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1/17 IN THE HIGH COURT OF KARNATAKA, BENGALURU
DATED THIS THE 26th DAY OF JULY 2018
PRESENT
THE HON'BLE Dr.JUSTICE VINEET KOTHARI
AND
THE HON’BLE Mrs.JUSTICE S.SUJATHA
I.T.A.No.69/2016 BETWEEN:
PR. COMMISSIONER OF INCOME TAX-5 C.R. BUILDING, QUEENS ROAD BANGALORE-560 001.
THE INCOME TAX OFFICER WARD-11(2), BANGALORE.
…APPELLANTS (By Mr. E.I. SANMATHI, ADV.)
AND:
M/S. IGEFI SOFTWARE INDIA P. LTD., (FORMERLY FINCH SOFTWARE INDIA P LTD) # SAFINA TOWERS-2, No.3 3RD, 4TH & 5TH FLOORS, ALI ASKAR ROAD VASANTH NAGAR, NEAR HIGH GROUNDS BANGALORE-560052 PAN: AAACF4678A.
…RESPONDENT (By Mr. BALARAM R. RAO, ADV.)
THIS I.T.A. IS FILED UNDER SECTION 260-A OF THE IT ACT 1961, PRAYING TO DECIDE THE FOREGOING QUESTION OF LAW AND/OR SUCH OTHER QUESTIONS OF LAW AS MAY BE FOURMULATED BY THE HON’BLE Court AS DEEMED FIT AND
Date of Judgment 26-07-2018 I.T.A.No.69/2016 Pr. Commissioner of Income Tax-5 & Anr. Vs. M/s. IGEFI Software India P. Ltd.,
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SET ASIDE THE APPELLATE ORDER DATED 30/07/2015 PASSED BY THE ITAT, ‘C’ BENCH, BENGALURU, AS SOUGHT FOR, IN THE RESPONDENT-ASSESSEE’S CASE, IN APPEAL PROCEEDINGS IN IT(TP)A No.1201/BANG/2014 FOR A.Y. 2009- 10 ANNEXURE-A AND 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. E.I. Sanmathi, Adv. for Appellants- Revenue Mr. Balaram R. Rao, 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 ‘C’, Bangalore, dated 30.07.2015 passed in IT(TP)A No.1201/Bang/2014 (IGEFI Software India P. Ltd., vs. Income-tax Officer ) for A.Y.2009-10.
The proposed substantial questions of law framed in the Memorandum of appeal by the
Date of Judgment 26-07-2018 I.T.A.No.69/2016 Pr. Commissioner of Income Tax-5 & Anr. Vs. M/s. IGEFI Software India P. Ltd.,
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Appellants-Revenue are quoted below for ready reference:- “1. Whether, on the facts and circumstances of the case, the Tribunal was right in seeking exact comparability while searching for comparable companies of the assessee under TNMM method whereas requirement of law and international jurisprudence require seeking similar comparable companies?
Whether, on the facts and circumstances of the case, while seeking the exact comparability as mentioned above the Tribunal was right in fact and in law in imposing condition beyond law where the requirement of law is to acknowledge only those differences that are likely to materially affect the margin?
Whether, on the facts and circumstances of the case, the Tribunal was right in law in not acknowledging the determination of ALP by carrying out comparability analysis of the companies is an art and not exact science as no two companies are the same?
Whether, on the facts and circumstances of the case, the Tribunal was right in law in demanding comparability standards
Date of Judgment 26-07-2018 I.T.A.No.69/2016 Pr. Commissioner of Income Tax-5 & Anr. Vs. M/s. IGEFI Software India P. Ltd.,
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that may itself defeat the purpose of law relating to determination of ALP under the IT Act?
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 Vs. Tata Elxsi when the said ruling has not reached finality?
Whether on the facts and in the circumstances of the case, the Tribunal is right in law in holding that foreign exchange fluctuation gain is a part of operating revenue as the assessee has its total revenue on account of exports when, such loss/gain though attributable to the operating activity is not derived from the operating activity of the assessee and earlier decision’s of Tribunal on such findings has been challenged before this Hon’ble Court in several cases?
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, Bodhtree Consulting Ltd and other companies on the ground of functional dissimilarity even when selection of comparable
Date of Judgment 26-07-2018 I.T.A.No.69/2016 Pr. Commissioner of Income Tax-5 & Anr. Vs. M/s. IGEFI Software India P. Ltd.,
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in a case for determining Arms Length Price depends on assessee specific FAR analysis and qualitative and quantitative tests are satisfied in case of each comparable’s chosen by Transfer Pricing Officer?.”
The learned counsel appearing for the Appellants – Revenue Mr.E.I.Sanmathi submitted that in so far as the fifth 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
Date of Judgment 26-07-2018 I.T.A.No.69/2016 Pr. Commissioner of Income Tax-5 & Anr. Vs. M/s. IGEFI Software India P. Ltd.,
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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.
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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
Date of Judgment 26-07-2018 I.T.A.No.69/2016 Pr. Commissioner of Income Tax-5 & Anr. Vs. M/s. IGEFI Software India P. Ltd.,
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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”.
In so far as the substantial question of law Nos.1 to 4 raised by the Revenue are concerned, learned counsel for the Revenue submitted that the learned ITAT in its Order dated 30.07.2015 has given the findings, the relevant portion of which is quoted below for ready reference:- “13. We have perused the orders and heard the rival contentions. Profile of the assessee as it appears at pages 2 of the order of TPO reads as under:
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Date of Judgment 26-07-2018 I.T.A.No.69/2016 Pr. Commissioner of Income Tax-5 & Anr. Vs. M/s. IGEFI Software India P. Ltd.,
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The method by which the AO had worked out the PLI of 12.7% for the assessee has been reproduced at para 08 above. Whole of the revenue of assessee was from software development services rendered to its AE, in Mauritius. Assessee in its TP study had adopted TNMM for justifying its international transactions and selected nine comparable companies and after making working capital adjustment, the average PLI of the comparables selected by the assessee came to 5.18%. Since assessee’s PLI was much higher than this, as per the assessee, there was no requirement for adjustment of transfer pricing. Comparables selected by the assessee were as under in its TP study:
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However the TPO rejected all except R S Software (India) Ltd out of the comparables considered by the assessee, for various reasons like RPT exceeding 20%, export sales lesser than 75%, different financial year being considered etc., TPO thereafter made his own study on the prowess and capitaline data base and arrived at a list of 11 comparables. List of 11 comparables considered by the TPO and the adjusted average PLI is given as under:
Date of Judgment 26-07-2018 I.T.A.No.69/2016 Pr. Commissioner of Income Tax-5 & Anr. Vs. M/s. IGEFI Software India P. Ltd.,
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Working capital adjustment was considered by the TPO based on average PLR adopted by SBI. TPO did not allow any adjustment on account of risk. ALP and the shortfall worked out by the TPO was as under:
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TPO thus recommended an adjustment of Rs.1,34,50,581/-. AO accordingly completed the assessment. In its appeal before the CIT (A), one of the grounds of the assessee sought exclusion of comparables which had turnover in excess of Rs.200 crores. As per the assessee, its turnover was only Rs.15.17 crores and could not be bracketed with companies having large turnover in excess of Rs.200 crores. Assessee had also argued for exclusion of M/s. Kals Information Systems Ltd, Akshay Software Technologies Ltd, M/s. Bodhtree Consulting Ltd and R S Software (India) Ltd, on a premise that these companies failed the functional test and had functions dissimilar to that of the assessee. CIT (A) was of the opinion that assessee’s contention with regard to exclusion of comparables having turnover in excess of Rs.200 crores was acceptable in view of the decision of the
Date of Judgment 26-07-2018 I.T.A.No.69/2016 Pr. Commissioner of Income Tax-5 & Anr. Vs. M/s. IGEFI Software India P. Ltd.,
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coordinate bench in the case of Genesis Integrating Systems v. DCIT (15 ITR (Trib) 475). However, according to him, contention of the assessee that the four companies mentioned above were functionally dissimilar could not be accepted since the line of business of the these companies fell within the realm of software development services segment. The result of the directions of the CIT (A) was that following companies got excluded on turnover filter”.
In so far as the sixth substantial question of law raised by the Revenue is concerned, learned counsel for the Revenue submitted that the learned ITAT in its Order dated 30.07.2015 has given the findings, the relevant portion of which is quoted below for ready reference:- “ 8. We have perused the orders and heard the rival contentions. Audited profit and loss account filed by the assessee placed at paper book page no.9 shows the gains arising out of the foreign exchange fluctuations as a negative figure. Effectively it means that such amount stand deducted from the expenditure. If such gain shown as a negative expenditure under the
Date of Judgment 26-07-2018 I.T.A.No.69/2016 Pr. Commissioner of Income Tax-5 & Anr. Vs. M/s. IGEFI Software India P. Ltd.,
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expenditure column is placed under the income head, then the revenues of the assessee, would increase from Rs.157,816,363/- to Rs. 160,943,265/-. Operating cost would go up from Rs.12,55,18,778/- to Rs. 13,46,63,741/-. The figures considered by the AO for working out the PLI of assessee were as under:
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Visa-a-vis exclusion of a few of the comparables remaining out of the list, after giving effect to the directions of the CIT (A), Ld. AR submitted that Kals Information Systems Ltd and Bodhtree Consulting Ltd were held by various coordinate benches in a host of decisions to be functionally different from software development service provider. As per the Ld. AR assessee was a wholly owned subsidiary of one Finch Software Mauritius P. Ltd., and it was doing software development and maintenance services for various products of one M/s. IGEFI, on behalf of Finch Software Mauritius P Ltd., Ld. AR submitted that TPO had accepted it to be a software development services company. Relying on the following decisions, Ld. AR submitted that both M/s. Kals Information Systems Ltd and M/s.
Date of Judgment 26-07-2018 I.T.A.No.69/2016 Pr. Commissioner of Income Tax-5 & Anr. Vs. M/s. IGEFI Software India P. Ltd.,
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Bodhtree Consulting Ltd were functionally different from the assessee:
CISCO Systems (India) Private Limited v DCIT IT(TP)No.271/Bang/2014 dated 14-8-2014.
Mindtech (India) Ltd v DCIT IT(TP)A No.70/Bang/2014 dated 21-08-2014. 3. ASM Technologies Ltd v. DCIT – IT(TP)A No.158/Bang/2014, dt 30-09-2014.
Airbus India Operations Private Limited v DCIT IT(TP)A No.35/Bang/2014 dated 10-10- 2014.
Aptean Software India Pvt. Ltd v ITO – IT(TP)A No.207/Bang/2014 dated 31-10-2014.
Torry Harris Business Solutions P Ltd v DCIT – IT(TP)A No.13/Bang/2014 dated 21-11- 2014
Yodlee infotech P Ltd v ITO IT(TP)A No.108/Bang/2014 dated 12-12-2014.
McAfee Software India P. Ltd v. DCIT – IT(TP)A 1009/Bang/2014, dt 24-04-2015.
In so far as the seventh substantial question of law raised by the Revenue is concerned, learned counsel for the Revenue submitted that the learned ITAT in its Order dated 30.07.2015 has given the findings, the
Date of Judgment 26-07-2018 I.T.A.No.69/2016 Pr. Commissioner of Income Tax-5 & Anr. Vs. M/s. IGEFI Software India P. Ltd.,
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relevant portion of which is quoted below for ready reference:- “16. Vis-à-vis pleading of the assessee that M/s.Kals Information Systems Ltd. and M/s.Bodhtree Consulting Ltd. had to be excluded, we find that the case of the assessee stands on a strong wicket. In the case pf Cisco Systems (India) P. Ltd., (supra), this Tribunal in relation to Bodhtree Consulting Ltd. held as under in para 26.1:-
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Vis-à-vis Kals Information Systems Ltd., it was held as under:
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Case of Cisco System (India) P. Ltd., also related to software development services and was for the very same assessment year. We are, therefore, of the opinion that the said case can be considered as a good precedent; M/s.Bodhtree Consulting Ltd., and M/s.Kals Information Systems Ltd., are directed to be excluded from the list of comparables in the case of assessee also. Ordered accordingly. Once these two companies are excluded, that would
Date of Judgment 26-07-2018 I.T.A.No.69/2016 Pr. Commissioner of Income Tax-5 & Anr. Vs. M/s. IGEFI Software India P. Ltd.,
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remain in the list of comparables are set out hereunder:
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TPO is directed to verify the workings as given above and if these are found to be correct, then no adjustment whatsoever need be made on the ALP pricing. Grounds 3 to 10 of the assessee are treated as allowed for statistical purposes”.
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 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:
Date of Judgment 26-07-2018 I.T.A.No.69/2016 Pr. Commissioner of Income Tax-5 & Anr. Vs. M/s. IGEFI Software India P. 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
Date of Judgment 26-07-2018 I.T.A.No.69/2016 Pr. Commissioner of Income Tax-5 & Anr. Vs. M/s. IGEFI Software India P. Ltd.,
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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.”
Having heard the learned counsels for the parties, we are therefore of the opinion that no
Date of Judgment 26-07-2018 I.T.A.No.69/2016 Pr. Commissioner of Income Tax-5 & Anr. Vs. M/s. IGEFI Software India P. Ltd.,
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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
Sd/-
JUDGE
Srl.