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1/21 IN THE HIGH COURT OF KARNATAKA, BENGALURU
DATED THIS THE 18TH DAY OF JULY 2018
PRESENT
THE HON’BLE DR.JUSTICE VINEET KOTHARI
AND
THE HON’BLE MRS.JUSTICE S.SUJATHA
I.T.A. No.454/2015
BETWEEN :
THE COMMISSIONER OF INCOME-TAX C.R. BUILDING QUEENS ROAD BANGALORE
THE DEPUTY COMMISSIONER OF INCAME-TAX CIRCLE-11(1), RASHTROTHANA BHAVAN NRUPATHUNGA ROAD BANGALORE-560 001 ...APPELLANTS
(BY SRI K.V.ARAVIND, ADV.)
AND :
M/S. ANALOG DEVICES INDIA PVT. LTD., LEVEL-6, TOWER D, RMZ INFINITY NO.3, OLD MADRAS ROAD BANGALORE-560 016 PAN: AABCA 1873F …RESPONDENT
THIS INCOME TAX APPEAL IS FILED UNDER SEC.260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED:10/04/2015 PASSED IN ITA NO.1161/BANG/2010, FOR
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THE ASSESSMENT YEAR 2006-07 ANNEXURE - D. PRAYING TO:1. FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED ABOVE. 2. ALLOW THE APPEAL AND SET ASIDE THE ORDER PASSED BY THE ITAT, BANGALORE IN ITA NO. 1161/BANG/2010 DATED:10/04/2015 ANNEXURE-D AND CONFIRM THE ORDER OF THE DRP CONFIRMING THE ORDER PASSED BY THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-11(1), BANGALORE.
THIS APPEAL COMING ON FOR ORDERS, THIS DAY, S.SUJATHA J., DELIVERED THE FOLLOWING:
J U D G M E N T
Mr.K.V.ARAVIND, Adv. for Appellants – Revenue.
This Appeal is filed by the Revenue purportedly raising substantial questions of law arising from the Order of the Income Tax Appellate Tribunal, ‘B’ Bench, Bangalore, in IT [TP]A No.1161/Bang/2010 dated 10.04.2015, relating to the Assessment Year 2006-07.
The appeal is admitted on 07.12.2015 to consider the following substantial questions of law framed by the Revenue in the Memorandum of Appeal which are as under: “1. Whether the Tribunal was correct in applying an upper limit of Rs.200 crores for the turnover filter and directing the TPO to
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compute ALP after excluding the comparable companies dealt with its order ?
Whether the Tribunal was correct in excluding Accel Transmatics Ltd., Kals Information systems Ltd., Lucid Software Ltd., Tata Elxsi Ltd., from the list of comparables, holding that they are functionally different without appreciating that the comparables satisfy all the qualitative and quantitative filters applied by the TPO and that selection of comparables in a case depends on assessee specific FAR analysis ?
Whether the Tribunal was correct in considering the comparables as engaged in software products business, merely because it has developed software products by following software development process, without having legal ownership on such software products ?
Whether the Tribunal was correct in not appreciating the acceptance of the enterprise level financials of Megasoft Ltd as proper uncontrolled comparable when the enterprise level financials were adopted after a
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detailed analysis supplemented by information obtained u/s.133(6) of the Act ?
Whether the Tribunal was correct in directing the AO to recomputed the deduction u/s 10A after reducing telecommunication expenses from the total turnover also, without appreciating that there is no provision in section 10A to the effect that such expenses should also be reduced form the total turnover, as clause (iv) of the Explanation to section 10A provides that such expenses have to be reduced only from the export turnover ?
Whether the Tribunal was correct in directing the AO to exclude the data link charges of Rs.55,88,855/- and foreign travel expenses of Rs.66,92,610/- incurred in foreign currency for rendering technical services outside India both from the export turnover and the total turnover when there is no provision in section 10B which requires the concerned expenses, which are required to be reduced from the export turnover as per clause
(iv) of the Explanation to section 10B to be reduced from the total turnover also?”
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REGARDING SUBSTANTIAL QUESTION Nos. 5 & 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).
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
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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.
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
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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: REGARDING SUBSTANTIAL QUESTION No. 1 : “(1). Turnover Filter: 11. The ld. Counsel for the assessee submitted that the TPO has applied a lower turnover filter of Rs.1 Crore, but has not chosen to apply any upper turnover limit. In this regard, it was submitted by him that under rule 10B(3) to the Income Tax Rules, it was necessary for comparing an uncontrolled transaction with an international transaction that there should not be any difference between the transaction compared or the enterprises entering into such transaction, which are likely to materially affect the price or cost charged or paid or profit arising from such transaction in the open market. Further it is also necessary to see that wherever there
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are some differences such differences should be capable of reasonable accurate adjustment in monetary terms to eliminate the effect of such differences. It was his submission that size was an important facet of the comparability exercise. It was submitted that significant differences in size of the companies would impart comparability. In this regard our attention was drawn to the decision of the Special Bench of the ITAT Chandigarh Bench in the case of DCIT v. Quark Systems Pvt. Ltd., 38 SOT 207, wherein the Special Bench had laid down that it is improper to proceed on the basis of lower limit of 1 crore turnover with no higher limit on turnover, as the same was not reasonable classification. Several other decisions were referred to in this regard laying down identical proposition. We are not referring to those decisions as the decision of the Special Bench of this aspect would hold the field. Reference was also made to the OECD TP Guidelines, 2010 wherein it has been observed as follows:
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xxxxx
The ICAI TP Guidelines note on this aspect lay down in para 15.4 that a transaction entered into by a Rs.1,000 crore company cannot be compared with the transaction entered into by a Rs.10 crore company. The two most obvious reasons are the size of the two companies and the relative economics of scale under which they operate. The fact that they operate in the same market may not make them comparable enterprises. The relevant extract is as follows [on Rule 10B(3)]: xxxxx 13. It was further submitted that the TPO’s range (Rs.1 crore to infinity) has resulted in selection of companies like Infosys which is 277 times bigger than the Assessee (turnover of Rs.13,149 crores as compared to Rs.47.46 crores of Assesse). It was submitted that an appropriate uncontrolled companies.
Reference was made to the decision of the ITAT Bangalore Bench in the case of Genesis Integrating Systems (India)
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Pvt. Ltd. vs. DCIT ITA No.1231/Bang/2010, wherein relying on Dun and Bradstreet’s analysis, the turnover of Rs.1 crore to Rs.200 crores was held to be proper. The following relevant observations were brought to our notice: xxxx 15. It was brought to our notice that the above proposition has also been followed by the Honourable Bangalore ITAT in the following cases: xxxxx
It was finally submitted that companies having turnover more than Rs.200 crores ought to be rejected as not comparable with the Assessee.
The ld. DR, on the other hand pointed out that even the assessee in its own TP study has taken companies having turnover of more than Rs.200 crores as comparables. In these circumstances, it was submitted by him that the assessee cannot have any grievance in this regard.
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We have considered the rival submissions. The provisions of the Act and the Rules that are relevant for deciding the issue have to be first seen. Sec.92 of the Act provides that any income arising from an international transaction shall be computed having regard to the arm’s length price Sec.92-B provides that “international transaction” means a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises. Sec.92-A defines what is an Associated Enterprise. In the present case there is no dispute that the transaction
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between the Assessee and its AE was an international transaction attracting the provisions of Sec.92 of the Act. Sec.92C provides the manner of computation of Arm’s length price in an international transaction and it provides:
xxxxxx
A reading of the provisions of Rule 10B(2) of the Rules shows that uncontrolled transaction has to be compared with international transaction having regard to the factors set out therein. Before us there is no dispute that the TNMM is the most appropriate method for determining the ALP of the international transaction. The disputes are with regard to the comparability of the comparable relied upon by the TPO.
In this regard we find that the provisions of law pointed out by the ld. Counsel for the assessee as well as the decisions referred to by the ld. Counsel for the assessee clearly lay down the principle that the turnover filter is an important criteria in
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choosing the comparables. The assessee’s turnover is Rs.47,46,66,638. It would therefore fall within the category of companies in the range of turnover fall within the category of companies in the range of turnover between 1 crore and 200 crores (as laid down in the case of Genesis Integrating Systems (India) Pvt. Ltd. vs. DCIT ITA No.1231/Bang/2010). Thus companies having turnover of more than 200 crores have to be eliminated from the list of comparables as laid down in several decisions referred to by the ld. Counsel for the assessee. Applying those tests, the following companies will have to be excluded from the list of 26 comparables drawn by the TPO viz.,
xxxxx
Whose turnover is above Rs.200 crores should be excluded from the list of comparable companies. The AO is directed to compute the Arithmetic mean by excluding the aforesaid companies from the list of comparable.”
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REGARDING SUBSTANTIAL QUESTION Nos. 2 & 3: 18. Vis-à-vis M/s KALS Information Systems Ltd., M/s Lucid Systems (India) Ltd., and M/s Accel Transmatics Ltd., (Segment), observations of this Tribunal in the case of M/s Ariba Technologies India Pvt. Ltd. (supra) read as under:
Improper selection of comparables: It was submitted by the learned counsel for the Assesse that the following 2 companies are not functionally comparable with that of the Assessee. a) KALS Information Systems Limited b) Accel Transmission Limited
In this regard our attention was drawn to the decision of the Hon’ble ITAT Bangalore Bench in the case of Triology E-Business Software India Pvt. Ltd. (supra) wherein these companies were held to be not functionally comparable with that of a pure software developer like the Assessee.
The following were the relevant observations of the Tribunal on the aforesaid
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comparable companies in the case of Triology E-Business Software India Pvt. Ltd. (supra).
(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 conclusion 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 an highlighted by the Assessee in its letter dated 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.
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(e) Accel Transmatic Ltd.
xxxxx
We have considered the submissions and are of the view that the plea of the assessee that the aforesaid company should not be treated as comparables was considered by the Tribunal in Capgemini India Ltd. (supra) where the assessee was software developer. The Tribunal, in the said decision referred to by the ld. counsel for the assessee, has accepted that this company was not comparable in the case of the assessee engaged in software development services business. Accepting the argument of the ld. counsel for the assessee we hold that the aforesaid company should be excluded as comparables.
(d) Lucid Software Limited xxxxx
The facts and circumstances under which the aforesaid companies were considered as comparable is identical in the case of the Assessee as well as in the case of
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Logica Private Ltd. (supra). Respectfully following the decision of the Tribunal referred to above in the case of Logica Pvt. Ltd. (supra), we direct that the company viz., Lucid Software be excluded from the list of 20 comparable arrived at by the TPO.”
REGARDING SUBSTANTIAL QUESTION No. 4: 19. Vis-à-vis M/s Megasoft Ltd. comparability of the said company was an issue which had come up before the co- ordinate Bench in the case of M/s Triology E- Business Software India Pvt. Ltd. vs. DCIT (2013) 140 ITD 40, wherein it was held as under at paras 24 to 38, which are reproduced hereunder:
xxxxx”
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- M/s Softbrands India Pvt. Ltd.,) wherein it has been
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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: Xxxxxx 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
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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 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
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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 the Appellant-Revenue, 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.
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Copy of the order be sent to the respondent- Assessee, forthwith.
Sd/- JUDGE
Sd/- JUDGE
ln.