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1/12 IN THE HIGH COURT OF KARNATAKA, BENGALURU
DATED THIS THE 1ST DAY OF AUGUST 2018
PRESENT
THE HON'BLE Dr.JUSTICE VINEET KOTHARI
AND
THE HON’BLE Mrs.JUSTICE S.SUJATHA
I.T.A.No.280/2016 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. SYNOPSYS INDIA P. LTD RMZ INFINITY TOWER, A, 4 AND 5TH FLOOR, No.3 OLD MADRAS ROAD BENNIGANAHALLI, BANGALORE-560016.
…RESPONDENT
(By Mr. T. SURYANARAYANA, ADV.,)
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 AS MAY BE FORMULATED BY THE HON’BLE COURT AS DEEMED FIT AND SET ASIDE THE APPELLATE ORDER DATED 08/10/2015 PASSED BY THE ITAT, ‘B’ BENCH, BENGALURU, AS SOUGHT FOR, IN THE RESPONDENT-ASSESSEE’S CASE, IN
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APPEAL PROCEEDINGS IN IT(TP)A No.1093/BANG/2011 FOR A.Y. 2005-06.
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 Mr. T. Suryanarayana, Adv. for Respondent-Assessee
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, ‘B’ Bench, Bangalore (for short ‘Tribunal’) dated 08.10.2015 passed in I.T (TP)A No.1093/Bang/2011 for the A.Y.2005-06.
The proposed substantial questions of law framed in the Memorandum of appeal by the Appellants-Revenue are quoted below for ready reference:- “1. Whether on the facts and in the circumstances of the case, the Tribunal was justified in excluding Foursoft Ltd as comparable
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and in directing the assessing authority to exclude those companies as the related party transactions exceed 15% by following its earlier decision in case of M/s. 24/7 Customer care which has been challenged before this Hon’ble Court in ITA No.141/13 and even when the facts are not similar and without adducing the basis for arriving at 15% cut off for RPT filter?.
Whether on the facts and in the circumstances of the case, the Tribunal was justified in holding that few companies are functionally different from the assessee when it satisfies all the qualitative and quantitative filters applied by the TPO. The Tribunal had used a narrower functionality filter than the TPO, but had not tested other comparables against the narrower functionality filter applied by it?.
Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in directing the Assessing Officer to exclude reimbursement of certain expenditure incurred in foreign currency, both from the Export Turnover and Total Turnover, without appreciating the fact that the statute allows exclusion of such expenditure expressly only from the Export Turnover by way of specific definition
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of export turnover defined in the Act, while there is no specific provision in Section 10A warranting exclusion of the above expense from the Total Turnover?.”
The substantial question of law No.3 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 same are reduced from the export turnover? While giving the answer to the issue, the High Court, inter-alia,
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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.
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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 from export business, expenses excluded from export turnover have to be excluded from total turnover also. Otherwise, any other interpretation makes
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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 Nos.1 and 2:
“08. We have perused the orders and heard the rival contentions. This Tribunal in the case of 24/7 customer.com Pvt Ltd (supra) had held as under : “In respect of the ground raised at S.No.1 regarding acceptance of comparable companies having related party transactions as proposed by the TPO, the learned counsel for the assessee argued that the transfer pricing regulations do not stipulate any minimum limit of related party transactions which form the threshold for exclusion as a comparable. In this regard, the
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learned counsel for the assessee objected to the TPO’s setting a limit of 25 percent on related party transactions. He objected to the inclusion of comparables being related party transactions in excess of 15 percent of sales / revenue. In support of this proposition, the learned counsel for the assessee placed reliance on the decision of the Hon'ble Bench of the ITAT, Delhi in the case of Sony India (P) Ltd. reported in 2008-TIOL-439-ITAT- Delhi dt.23.12.2008. The learned counsel for the assessee drew our attention to para 115.3 of the order wherein the Tribunal has held that - " ………..We are further of the view that an entity can be taken as uncontrolled if its related party transactions do not exceed 10 to 15 percent of total revenue. Within the above limit, transactions cannot be held to be significant to influence the profitability of the comparables. For the purpose of comparison what is to
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be judged is the impact of the related party transactions vis-à-vis sales and not profit since profit of an enterprise is influenced by large number of other factors …." Respectfully following the decision of the Tribunal in the case of Sony India (P) Ltd (supra), the Assessing Officer / TPO are directed to exclude after due verification those comparables from the list with related party transactions or controlled transactions in excess of 15 percent of total revenues for the financial year 2003-04.”
Accordingly we are of the opinion that CIT (A) fell in error in directing exclusion of comparables which were having any RPTs. RPT ratio has to be considered at 15% in accordance with the above decision. Vis-a-vis argument of the Ld. AR that a few of the companies which come back to the list of comparables, still had to be excluded, for other reasons, we are of the opinion that the submission warrants consideration.
These companies will be considered by us when we take up the appeal of
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the assessee, while adjudicating on the grounds taken by the assessee seeking exclusion of certain comparable companies. Ground 3 of the Revenue is treated as partly allowed.
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Accordingly we direct exclusion of Tata Elxsi Ltd and Sankhya Infotech Ltd from the list of comparables.”
Similarly, the learned Tribunal has considered and excluded the other comparables also.
The appeal ITA No.141/2013 filed by the appellants-Revenue challenging the decision followed by the Tribunal in the case of 24/7 Customer.com Pvt. Ltd. vs. DCIT (2013) 140 ITD 344 has been dismissed by this Court on 10.07.2018 holding that no substantial question of law arises for consideration placing reliance on the recent judgment of this Court passed in ITA No.536/2015 C/w ITA No.537/2015 delivered on 25.06.2018
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(Prl. Commissioner of Income Tax & Anr. Vs. M/s. Softbrands India Pvt. Ltd.,) wherein it has observed 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 and the relevant portion of the judgment in M/s. Softbrands India Pvt. Ltd. (supra) 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
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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 has found certain comparables to be good
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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. In the circumstances, having heard the learned Counsel appearing for both the sides, We are of the considered opinion that no substantial question of law arises for consideration in the present case.
Hence, the Appeal filed by the Appellants- Revenue is liable to be dismissed and is accordingly dismissed. No costs.
Sd/- JUDGE
Sd/- TL JUDGE