent-Assessee, has returned the findings as under: Regarding Substantial Question of Law No.3 & 4: “13. Infosys Ltd., Kals Information Systems Ltd (Seg), Persistent Systems Ltd., and RS
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Software (India) Ltd., are dealt in the case of Inteva Products in ITA 83/Bang/2015 and 136/Bang/2015, wherein it has been held as under:
Xxxxx Accordingly , when no substantial difference in the business activity of the company for the year under consideration we do not find any error or illegality in the directions of the DRP for exclusion of this company.”
The assessee submitted that the market risk per se is not subject to any volatility of the market as opposed to the comparable companies during the assessment year. The comparable companies selected by the TPO are independent, risk-bearing entitles, whereas the software segment of Appellant is a risk-bearing entities, whereas the software segment of Appellant is a risk-free entity that is compensated on the Cost plus basis irrespective of the result of its operations. In the open market, any entity assuming increased risk will also be compensated by an increase in the expected return in the long run. Hence it is
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essential to perform a risk adjustment to bridge to bridge the disparities in risk profile between a risk free entity like the software service segment of IDS and risk bearing entities like the comparable companies selected by the TPO.
In the case of Itellinet Technologies Inida Private Limited (“Intellinet Ruling”), the jurisdictional ITAT has held that the single customer risk borne by a captive service provider is only an ‘anticipated’ risk vis a vis the ‘existing’ market risk borne by independent comparables. The ITAT has directed the TPO to consider all the contentions of the taxpayer and after taking into account all the relevant materials decide the percentage of risk adjustment to be made in accordance to the law. The honourable Tribunal has stated that: Xxxxx 26. This jurisdictional ITAT has further upheld the directions of the Intelligent Ruling with respect to market risk adjustment in the case of Bearing Point Business and has directed the AO/TPO to work out suitable risk adjustment and compute the ALP accordingly.”
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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 case of substantial question of interpretation of provisions of Double Taxation Avoidance Treaties (DTAA), interpretation of provisions of
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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 substantial question of law and the suggested substantial questions of law do not meet the requirements of Section 260-A of the Act and
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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.”
Having heard the learned counsels appearing for the parties, we are therefore of the opinion that no
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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
ln.