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1/13 IN THE HIGH COURT OF KARNATAKA, BENGALURU
DATED THIS THE 30th DAY OF JULY 2018
PRESENT
THE HON'BLE Dr.JUSTICE VINEET KOTHARI
AND
THE HON’BLE Mrs.JUSTICE S.SUJATHA
I.T.A.No.510/2016 BETWEEN:
PR. COMMISSIONER OF INCOME TAX -4, BMTC COMPLEX, KORMANGALA, BANGALORE.
DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-12(1), BANGALORE.
…APPELLANTS (By Mr. E.I. SANMATHI, ADV.)
AND:
M/S. MOOG CONTROLS (INDIA) PVT. LTD., NO. 41P/99P/100P, KIADB INDUSTRIAL AREA, ELECTRONIC CITY, PHASE-II, BANGALORE-560 100. PAN: AABCM 3226G.
…RESPONDENT (By Mr. ANKUR PAI, 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 FORMULATED BY THE HON’BLE COURT AS DEEMED FIT AND
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SET ASIDE THE APELLATE ORDER DATED: 27/11/2015 PASSED ITAT, ‘C’ BENCH, BENGALURU, AS SOUGHT FOR, IN THE RESPONDENT-ASSESSEE’S CASE, IN APPEAL PROCEEDINGS IN IT (TP) A NO. 551/BANG/2015 FOR A.Y.2009- 10 ANNEXURE A AND GRANT SUCH OTHER RELIEF AS DEEMED FIT, IN THE INTEREST OF JUSTICE & ETC.
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. Ankur Pai, 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, ‘C’ Bench, Bangalore, dated 27.11.2015 passed in IT(TP)A No.551/Bang/2015 (Moog Controls (India) Pvt. Ltd., vs. The Deputy Commissioner of Income Tax) for A.Y.2009- 10.
This appeal has been admitted on 24.10.2017 to consider the following substantial question of law formulated in the Appeal Memo:-
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“1. It is submitted that the Tribunal erred in excluding the comparables such Kals Information Systems Ltd and Bodhtree Consulting Ltd even though the said companies are similar to the assesses”.
Learned counsel for the Appellants-Revenue Mr.E.I.Sanmathi has filed a Memo dated 29.07.2018 reframing the substantial questions of law Nos. 1 and 2, which are quoted below for ready reference:- “1. Whether on the facts and in the circumstances of the case, the Tribunal is right in law in excluding comparable’s namely, Kals Information Systems Ltd and Bodhtree Consulting Ltd even though the said comparable’s are functionally similar to that of assessee?
Whether on the facts and in the circumstances of the case, the Tribunal is right in law in setting aside the disallowance of software expenses claimed by the assessee even though the said expenditure is capital in nature?”
In so far as the second substantial question of law raised by the Revenue is concerned, learned counsel
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for the Revenue submitted that the learned ITAT in its Order dated 27.11.2015 has given the findings, the relevant portion of which is quoted below for ready reference:- “ 43. We find that in the present case, the license fee paid represents usage charges of leased licenses. Further, the use of license does not give any ownership of the software to the assessee and thereby does not lead to creation of any capital asset. The license used by the assessee is application software designed to perform various business processes. The application software enables the assessee to carry out its business operations efficiently and smoothly and does not provide any enduring benefit. Such software enhances the efficiency of the operations. It is an aid in the manufacturing process. Considering the above facts and the judicial precedents relied upon by the assessee company, we hold that the said license fees and maintenance fee is to be allowed as revenue expenditure”.
This issue has been considered by the co- ordinate Bench of this Court in the case of
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Commissioner of Income Tax vs. IBM India Ltd., reported in (2013) 357 ITR 88 (Kar) and answered the substantial question of law in favour of the Assessee and against the Revenue, treating the software expenses as revenue expenditure. The relevant portion of the aforesaid judgment is quoted below for ready reference:- “9. The second substantial question of law relates to application of the amount utilized for projects of Software in a sum or Rs.33,14,298/-.
The Tribunal on consideration of the material on record and the rival contentions held, when the expenditure is made not only once and for all but also with a view to bringing into existence an asset or an advantage for the enduring benefit, the same can be properly classified as capital expenditure. At the same time, even though the expenses are once and for all and may give an advantage for enduring benefit but is not with a view to bringing into existence any asset, the same cannot be always classified as capital expenditure. The test to be applied is, is it a part of company’s working expenses or is it expenditure laid out as a part of
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process of profit earning. Is it on the capital layout or is it expenditure necessary for acquisition of property or of rights of a permanent character, possession of which is condition on carrying on trade at all. The assessee in the course of its business acquired certain application software. The amount is paid for application of software and not system software. The application software enables the assessee to carry out his business operation efficiently and smoothly. However, such software itself does not work on stand alone basis. The same has to be fitted to a computer system to work. Such software enhances the efficiency of the operation. It is an aid in manufacturing process rather than the tool itself. Thus, for payment of such application software, though there is an enduring benefit, it does not result into acquisition of any capital asset. The same merely enhances the productivity or efficiency and hence to be treated as revenue expenditure. In fact, this Court had an occasion to consider whether the software expenses is allowable as revenue expenses or not and held, when the life of a computer or software is less than two years and as such, the right to use it for a limited period, the fee paid for acquisition of the said right is
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allowable as revenue expenditure and these software’s if they are licensed for a particular period, for utilizing the same for the subsequent years fresh license fee is to be paid. Therefore, when the software is fitted to a computer system to work, it enhances the efficiency of the operation. It is an aid in manufacturing process rather than the tool itself. Though certain application is an enduring benefit, it dos not result into acquisition of any capital asset. It merely enhances the productivity or efficiency and therefore, it has to be treated as revenue expenditure in that view of the matter, the finding recorded by the Tribunal is in accordance with law and do not call for any interference. Accordingly, the second substantial question of law is answered in favour of the assessee and against the Revenue”.
In view of the aforesaid decision rendered by this Court treating the computer or software expenses as revenue expenditure, no substantial question of law arises for our consideration.
In so far as the first substantial question of law raised by the Revenue is concerned, learned counsel for
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the Revenue submitted that the learned ITAT in its Order dated 27.11.2015 has given the findings, the relevant portion of which is quoted below for ready reference:- “12. With respect to KALS Information Systems Ltd., the ld. counsel for the assessee stated that the assessee had accepted the same as a comparable before the CIT(Appeals), but it is now sought to be rejected as a comparable on the ground that it is functionally dissimilar. It was also contended that the company is into development of software products and there is presence of significant inventory. The ld. counsel for the assessee relied on the decision of CISCO Systems (India) Pvt. Ltd. in IT(TP)A No.271/Bang/2014, order dated 14.08.2014, wherein it was held as follows:-
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Following the aforesaid decision of the Tribunal in the case of CISCO Systems (India) Pvt. Ltd. (supra), we are of the opinion that KALS Information Systems Ltd. is functionally dissimilar to that of the assessee and hence it is not to be regarded as a comparable.
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With respect to Bodhtree Consulting Ltd., the CIT(Appeals) had accepted the same as a comparable. The CIT(Appeals) relied on the decision of the Bangalore Bench decision in the case of Trilogy E-Business Software India (P.) Ltd. (supra) and 24/7 Customer.com (P) Ltd. 28 taxmann.com 258 (Bang). The CIT(A) observed that in the above decisions it has been made clear that there is no bar in considering companies with abnormal profits/losses as comparables unless the assessee demonstrates and establishes that some abnormal event took place which led to abnormal results. Hence, the CIT(A) rejected the contentions of the assessee for exclusion of Bodhtree Consulting Ltd. as a comparable.
We have heard both the parties and perused the material on record. In the case of CISCO Systems (India) Pvt. Ltd. (supra), the coordinate Bench of this Tribunal held that Bodhtree Consulting Ltd. is not to be treated as a comparable company. In this regard, the relevant observations of the Tribunal on the functional dissimilarity are as under:-
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Respectfully following the decisions of the Tribunal in the case of CISCO Systems (India)
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Pvt. Ltd. (supra) and Ciena India Pvt. Ltd. (supra), we are of the opinion that Bodhtree Consulting Ltd. is to be excluded from the list of comparables selected by the TPO”.
However, as regards this first substantial question of law is concerned, the controversy is already covered in a recent judgment of this Court 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.,), whereby it has been 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
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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 Revenue do not give rise to any substantial question of law and the suggested substantial questions of law do not meet the requirements of
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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.”
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
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liable to be dismissed and it is dismissed accordingly. No costs.
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