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1/10 IN THE HIGH COURT OF KARNATAKA, BENGALURU
DATED THIS THE 08TH DAY OF AUGUST 2018
PRESENT
THE HON'BLE Dr.JUSTICE VINEET KOTHARI
AND
THE HON’BLE Mrs.JUSTICE S.SUJATHA
I.T.A.No.374/2017
BETWEEN:
THE PR. COMMISSIONER OF INCOME-TAX, 5TH FLOOR, BMTC BUILDING, 80 FEET ROAD, KORMANGALA, BENGALURU-560 095.
THE DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-11(1), PRESENT ADDRESS, CIRCLE-1(1)(1), 2ND FLOOR, BMTC BUILDING, 80 FEET ROAD, KORMANGALA, BENGALURU-560 095.
…APPELLANTS (By Mr. K.V. ARAVIND, ADV.)
AND:
M/S. ANALOG DEVICES INDIA PVT. LTD., RMZ INFINITY, TOWER D, LEVEL 6, NO.3, OLD MADRAS ROAD, BENGALURU.
…RESPONDENT (By Mr. SRIKANTH PATIL. K, ADV.)
Date of Judgment 08-08-2018 I.T.A.No.374/2017 The Pr. Commissioner of Income-tax & Anr. Vs. M/s. Analog Devices India Pvt. Ltd.,
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THIS I.T.A. IS FILED UNDER SECTION 260-A OF THE IT ACT, PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW. ALLOW THE APPEAL AND SET ASIDE THE ORDERS PASSED BY THE INCOME-TAX APPELLATE TRIBUNAL, BENGALURU IN IT (TP) A NO. 852/BANG/2011 DATED 30/09/2016 ANNEXURE-D CONFIRM THE ORDER OF THE DRP CONFIRMING THE ORDER PASSED BY THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-1(1)(1), BENGALURU & ETC.
THIS I.T.A. COMING ON FOR HEARING THIS DAY, S. SUJATHA J. DELIVERED THE FOLLOWING:-
JUDGMENT
Mr. K.V. Aravind, Adv. for Appellants- Revenue Mr. Srikanth Patil. K, 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 30.09.2016 passed in IT(TP)A No.852/Bang/2011 (M/s.Analog Devices India Pvt. Ltd., vs. The Dy.Commissioner of Income-tax) for A.Y.2007- 08.
This appeal has been admitted on 17.01.2018 to consider the following substantial questions of law
Date of Judgment 08-08-2018 I.T.A.No.374/2017 The Pr. Commissioner of Income-tax & Anr. Vs. M/s. Analog Devices India Pvt. Ltd.,
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framed by the learned counsel for the Appellants- Revenue:- “1. Whether in the facts and circumstances of the case, the Tribunal is right in law in directing the AO/TPO to workout suitable risk adjustment by following its earlier order in case of M/s.Intelligent Technologies India P.Ltd even though it has not reached finality and when there is no reliable method to convert qualitative risk differences into qualitative risk adjustment and ignoring that it is not possible to provide risk adjustment accurately and thereby it contravenes Rule 10B (3) of I.T.Rules? 2. Whether in the facts and circumstances of the case, the Tribunal is right in law in excluding the comparables, namely, M/s.Bodhtree Consulting Ltd., Persistent Systems Ltd., Infosys Ltd., and Larsen & Toubro Infotech Ltd on the ground of functional dissimilarity by following its earlier order which has not reached finality and even when the TPO had chosen the comparables as it satisfies qualitative and quantitative filters applied by the TPO and Tribunal ought to have decided the comparability of these companies on the basis
Date of Judgment 08-08-2018 I.T.A.No.374/2017 The Pr. Commissioner of Income-tax & Anr. Vs. M/s. Analog Devices India Pvt. Ltd.,
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of specific facts brought out on record by the TPO in the case of the assessee?.”
The learned Tribunal, after discussing the rival contentions of both the Appellants-Revenue and the Respondent-Assessee, has given the following findings:- Regarding substantial question of law No.1:- “ 15. The assessee submits that the adjustment for the market risk perse is to be admitted as the appellant is not subject to any volatility of the market as opposed to the comparable companies during that assessment year. The comparable companies selected by the TPO are independent, risk-bearing entities, whereas the software segment of Appellant is a risk-free entity that is compensated on a 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 essential to perform a risk adjustment to bridge the disparities in risk profile between a risk free entity like the software services segment of ADIPL
Date of Judgment 08-08-2018 I.T.A.No.374/2017 The Pr. Commissioner of Income-tax & Anr. Vs. M/s. Analog Devices India Pvt. Ltd.,
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and risk bearing entities like the comparable companies selected by the TPO. 16. In the case of Intellinet Technologies India Private Limited (“Intellinet Ruling”), in ITA No.1237/Bang/2007, 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 honorable Tribunal has stated that – xxxxxxxxxx 17. We are of the opinion that market risk adjustment is to be given by following the decision in the case of Intellinet Technologies India Pvt. Ltd., (Supra) and Bearing Point Business Consulting Pvt. Ltd., ITA No.1124/Bang/2011 and direct the TPO to work out suitable risk adjustment”. Regarding substantial question of law No.2:- “Persistent Systems Ltd.
Date of Judgment 08-08-2018 I.T.A.No.374/2017 The Pr. Commissioner of Income-tax & Anr. Vs. M/s. Analog Devices India Pvt. Ltd.,
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17.1.1 This company was selected by the TPO as a comparable. The assessee objected to the inclusion of this company as a comparable for the reasons that this company being engaged in software product designing and analytic services, it is functionally different and further that segmental results are not available. The TPO rejected the assessee’s objections on the ground that as per the Annual Report for the company for Financial Year 2007-08, it is mainly a software development company and as per the details furnished in reply to the notice under section 133(6) of the Act, software development constitutes 96% of its revenues. In this view of the matter, the Assessing Officer included this company i.e. Persistent Systems Ltd., in the list of comparables as it qualified the functionality criterion. xxxxxxxxxx 17.3 We have heard the rival submissions and perused and carefully considered the material on record. It is seen from the details on record that this company i.e. Persistent Systems Ltd., is engaged in product development and product design services while the assessee is a software development services provider. We find
Date of Judgment 08-08-2018 I.T.A.No.374/2017 The Pr. Commissioner of Income-tax & Anr. Vs. M/s. Analog Devices India Pvt. Ltd.,
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that, as submitted by the assessee, the segmental details are not given separately. Therefore, following the principle enunciated in the decision of the Mumbai Tribunal in the case of Telecordia Technologies India Pvt. Ltd. (supra) that in the absence of segmental details/information a company cannot be taken into account for comparability analysis, we hold that this company i.e. Persistent Systems Ltd. ought to be omitted from the set of comparables for the year under consideration. It is ordered accordingly. xxxxxxxxxxxx 10. Respectfully following the co-ordinate Bench in the case of Hewlet Packard we reject 14 comparables as stated in para 9”.
Similarly, the learned Tribunal has considered the other comparables and excluded the same.
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
Date of Judgment 08-08-2018 I.T.A.No.374/2017 The Pr. Commissioner of Income-tax & Anr. Vs. M/s. Analog Devices India Pvt. Ltd.,
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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 (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
Date of Judgment 08-08-2018 I.T.A.No.374/2017 The Pr. Commissioner of Income-tax & Anr. Vs. M/s. Analog Devices India Pvt. Ltd.,
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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 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
Date of Judgment 08-08-2018 I.T.A.No.374/2017 The Pr. Commissioner of Income-tax & Anr. Vs. M/s. Analog Devices India Pvt. Ltd.,
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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.
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