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1/12 IN THE HIGH COURT OF KARNATAKA, BENGALURU
DATED THIS THE 13TH DAY OF JULY 2018
PRESENT
THE HON'BLE Dr.JUSTICE VINEET KOTHARI
AND
THE HON’BLE Mrs.JUSTICE S.SUJATHA
I.T.A.No.83/2015
BETWEEN:
THE COMMISSIONER OF INCOME-TAX C.R. BUILDING, QUEENS ROAD BANGALORE.
THE INCOME-TAX OFFICER WARD-11(2) RASHTROTHANA BHAVAN NRUPATHUNGA ROAD BANGALORE-560001.
…APPELLANTS (By Mr. K.V. ARAVIND, ADV.,)
AND:
M/S. GENISYS INFORMATION SYSTEMS INDIA PVT. LTD., 43-46 & 33-36, EXPORT PROMOTION INDUSTRIAL PARK, WHITEFIELD ROAD BANGALORE-560 066.
…RESPONDENT (By Mr. S. SHARATH, ADV., FOR Mr. CHYTHANYA K.K. ADV.,)
THIS I.T.A. IS FILED UNDER SECTION 260-A OF THE I.T. ACT, 1961, PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED ABOVE. ALLOW THE APPEAL AND SET ASIDE THE ORDERS PASSED BY THE INCOME TAX
Date of Judgment 13-07-2018 I.T.A.No.83/2015 The Commissioner of Income-tax & Anr. Vs. M/s. Genisys Information Systems India Pvt. Ltd.,
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APPELLATE TRIBUNAL, BANGALORE IN IT(TP)A No.17/Bang/2014 DATED 12/09/2014 ANNEXURE-D AND CONFIRM THE ORDER OF THE DRP CONFIMING THE ORDER PASSED BY THE INCOME TAX OFFICER, WARE-11(2), BANGALORE.
THIS I.T.A. COMING ON FOR HEARING, THIS DAY S. SUJATHA J. DELIVERED THE FOLLOWING:-
JUDGMENT
Mr. K.V. Aravind, Adv. for Appellants- Revenue Mr. S. Sharath, Adv. for Mr. Chythanya K.K. 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 ‘A’, Bangalore, dated 12.09.2014 passed in IT(TP)A No.17/Bang/2014 (M/s.Genisys Information Systems India Pvt. Ltd., vs. Income Tax Officer ) for A.Y.2009-10.
The proposed substantial questions of law framed in the Memorandum of appeal by the Appellants-Revenue are quoted below for ready reference:-
Date of Judgment 13-07-2018 I.T.A.No.83/2015 The Commissioner of Income-tax & Anr. Vs. M/s. Genisys Information Systems India Pvt. Ltd.,
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“1. Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding the functions of the assessee are not comparable to the functions of M/s. Kals Information Systems Ltd, M/s. Cosmic Global Ltd by super imposing decisions of other benches of Tribunal without doing any FAR analysis in the instant case even when this comparables satisfies all the qualitative and quantitative filters applied by the TPO and the Tribunal ought to have decided comparability of these companies on the basis of specific facts brought on record by the TPO in the case of assessee?. 2. Whether a comparable may be considered as engaged in software product business merely because it has developed software product by following software development process without having legal ownership on such software products?. 3. Whether on the facts and in the circumstances of the case, the Tribunal is right in law in directing to include forex gain or loss as part of operating income/loss without ascertaining the nexus with the business activity of the assessee?”.
Date of Judgment 13-07-2018 I.T.A.No.83/2015 The Commissioner of Income-tax & Anr. Vs. M/s. Genisys Information Systems India Pvt. Ltd.,
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This Appeal was admitted on 18.08.2015 to consider the aforesaid substantial questions of law framed by the learned counsel for the Appellants- Revenue.
In so far as the first and second substantial questions of law raised by the Revenue are concerned, learned counsel for the Revenue submitted that the learned ITAT in its Order dated 12.09.2014 has given the findings, the relevant portion of which is quoted below for ready reference:- 12. KALS Information Systems Ltd.
12.1 This is a comparable selected by the TPO inspite of the assessee’s objections to the inclusion of this company in the final set of comparables on grounds of it being functionally different as the accounts show it has significant inventory and is a software product company, having many products and generating revenue therefrom, unlike the assessee who provides software development services to its AEs.
Date of Judgment 13-07-2018 I.T.A.No.83/2015 The Commissioner of Income-tax & Anr. Vs. M/s. Genisys Information Systems India Pvt. Ltd.,
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12.2 Before us, learned Authorised Representative reiterated the contentions that this company is not functionally comparable to the assessee as it is into software products whereas the assessee is providing software development services to its AEs. The learned Authorised Representative placed reliance on the following decisions of the Tribunal in support of the proposition that KALS Information Systems Ltd. has been rejected as comparable in the case of software development service providers for the reason that it is functionally dissimilar:- i) Triology E-Business Software India Pvt. Ltd. V DCIT (ITA No.1054/Bang/2011). ii) Bearing Point Business Consulting Pvt. Ltd. V DCIT (ITA No.1124/Bang/2011). iii) CSR India Pvt. Ltd. V ITO (IT(TP)A No.1119/Bang/2011). iv) Mercedes Benz Research & Development India Pvt. Ltd., V DCIT (IT(TP)A No.1222/Bang/2011). v) 3DPLM Software Solutions Ltd. V DCIT (IT(TP)A No.1303/Bang/2012).s
It is contended by the learned Authorised Representative that there is no change in the functional profile of this company and being into development of software products, it cannot be taken as a comparable for a mere software service providers like the assessee in the case on hand.
Date of Judgment 13-07-2018 I.T.A.No.83/2015 The Commissioner of Income-tax & Anr. Vs. M/s. Genisys Information Systems India Pvt. Ltd.,
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12.3 Per contra, the learned Departmental Representative relied on the orders passed by the TPO & DRP and contended that KALS Information Systems Ltd. should be retained as a comparable.
12.4.1. We have heard both parties and perused and carefully considered that material on record in including the judicial decisions cited. The co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. V DCIT in IT(TP)A No.1303/Bang/2012 vide order dt:28-11- 2013 for Assessment Year 2008-09 has held that KALS Information Systems Ltd. being into developing of software products was functionally different from a purely software service provider and therefore should be rejected as a comparable for software service providers. The relevant observations of the Tribunal’s order at para 10.4 thereof is extracted hereunder:
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12.4.2 Following the above decision of the co-ordinate bench of this Tribunal in the case of 3DPLM Software Solutions Ltd. (supra), we hold that KALS Information Systems Ltd. be excluded from the list of comparable companies as it is
Date of Judgment 13-07-2018 I.T.A.No.83/2015 The Commissioner of Income-tax & Anr. Vs. M/s. Genisys Information Systems India Pvt. Ltd.,
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functionally different; being into software products and cannot be comparable to the assessee in the case on hand who is a software service provider. The Assessing Officer/ TPO are accordingly directed.
Cosmic Global Limited (formerly Tulsyan Technologies Ltd.)
24.1 The assessee seeks the exclusion of this comparable on the grounds that it is functionally different and has outsourced most of its work. In this regard the learned Authorised Representative placed reliance on the decision of the Mumbai Tribunal in the case of ACIT V Maersk Global Services Centre (India) Pvt. Ltd. (ITA No.3774/Mum/2011 dt. 9-11-2011) wherein this company was excluded from this list of comparables for the reason that it has outsourced most of its work.
24.2 We have heard both parties and perused and carefully considered the material on record, including the judicial decisions cited. On a perusal of the order of the DRP, at pages 63 to 65 thereof, we find it concluded that the margin in the case of an entity outsourcing a part of its work is bound to be lower than the margin in the case of an entity performing its activities in
Date of Judgment 13-07-2018 I.T.A.No.83/2015 The Commissioner of Income-tax & Anr. Vs. M/s. Genisys Information Systems India Pvt. Ltd.,
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house. However from the annual report of this company reproduced at page 64 of DRP order it is evident that the company has incurred translation charges in excess of Rs.3 Crores, whereas, on the other hand, the assessee in the case on hand is carrying out its ITES business on its own. The Mumbai ITAT in the case of Maersk Global Service Centre (India) P. Ltd. (supra) in its order dt.9-11-2011 has held at para 48 thereof as under:
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Following the above decision of the ITAT, Mumbai in the case of Maersk Global Service Centre (India) P. Ltd. (supra) dt:9-11-2011, we hold that Cosmic Global Ltd. should be excluded from the list of comparables.
In so far as the third substantial question of law raised by the Revenue is concerned, learned counsel for the Revenue submitted that the learned ITAT in its Order dated 12.09.2014 has given the findings, the relevant portion of which is quoted below for ready reference:-
Date of Judgment 13-07-2018 I.T.A.No.83/2015 The Commissioner of Income-tax & Anr. Vs. M/s. Genisys Information Systems India Pvt. Ltd.,
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“ 32.4 We have heard the rival contentions and perused and carefully considered the material on record including the judicial decisions cited. We find that in the case of Trilogy E-Business Software India Pvt. Ltd. (ITA No.1056/Bang/2011), the co-ordinate bench of this Tribunal held that foreign exchange losses/gains should be considered as operating in nature for computing the margins of comparables and the assessee. The relevant portion at para 79 of the order is extracted hereunder:
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Following the above decision, we hold that foreign exchange gain/loss should be considered as operating in nature for computing the margins for comparability analysis”.
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
Date of Judgment 13-07-2018 I.T.A.No.83/2015 The Commissioner of Income-tax & Anr. Vs. M/s. Genisys Information Systems India Pvt. Ltd.,
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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 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
Date of Judgment 13-07-2018 I.T.A.No.83/2015 The Commissioner of Income-tax & Anr. Vs. M/s. Genisys Information Systems India Pvt. Ltd.,
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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 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.
Date of Judgment 13-07-2018 I.T.A.No.83/2015 The Commissioner of Income-tax & Anr. Vs. M/s. Genisys Information Systems India Pvt. Ltd.,
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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 liable to be dismissed and it is dismissed accordingly. No costs.
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