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1/16 IN THE HIGH COURT OF KARNATAKA, BENGALURU
DATED THIS THE 23RD DAY OF JULY 2018
PRESENT
THE HON'BLE Dr.JUSTICE VINEET KOTHARI
AND
THE HON’BLE Mrs.JUSTICE S.SUJATHA
I.T.A.No.52/2016
BETWEEN:
PRINCIPAL COMMISSIONER OF INCOME TAX, BANGALORE-6, B.M.T.C BUILDING, KORAMANAGALA, BANGALORE-95.
DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-12(3), B.M.T.C BUIDLING, KORAMANGALA, BANGALORE-95.
…APPELLANTS
(By Mr. JEEVAN.J. NEERALGI, ADV.)
AND:
M/S. SERIAL INNOVATIONS INDIA PVT.LTD., (formerly known as ‘Sarnoff Innovative Technologies Pvt. Ltd), NO.104, 1 FLOOR, 17TH C MAIN, 5TH CROSS, 5TH BLOCK, KORAMANGALA, BANGALORE - 560 095.
…RESPONDENT (By Mr. S.SANKARA NARAYANAN, ADV.)
Date of Judgment 23-07-2018 I.T.A.No.52/2016 Principal Commissioner of Income-Tax & Anr., Vs. M/s.Serial Innovations India Pvt.Ltd.,
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THIS I.T.A. IS FILED UNDER SECTION 260-A OF INCOME TAX ACT 1961, PRAYING TO DECIDE THE FOREGOING QUESTIONS OF LAW AS MAY BE FORMULATED BY THE HON’BLE COURT AS DEEMED FIT IN FAVOR OF THE APPELLANT AND SET ASIDE THE ORDER DATED 30/06/2015 PASSED BY THE ITAT IN IT (TP) A NO.1330/BANG/2011 FOR ASSESSMENT PERIOD 2007-08, ANNEXURE-A.
THIS I.T.A. COMING ON FOR HEARING, THIS DAY S. SUJATHA J. DELIVERED THE FOLLOWING:-
JUDGMENT
Mr. Jeevan J Neeralgi, Adv. for Appellants-Revenue Mr. S.Sanakara Narayanan, 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, Bangalore Bench ‘B’ (for short ‘Tribunal’) dated 30.06.2015 passed in I.T(TP)A No.1330/Bang/2011 for the A.Y.2007-08.
Date of Judgment 23-07-2018 I.T.A.No.52/2016 Principal Commissioner of Income-Tax & Anr., Vs. M/s.Serial Innovations India Pvt.Ltd.,
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This appeal has been ADMITTED on 25.10.2017 to consider the following substantial questions of law as formulated in the appeal memo: “1. WHETHER, the ITAT is right in rejecting the comparables when selection of comparables in a case, in transfer pricing depends upon the assessee specific FAR analysis and the ITAT ought to have decided the comparability of these comparables on the basis of specific facts brought on record by the TPO in the case of the respondent assessee.
WHETHER, the ITAT was right in holding that the size and turnover of the company are deciding factors for treating a company as a comparable and consequently, in excluding 6 companies out of 26 companies as comparables in the case of the respondent company.
WHETHER, in the facts and circumstances of the case, the ITAT is right holding that few companies are functionally different from the respondent company when it satisfies all the qualitative an quantitative filters applied by the TPO particularly in the light of the fact that the ITAT has used a narrower functionality filter than
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the TPO, but has not tested other comparables against the narrower functionality filter applied by it.
WHETHER, the change in any filter- quantitative or qualitative by an appellate authority should be followed by fresh TP study, or whether the ITAT can selectively apply their modified qualitative filter to only few comparables challenged by the respondent assessee or whether a fresh TP study has to be done.”
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 Nos.1 & 2: “ (e) Accel Transmatic Ltd.
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Respectfully following the decision of the Tribunal referred to above, we direct the AO/TPO to exclude the aforesaid companies
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from the final list of comparable companies for the purpose of determining ALP.
As far as comparable companies listed at Sl.No.11 & 14 of the final list of comparable companies chosen by the TPO viz., M/s.Ishir Infotech Ltd., and Lucid Software Ltd., is concerned, this Tribunal in the case of First Advantage Offshore Services Pvt. Ltd. Vs. DCIT IT (TP) No.1086/Bang/2011 for AY 07- 08 held that the companies should be excluded for the reasons as held in the following paras: xxxx
xxxx
Respectfully following the decision of the Tribunal referred to above, we direct the AO/TPO to exclude the aforesaid companies from the final list of comparable companies for the purpose of determining ALP.”
As far as comparable companies listed at Sl.No.10, 24 & 26 of the final list of comparable companies chosen by the TPO viz., M/S.Infosys Technologies Limited, Tata
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Elxsi Ltd. (Seg.) & Wipro Limited are concerned, this Tribunal in the case of M/S.Curam Software International Pvt.Ltd. Vs. ITO ITA No.1280/Bang/2012 for AY 08- 09 order dated 31.7.2013 has held that the aforesaid companies are not comparable companies in the case of software development services provider. The following were the relevant observations in the case of M/S.Curam Software International Pvt. Ltd.(supra):
Infosys Technologies Ltd. xxxx xxxx
Wipro Limited
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Tata Elxsi Ltd.
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Respectfully following the decision of the Tribunal referred to above, we direct the
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AO/TPO to exclude the aforesaid companies from the final list of comparable companies for the purpose of determining ALP for the above reasons as well as for the reasons given in para.18 above.”
Regarding substantial question of law Nos.3 and 4: “19. As far as comparable companies listed at Sl.No.1,2,3 and 12 of the final list of comparable companies chosen by the TPO viz., M/s.Accel Transmatic Limited (seg.), Avani Cincom Technologies Ltd., Celestial labs Limited and KALS Infosystems Ltd., are concerned, this Tribunal in the case of First Advantage Offshore Services Pvt. Ltd. Vs. DCIT, IT(TP)A No.1086/Bang/2011 for AY 07- 08 held that the aforesaid companies are not comparable companies in the case of software development services provider. The nature of services rendered by the Assessee in this appeal and the Assessee in the case of First Advantage Offshore Services Pvt.Ltd.(supra) are one and the same. This
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fact would be clear from the fact that the very same 26 companies were chosen as comparables in the case of the Assessee as well as in the case of First Advantage Offshore Services Pvt. Ltd.(supra). In coming to the aforesaid conclusion, the Tribunal in the case of First Advantage Offshore Services Pvt. Ltd.(supra) followed the decision rendered in the case of Trilogy E-Business Software India Pvt.Ltd. Vs. DCIT ITA No.1064/Bang/2011 for AY 07-08 order dated 23.11.2012. The following were the relevant observations in the case of First Advantage Offshore Services Pvt.Ltd.(supra):
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(b) Avani Cimcon Technologies Ltd
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xxxx
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We have given a careful consideration to the submissions made on behalf of the Assessee and are of the view that the same deserves to be accepted. The reasons given
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by the Assessee for excluding this company as comparable are found to be acceptable. The decision of ITAT (Mumbai) in the case of Telcordia Technologies Pvt. Ltd. v. ACIT (supra) also supports the plea of the assessee. We therefore accept the plea of the Assessee to reject this company as a comparable.
(c) Celestial Labs Ltd.
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From the material available on record, it transpires that the TPO has accepted that up to AY 06-07 this company was classified as a Research and Development company. According to the TPO in AY 07-08 this company has been classified as software development service provider in the Capitaline/Prowess database as well as in the annual report of this company. The TPO has relied on the response from this company to a notice u/s. 133(6) of the Act in which it
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has said that it is in the business of providing software development services. The Assessee in reply to the proposal of the AO to treat this as a comparable has pointed out that this company provides software products/services as well as bioinformatics services and that the segmental data for each activity is not available and therefore this company should not be treated as comparable. Besides the above, the Assessee has point out to several references in the annual report for 31.3.2007 highlighting the fact that this company was develops biotechnology products and provides related software development services. The TPO called for segmental data at the entity level from this company. The TPO also called for description of software development process. In response to the request of the TPO this company in its reply dated 29.3.2010 has given details of employees working in software development but it is not clear as to whether any segmental data was given or not. Besides the above there is no other detail in the TPO’s order as to the nature of
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software development services performed by the Assessee. Celestial labs had come out with a public issue of shares and in that connection issued Draft Red Herring Prospectus (DRHP) in which the business of this company was explained as to clinical research. The TPO wanted to know as to whether the primary business of this company is software development services as indicated in the annual report for FY 06-07 or clinical research and manufacture of bio products and other products as stated in the DRHP. There is no reference to any reply by Celestial labs to the above clarification of the TPO. The TPO without any basis has however concluded that the business mentioned in the DRHP are the services or businesses that would be started by utilizing the funds garnered though the Initial Public Offer (IPO) and thus in no way connected with business operations of the company during FY 06-07. We are of the view that in the light of the submissions made by the Assessee and the fact that this company was basically/admittedly in clinical research and
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manufacture of bio products and other products, there is no clear basis on which the TPO concluded that this company was mainly in the business of providing software development services. We therefore accept the plea of the Assessee that this company ought not to have been considered as comparable.” xxxx xxxx xxxx xxxx
As far as comparable companies listed at Sl.No.16 of the final list of comparable companies chosen by the TPO viz., M/s.Megasoft Limited is concerned, this Tribunal in the case of First Advantage Offshore Services Pvt.Ltd. Vs. DCIT
IT (TP) No.1086/Bang/2011 for AY 07-08 held that only segmental data of the said company should be considered. This Tribunal held that :
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Respectfully following the decision of the Tribunal referred to above, we direct the AO/TPO to compute the correct margin of Mega Soft Ltd., as directed by the Tribunal in the case of First Advantage Offshore Services Pvt.Ltd. (supra)”.
Similarly, the Tribunal has considered and excluded the other comparables also.
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 23-07-2018 I.T.A.No.52/2016 Principal Commissioner of Income-Tax & Anr., Vs. M/s.Serial Innovations 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 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.”
In the circumstances, having heard the learned Counsel appearing for both the sides, We are of
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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