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1/14 IN THE HIGH COURT OF KARNATAKA, BENGALURU
DATED THIS THE 3RD DAY OF AUGUST 2018
PRESENT
THE HON'BLE Dr.JUSTICE VINEET KOTHARI
AND
THE HON’BLE Mrs.JUSTICE S.SUJATHA
I.T.A.No.277/2017
BETWEEN:
PR. COMMISSIONER OF INCOME TAX-6 BMTC COMPLEX, KORMANGALA BANGALORE.
DEPUTY COMMISSIONER OF INCOME TAX CIRCLE-12(3), BANGALORE.
…APPELLANTS
(By Mr. E.I. SANMATHI, ADV.)
AND:
M/S. SWISS RE-SHARED SERVICES (INDIA) PVT. LTD No.21, 3RD FLOOR, LANGFORD ROAD LANGFORD TOWN, BANGALORE PAN:AAECS8786L.
…RESPONDENT
(RESPONDENT SERVED & UNREPRESENTED)
THIS I.T.A. IS FILED UNDER SECTION 260-A OF INCOME TAX ACT 1961, PRAYING TO DECIDE THE FOREGOING QUESTION OF LAW AND/OR SUCH OTHER QUESTIONS OF LAW
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AS MAY BE FORMULATED BY THE HON’BLE COURT AS DEEMED FIT AND SET ASIDE THE APPELLATE ORDER DATED 11/08/2016 PASSED BY THE ITAT, ‘B’ BENCH, BENGALURU, AS SOUGHT FOR, IN THE RESPONDENT-ASSESSEE’S CASE, IN APPEAL PROCEEDINGS IN IT(TP)A No.172/BANG/2012 FOR A.Y. 2005-06 ANNEXURE-A.
THIS I.T.A. COMING ON FOR HEARING, THIS DAY S.SUJATHA J. DELIVERED THE FOLLOWING:-
JUDGMENT
Mr. E.I. Sanmathi, Adv. for Appellants-Revenue
The appellants-Revenue have filed this appeal u/s. 260A of the Income Tax Act, 1961 (for short ‘Act’) raising purportedly certain substantial questions of law arising from the order of the Income Tax Appellate Tribunal, Bangalore Bench ‘B’, Bangalore (for short ‘Tribunal’) dated 11.08.2016 passed in I.T (TP)A No.172/Bang/2012 for the A.Y.2005-06.
This appeal has been admitted on 05.12.2017 to consider the following substantial questions of law as formulated in the appeal memorandum, which is quoted hereunder:
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“1. Whether on the facts and in the circumstances of the case, the Tribunal is right in law in directing the AO/TPO to retain the following comparable’s namely M/s. Allsec Technologies Ltd. M/s. Transworks Information Services Ltd, M/s. Ace Software Exports Ltd and M/s. Wipro BPO Solutions Ltd as RPT filter is 15% even when the application filter less than 25%?
Whether on the facts and in the circumstances of the case, the Tribunal is right in law directed AO/TPO to exclude certain companies as comparables on the ground of functional dissimilarity by following its earlier order in case of M/s. Flextronics Technologies India (P) Ltd which has not reached finality even when the TPO has chosen the comparables based on FAR Analysis and by application of qualitative and quantitative tests?
Whether, on the facts and circumstances of the case, the Tribunal is right in law in setting aside the re-computation of deduction under section 10A of the Act by following the decision of this Hon’ble High Court in the case of CIT v/s. Tata Elxsi which has not reached finality?”
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In so far as substantial question of law No.3 is concerned, the controversy is no longer res integra and is covered by the decision of the Division Bench of this Court in the case of M/s.Tata Elxsi Ltd., vs. Asst.Commissioner of Income Tax, decided on 20.10.2015 since reported in (2015) 127 DTR 0327 (Kar), which has been affirmed by 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
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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 which could have never been the intention of the legislature.
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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”.
The learned Tribunal, after discussing the rival contentions of both the Appellants-Revenue and Respondent-Assessee, has returned the findings as under: Regarding substantial question of law No.1:
“13. Regarding eighth comparable M/s Nucleus Netsoft & GIS Ltd., he submitted that this comparable was rejected by the ld. CIT(A) because the TPO has considered the previous year financials to conclude that this company provided ITES services and the ld. CIT(A) in assessee’s own case for different year has rejected this comparable and the department had not filed any objection against the same and in the present year also, there is no specific
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objection about this comparable in the grounds of appeal raised by the revenue and therefore, regarding this company, order of the ld. CIT(A) should be confirmed.
Regarding ninth and last comparable i.e. M/s Maple E-Solutions Ltd., he submitted that this comparable was rejected by the ld. CIT(A) since this comparable was rejected by the ld. CIT(A) in assessee’s own case in different year and the department has not filed any objection against the same in that year and in the present year also, there is no specific objection raised against this comparable as per the grounds of appeal raised by the revenue and therefore, on this issue, the order of the ld. CIT(A) should be confirmed.
We have considered the rival submissions. We find that out of nine comparables selected by the TPO, some comparables were rejected by the ld. CIT(A), Out of these comparable rejected by ld.CIT(A), ld. AR of the assessee conceded that three such comparables should be reinstated because, the same were rejected by the ld. CIT(A) by applying 0% RPT filter and now the RPT filter should be applied at 15% and when 15% filter is
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applied, these three companies satisfies the RPT filter. These three companies are; a) M/s. Allsec Technologies Ltd., b) M/s. Transworks Information Services Ltd., c) Ace Software Exports Ltd.,
Hence, we hold that these three comparables rejected by the ld. CIT(A) by applying 0% RPT filter are good comparables because these companies are satisfying 15% RPT filter and there is no other basis pointed out by any side to reject any of these comparables.
Regarding M/s Wipro BPO Solutions Ltd., which was rejected by the ld. CIT(A) by applying 0% RPT filter, we find that this company fails even 15% RPT filter and therefore, we find no reason to interfere with the order of the ld. CIT(A) regarding this company.
Regarding M/s Saffron Global Ltd., the ld, CIT(A) has accepted the company as a good comparable and is not being objected by the assessee before us. Hence on this aspect also, no interference is called for in the order of the ld. CIT(A).
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Regarding M/s Vishal Information Tech. Ltd., we find that this comparable was accepted by the ld. CIT(A) but this is being disputed by the assessee before us on this basis that this company is functionally different and also fails employees cost filter because in this case, % of employees cost to revenue is only 0.9%. This is by now a settled position that a company should not be accepted as a good comparable, if employees cost to revenue is below 25%. By applying this filter, we hold that this company is not a good comparable in the present case.
Regarding comparable no.8 & 9 i.e. M/s Nucleus Netsoft & GIS Ltd., and M/s Maple E Solutions Ltd., we find that these comparables were rejected by the ld. CIT(A) and no specific ground has been raised by the revenue against rejection of these two comparables and it is the contention of the ld.AR in the chart that in earlier years also, these two companies were rejected by the ld. CIT(A) in assessee’s own case and in that year also, such rejection by the ld. CIT(A) was not disputed by the revenue before the Tribunal. The ld. DR of the revenue could not controvert these submissions of the ld. AR of the assessee and
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therefore, we find no reason to interfere with the order of the ld. CIT(A) on these two comparables.
As per the above discussion, we find that the order of the ld. CIT(A) is required to be modified by rejecting one comparable i.e. M/s Vishal Information Technologies Ltd., which was accepted by the ld. CIT(A) and by incorporating three comparables which were rejected by the ld. CIT(A) by applying 0% RPT filter ad these three comparables are: a) M/s Allsec Technologies Ltd., b) M/s Transworks Information Services Ltd., c) Ace Software Exports Ltd.,
In the result, the appeal of the revenue and of the assessee for the assessment years : 2005- 06 are partly allowed.”
Regarding substantial question of law No.2:
“24. From the above paras of this order rendered in the case of M/s Flextronics Tech. India (P) Ltd. (Supra), it is seen that these eight comparables are not good comparables in case of BPO company i.e. M/s Flextronics Tech. India(P)Ltd., (Supra) and in the present case also, as per the assessee’s profile noted by the TPO on page-2 of his order, the assessee company is
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engaged in providing ITES and therefore, it appears to be a BPO company and the ld. DR of the revenue could not point out any difference in facts as compared to facts in the case of M/s Flextronics Tech. India(P) Ltd., (Supra). Hence respectfully following this Tribunal order we, hold that these eight comparables should be excluded from the list of final comparables and the TP adjustment, if any, has to be made on the basis of remaining comparables as per law. We direct AO/TPO accordingly.”
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:
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“ 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 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
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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. 58. The appeals filed by the Revenue are therefore dismissed with no order as to costs.” 6. Having heard the learned counsel for the appellants-Revenue, we are therefore of the opinion that
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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