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1/13 IN THE HIGH COURT OF KARNATAKA, BENGALURU
DATED THIS THE 24TH DAY OF JULY 2018
PRESENT
THE HON’BLE DR.JUSTICE VINEET KOTHARI
AND
THE HON’BLE MRS.JUSTICE S.SUJATHA
I.T.A.No.64/2016
BETWEEN : 1. Pr. COMMISSIONER OF INCOME TAX-5 C.R. BUILDING, QUEENS ROAD BANGALORE-560001.
THE INCOME TAX OFFICER WARD - 12 (1) BANGALORE.
...APPELLANTS
(BY SRI E.I.SANMATHI, ADV.)
AND : M/s. NETDEVICES INDIA PVT. LTD., SILVER OAK - A WING MANYATA AMBASSY BUSINESS PARK NAGAWARA VILLAGE KASABA HOBLI OUTER RING ROAD BANGALORE - 560045 PAN: AACCN2025R.
…RESPONDENT
(BY SRI K.R.VASUDEVAN AND SRI ANKUR PAI, ADVS.)
THIS INCOME TAX APPEAL IS FILED UNDER SECTION 260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 30/06/2015 PASSED IN ITA NO.1485/BANG/2010, FOR
Date of Judgment 24-07-2018, ITA No.64/2016 Pr. Commissioner of Income Tax-5 & Another Vs. M/s. NetDevices India Pvt. Ltd.,
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THE ASSESSMENT YEAR 2006-07, ANNEXURE-A, PRAYING TO: 1. 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: 30/06/2015 PASSED BY THE ITAT, 'A' BENCH, BENGALURU, AS SOUGHT FOR, IN THE RESPONDENT-ASSESSEE'S CASE, IN APPEAL PROCEEDINGS IN ITA NO.1485/BANG/2010 FOR A.Y. 2006-07, ANNEXURE-A & GRANT SUCH OTHER RELIEF AS DEEMED FIT, IN THE INTEREST OF JUSTICE.
THIS APPEAL COMING ON FOR ADMISSION, THIS DAY, S. SUJATHA, J., DELIVERED THE FOLLOWING:
J U D G M E N T
Mr. E.I.Sanmathi, Adv. for Appellants – Revenue. Mr. K.R.Vasudevan & Mr. Ankur Pai, Advs. for Respondent – Assessee.
This Appeal is filed by the Revenue purportedly raising substantial questions of law arising from the Order of the Income Tax Appellate Tribunal, Bangalore Bench ‘A’, Bangalore, in IT[TP]A No.1485/Bang/2010 dated 30.06.2015, relating to the Assessment Year 2006-07.
The substantial questions of law framed by the Appellants-Revenue in the Memorandum of Appeal are as under:
Date of Judgment 24-07-2018, ITA No.64/2016 Pr. Commissioner of Income Tax-5 & Another Vs. M/s. NetDevices India Pvt. Ltd.,
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“1. Whether on the facts and circumstances of the case the Tribunal has erred in holding that the functions of taxpayer is not comparable to the functions of KALS Information Systems Ltd., Accel Transmatics Ltd., and Tata Elxi Ltd.?
Whether the Hon’ble Tribunal was correct in imposing the decision of its co-ordinate benches rendered in other cases to the facts of the taxpayer without doing any FAR analysis of the taxpayer with those other cases?
Whether the Tribunal, Bangalore, erred in directing the exclusion of comparable companies having RPT transactions more than 15% ignoring the TPO’s observation that the basis for determining the threshold limit for eliminating companies having RPT transactions more than 25% was through the determination of India companies with foreign shareholding greater than 26% and therefore had its basis in the provisions of the IT Act, 1961 and the accounting standards AS-18?
Whether the Tribunal, Bangalore, erred in super imposing the decision other Benches of Tribunal in the case of assessee to
Date of Judgment 24-07-2018, ITA No.64/2016 Pr. Commissioner of Income Tax-5 & Another Vs. M/s. NetDevices India Pvt. Ltd.,
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reject these comparables when selection of comparables in a case depends in transfer pricing assessee specific FAR analysis?
Whether, the Tribunal, Bangalore, instead of relying on decision of Benches of Tribunal ought to have decided the comparability of these companies on the basis of specific facts brought on record by the TPO in the case of the assessee?
Whether on the facts and circumstances of the case, the Tribunal is right in giving relief to assessee in respect of computation of section 10A deduction by relying upon the decision of this Hon’ble Court in case of CIT V/s. Tata Elxsi when the said ruling has not reached finality?”
Regarding Substantial Question of Law No.6: 3. The issue 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).
Date of Judgment 24-07-2018, ITA No.64/2016 Pr. Commissioner of Income Tax-5 & Another Vs. M/s. NetDevices India Pvt. Ltd.,
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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, 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.
Date of Judgment 24-07-2018, ITA No.64/2016 Pr. Commissioner of Income Tax-5 & Another Vs. M/s. NetDevices India Pvt. Ltd.,
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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.
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:
Date of Judgment 24-07-2018, ITA No.64/2016 Pr. Commissioner of Income Tax-5 & Another Vs. M/s. NetDevices India Pvt. Ltd.,
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Regarding Substantial Question of Law Nos.1 and 2: “13. Having regard to the rival contentions and the material on record, we find that being the very same assessment year viz., 2006-07 in the case of M/s.Ariba Technologies India Pvt. Ltd. this Tribunal had occasion to go into the comparability of these companies with the said company and the Tribunal has held it to be functionally dissimilar from the similar activity of software development service. We find that the Tribunal, at para.12 & 13 of its order, has held as under:
xxxxx
(d) KALS Information Systems Ltd.
xxxxx
We have given a careful consideration to the submission made on behalf of the Assessee. We find that the TPO has drawn conclusions on the basis of information obtained by issue of notice u/s.133(6) of the Act. This information which was not available in public domain could not have been used by the TPO, when the same is contrary to the annual report of this company as highlighted by the Assessee in its letter dated
Date of Judgment 24-07-2018, ITA No.64/2016 Pr. Commissioner of Income Tax-5 & Another Vs. M/s. NetDevices India Pvt. Ltd.,
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21.6.2010 to the TPO. We also find that in the decision referred to by the learned counsel for the Assessee, the Mumbai Bench of ITAT has held that this company was developing software products and not purely or mainly software development service provider. We therefore accept the plea of the Assessee that this company is not comparable.
(e) Accel Transmatic Ltd.
With regard to this company, the complaint of the assessee is that this company is not a pure software development service company. It is further submitted that in a Mumbai Tribunal Decision of Capgemini India (F) Ltd v Ad. CIT 12 Taxman.com 51, the DRP accepted the contention of the assessee that Accel Transmatic should be rejected as comparable. The relevant observations of DRP as extracted by the ITAT in its order are as follows:
“In regard to Accel Transmatics Ltd. the assessee submitted the company profile and its annual report for financial year 2005-06 from which the DRP noted that the business activities of the company were as under.
xxxxx
Date of Judgment 24-07-2018, ITA No.64/2016 Pr. Commissioner of Income Tax-5 & Another Vs. M/s. NetDevices India Pvt. Ltd.,
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7.7. Tata Elxsi Limited.:
xxxxx
In view of the aforesaid decision, we hold that Tata Elxsi has to be excluded from the list of comparable chosen by the TPO. Respectfully following the same, we direct the AO to exclude these companies from the final list of comparables.”
Regarding Substantial Question of Law Nos.3, 4 & 5:
“14. Further, as regards Mega Soft Ltd., Aztec Software Ltd., and Geometric Software Ltd.(segment) are concerned, it is stated by the learned counsel for the assessee that RPT of these companies is 17.08%, 17.78% and 19.34% respectively. He stated that this Tribunal, in a number of cases has been holding that if the RPT are more than 15%, then such comparable companies have to be excluded from the final list of comparables. In support of this contention also, the learned counsel for the assessee has placed reliance upon the decision of the co-ordinate bench of the Tribunal in the case of M/s.Ariba Technologies India Pvt. Ltd.
Date of Judgment 24-07-2018, ITA No.64/2016 Pr. Commissioner of Income Tax-5 & Another Vs. M/s. NetDevices India Pvt. Ltd.,
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The learned Departmental Representative, however, supported the orders of the authorities below.
On going through the decision of the Tribunal, in the case of M/s.Ariba Technologies India Pvt. Ltd., we find that at para.15 of its order, the Tribunal has held as under:
“xxxxx”
As facts and circumstances before us are similar, respectfully following the same, we direct the AO to exclude these companies also from the final list of comparables.”
The controversy involved herein is no more res integra in view of the decision of this Court in I.T.A. Nos.536/2015 c/w 537/2015 dated 25.06.2018 [Prl. Commissioner of Income Tax & Anr. V/s. M/s.Softbrands India Pvt. Ltd.,] wherein it has been observed that unless the finding of the Tribunal is found ex facie perverse, the Appeal u/s. 260-A of the Act, is not maintainable. The relevant portion of the Judgment is quoted below for ready reference:
Date of Judgment 24-07-2018, ITA No.64/2016 Pr. Commissioner of Income Tax-5 & Another Vs. M/s. NetDevices India Pvt. Ltd.,
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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
Date of Judgment 24-07-2018, ITA No.64/2016 Pr. Commissioner of Income Tax-5 & Another Vs. M/s. NetDevices India Pvt. Ltd.,
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considered opinion, give rise to any substantial question of law.
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
Date of Judgment 24-07-2018, ITA No.64/2016 Pr. Commissioner of Income Tax-5 & Another Vs. M/s. NetDevices India Pvt. Ltd.,
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a sufficient reason to invoke Section 260-A of the Act before this Court.
The appeals filed by the Revenue are therefore dismissed with no order as to costs.”
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/- JUDGE
NC.