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1/15 IN THE HIGH COURT OF KARNATAKA, BENGALURU
DATED THIS THE 31st DAY OF JULY 2018
PRESENT
THE HON'BLE Dr.JUSTICE VINEET KOTHARI
AND
THE HON’BLE Mrs.JUSTICE S.SUJATHA
I.T.A.No.544/2016 BETWEEN:
PR. COMMISSIONER OF INCOME TAX-7, BMTC COMPLEX, KORMANGALA, BANGALORE.
THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-12(4), BANGALORE.
…APPELLANTS (By Mr. E.I. SANMATHI, ADV.)
AND:
M/S. TEXTRON INDIA PRIVATE LIMITED, (Formerly Known as Textron Global Technology Centre Pvt. Ltd.,) GLOBAL VILLAGE, RVCE POST, MYLASANDRA, OFF MYSORE ROAD, BANGALORE-560059. PAN: AACCT0118M.
…RESPONDENT (By Mr. SANDEEP HUILGOL, ADV. FOR Mr. T.SURYANARAYANA, ADV.,)
THIS I.T.A. IS FILED UNDER SECTION 260-A OF I.T. ACT 1961, PRAYING TO DECIDE THE FOREGOING QUESTION OF LAW AND/OR SUCH OTHER QUESTIONS OF LAW AS MAY BE FORMULTED BY THE HON’BLE COURT AS DEEMED FIT AND SET ASIDE THE APELLATE ORDER DATED 13/01/2016 PASSED
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BY THE ITAT, ‘B’ BENCH, BENGALURU, AS SOUGHT FOR, IN THE RESPONDENT-ASSESSEE’S CASE, IN APPEAL PROCEEDINGS IN IT(TP)A No.1228/BANG/2010 FOR A.Y. 2006- 07 ANNEXURE A & GRANT SUCH OTHER RELIEF AS DEEMED FIT, IN THE INTEREST OF JUSTICE.
THIS I.T.A. COMING ON FOR ADMISSION, THIS DAY S. SUJATHA J. DELIVERED THE FOLLOWING:-
JUDGMENT
Mr. Sanmathi E.I. Adv. for Appellants - Revenue Mr. Sandeep Huilgol, Adv. for Mr. T.Suryanarayana, 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 ‘B’, Bangalore, dated 13.01.2016 passed in IT(TP)A No.1228/Bang/2010 (M/s.Textron India Private Limited vs. Dy.Commissioner of Income Tax) for A.Y.2006-07.
The proposed substantial questions of law framed in the Memorandum of appeal by the Appellants-Revenue are quoted below for ready reference:-
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“1. Whether on the facts and in the circumstances of the case, the Tribunal erred in holding that M/s. Infosys Ltd, Kals Information Systems Ltd, Tata Elaxy Ltd and Accel Transmatic Ltd., is different from assessee company, when it satisfies all the qualitative and quantitative filters applied by the TPO and the Tribunal has used a narrower functionality filter that the TPO, but has not tested other comparables against the narrower functionality filter applied by it? 2. Whether on the facts and in the circumstances of the case, the Tribunal was right in not setting aside the matter to the TPO for fresh Transfer Pricing study after taking a new view on functional matrix which is narrower than the functionality matrix originally used by the TPO? 3. Whether on the facts and in the circumstances of the case, the Tribunal was right in setting aside the 10A re-computation made by the assessing authority by following the decision of this Hon’ble High Court in the case of CIT v/s. Tata Elaxy even when the said order has not reached finality and no such method of re- computation is provided under the Act? 4. Whether on the facts and in the circumstances of the case, that the Tribunal was
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right in holding that 15% is to be considered for RPT filter instead of 25% as held by the TPO even when the decisions relied upon by the Tribunal has not reached finality?”
The learned counsel appearing for the Appellants – Revenue Mr. E.I.Sanmathi submitted that in so far as the third substantial question of law is concerned, the same is covered by the decision of the Hon’ble Apex 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
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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.
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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.
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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”.
In so far as the first and second substantial questions of law raised by the Revenue are concerned, the learned counsel for the Revenue submitted that the learned ITAT in its Order dated 13.01.2016 has given the findings, the relevant portion of which is quoted below for ready reference:- “ 13.1.3 We have considered the rival contentions as well as the relevant material on record. At the outset we note that the functional comparability of this company to that of software development service provider has been examined by this Tribunal in a series of decisions as relied upon by the assessee and referred (supra). In the case of Triology e-Business Vs. DCIT in ITA No.
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1054/ Bang/ 2012 (supra), the Tribunal has dealt with this issue in paragraphs 46 & 47. We further note that in the case of Misys Software Solutions (India) Pvt. Ltd. in IT(TP)A No.1425/Bang/2010 Dt.23.9.2015, the Tribunal has again considered functional comparability of this company in paragraphs 7.1 to 7.4.2 as under :-
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13.1.4 The learned Departmental Representative has not disputed the facts considered by the co-ordinate bench of this Tribunal regarding the nature of functions and business, revenue earned by this company from the sale of software products. Therefore, by following the decisions of the co ordinate bench (supra), we direct the A.O./TPO to exclude this Company from the list of comparables.
13.2 Tata Elxsi Ltd. (Seg.) 13.2.1 The learned Authorised Representative of the assessee has submitted that this company is functionally not comparable with the assessee as it fails the test of R&D expenditure to sale which is more than 3% filter. He has further contended that the company is
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engaged in the R&D activity resulting in creation of Intellectual Property Rights (IPRs). This company is not only into software products as explained in the Annual Report of this company but also is engaged in the embedded product development based on current and emerging technologies such as Multi-media, Wimax, Imaging, Imaging Process etc. The company actively engaged in developing house expertise in current and emerging markets through house development products and training. Further the software development business segment of this company also comprising of diversified activities such as hardware design, industrial design, engineering design and visual computing. Even this company in its response to notice under Section 133(6) has accepted that this company is not comparable with the software development services provider. In support of his contention, he has relied upon the following decisions :
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13.2.2 We have considered the rival submissions as well as the relevant material on record. At the outset we note that this company is not in the activity of pure software development
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services but engaged in the diversified product development activity which includes Multi-media, Wimax, Imaging and Imaging Process. Further, this company is also involved in the activities such as hardware design, industrial design, engineering design and visual computing. Therefore, the diversified activities as mentioned above are not comparable with the software development services provider like the assessee. The identical issue has been considered by the coordinate bench of this Tribunal in the case of Misys Software Solutions (India) Pvt. Ltd. (supra) in paragraphs 8.3.1 to 8.3.2 as under :
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In view of the above discussion, as well as the decision of the co-ordinate bench, we direct the A.O./TPO to exclude this company from the set of comparables for determining the ALP”.
In so far as the fourth substantial questions of law raised by the Revenue is concerned, the learned counsel for the Revenue submitted that the learned ITAT in its Order dated 13.01.2016 has given the
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findings, the relevant portion of which is quoted below for ready reference:- “12. We have considered the rival submissions as well as the relevant material on record. In strict sense, the ALP has to be determined by considering uncontrol comparable prices which means uncontrolled, unrelated comparable prices has to be taken into account to bench mark the international transactions which are the control and RPTs. However, 0% RPTs of the comparable price is an impossible situation and therefore a reasonable tolerance range of the revenue from RPT can be considered for selecting the uncontrolled comparables. There cannot be a single criteria / parameter which can be applied as a general rule in all cases. Therefore, this tolerance range varies from case to case and depending upon the availability of the comparables. If the comparables of international transactions are easily available, then, this tolerance of RPT should be restricted to minimum. There is no specified tolerance range in the Act or Rules under the Transfer Pricing provisions, however, in due course of discussion and adjudication of this issue in a series of decisions of this Tribunal, commonly accepted tolerance
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range of 5% to 25% of the total revenue from RPT has been considered as reasonable depending upon the facts and circumstances of each case. In the case on hand, the availability of the comparables is abundant in number as the assessee selected 44 comparables whereas the TPO selected 20 comparables by applying the filter of 25% of revenue from related parties. Therefore, in this case, good numbers of comparables are available and there is no difficulty in searching the comparables. Accordingly, in order to determine the ALP by considering the comparable uncontrolled transactions, it should be kept in mind that the uncontrolled transactions should be least influenced by the RPT. In the case of DCIT Vs. Textron Global Technology Centre Pvt. Ltd. in IT(TP)A No.29/Bang/2012 & C.O. No.40/Bang/2012 Dt.20.3.2015 for the Assessment Year 2005-06. The Tribunal has held in para 17 as under:-
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In view of the facts and circumstances of the case when there is good number of comparables available then, we concur with the view of the co-ordinate bench that the RPT filter of
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15% is proper in the case of the assessee. Accordingly we direct the Assessing Officer/TPO to exclude the comparable companies having the revenue of more than 15% from related parties. The learned Authorised Representative of the assessee has referred Annexure A to TPO order which mentions the percentage of RPTs. Thus as per the Annexure A of the TPO’s order, the following companies having more than 15% of RPT are directed to be excluded.
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 Sl.No. Comparable Company Name % of RPT Over sales 1 Aztec Software Limited 17.78 2 Geometric Software Limited 19.34 3 Megasoft Limited 17.08
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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 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
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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 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.
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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.