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1/14 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.431/2014
Between:
Commissioner of Income-tax, Bangalore-IV, C.R. Building, Queens Road, Bangalore-560 001.
…Appellant (By Mr. E.I.Sanmathi, Advocate)
And:
M/s. Sys Arris Software Pvt. Ltd., No.19/2, 13th Cross, Dollars Colony, J.P.Nagar, 4th Phase, Bangalore-560 078. PAN: AABCP2952J
…Respondent (By Mr. S.Sharath for Mr. Chythanya K.K, Advocate)
This I.T.A. is filed under Section 260-A of Income Tax Act 1961, 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. 2. Set aside the Appellate order dated 16-05-2014 passed by the Income Tax Appellate
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Tribunal, ‘C” Bench, Bangalore, in appeal proceedings No. ITA No. 1621/Bang/2012 for Assessment Year 2006-2007 Annexure–A, in the interest of justice & equity etc.
This I.T.A. 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 Appellant – Revenue Mr. S Sharath for Mr. Chythanya K.K. Adv. for Respondent – Assessee
The Appellant - Revenue has filed this appeal raising purported substantial questions of law arising from the Order of the learned Income Tax Appellate Tribunal Bangalore Bench “C”, Annexure A dated 16/05/2014 in IT(TP)A.No.1621/Bang/2012 for AY 2006-07. 2. The Revenue has suggested six substantial questions of law, which are quoted below for ready reference: “1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the size and turnover of the company are deciding factors for treating a company as a comparable and
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accordingly directing the AO/TPO not to include cases of M/s. Infosys Technologies Ltd., M/s. Mindtree Ltd., M/s. Persistent Systems Ltd, M/s. Sasken Communication Technologies Ltd., M/s. Flextronics Software Ltd and M/s. iGate Global Solutions Ltd as comparables for determining ALP in the case of the assessee without appreciating that the economies of scale is not relevant in software industry? 2. Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the functions of the assessee are not comparable to the functions of M/s. KALs Information Systems Ltd., M/s.Lucid Software Ltd., M/s. Tata Elxsi Ltd without doing any FAR analysis in the case of the assessee and the other cases and without going into the merits of each case? 3. Whether on the facts and in the circumstances of the case, the Tribunal was right in law in fixing the RPT filter at 15% of total revenue by ignoring the TPO’s observation that the basis for determining the threshold limit for eliminating companies
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having RPT transactions more than 25% was through the determination of Indian Companies with foreign shareholding greater than 26% and therefore had its basis in the provisions of the IT act and the AS 18?.
Whether on the facts and in the circumstances of the case, the Tribunal was right in law in fixing the RPT filter at 15% of total revenue, by superimposing the decisions of Tribunal in other cases, including those of other benches of Tribunal, without going into specific facts in the case of the assessee and without adducing the basis for arriving at the 15% cut off for RPT filter, in the case of the assesse?.
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?
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Whether on the facts and in the circumstances of the case, the Tribunal is right in law in concluding that forex gain or loss are to be treated as operating in nature despite the fact that the forex gain/loss may be incidental but cannot be deemed as operating in nature since they are not critical to operational activities of the business conducted by the assessee?”
In so far as the first and second substantial question of law raised in the present appeal are concerned, the learned counsel for the Revenue, Mr.E.I. Sanmathi submitted that the learned ITAT in its Order dated 16/05/2014 has given the findings, the relevant portion of which is quoted below for ready reference:-
“ 09. As far as the comparables chosen by the TPO at Sl.Nos 3,5,6,7,14 & 15 are concerned, it is not in dispute that the turnover of these companies are more than Rs.200 crores. The turnover of the assessee in the present case is Rs. 6,99,33,551. It has
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been held by this Tribunal in the case of Trilogy E-Business Software India Pvt. Ltd.(supra) that companies with a turnover of more than Rs.200 crores cannot be taken as comparables while determining the ALP in the case of companies having turnover of less than Rs.200 crores. The following are the relevant observations of the Tribunal in this regard:- … … … … … … 10. Respectfully following the decision of the Tribunal referred to above, we hold that the comparables chosen by the TPO at Sl.Nos. 3,5 to 7, 14 & 15 have to be excluded as comparables for the purpose of determining the ALP of the impugned transaction in this appeal. … … …
… … … 12. In view of the aforesaid decision of the Tribunal, comparables at Sl.Nos.4 & 13 of the list of comparables chosen by the TPO have to be excluded for the purpose of comparison
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while determining the ALP of the impugned transaction in this appeal.”
In so far as the third and fourth substantial questions of law raised in the present appeal are concerned, the learned ITAT in its Order dated 16/05/2014 has given the findings, the relevant portion of which is quoted below for ready reference:- “15. As far as companies at Sl.No.1, 2 and 18 of the list of comparable chosen by the TPO are concerned, it si not in dispute that the related party transaction of these comparable companies was more than 15%. This Tribunal in the case of 24/7 Customer Com Pvt. Ltd., ITA No.27/Bang/2010 (supra), had held that where comparables have related party transactions which are in excess of 15% of its total receipts, then such companies cannot be chosen for the purpose of comparison. Following are the relevant observations of the Tribunal:- … … … … … …
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In view of the above, the aforesaid comparable at Sl.No. 1, 2 and 18 of the list of comparable chosen by the TPO should also be excluded for the purpose of comparison while determining the ALP of the international transaction in question.”
In so far as the fifth and sixth substantial questions of law raised in the present appeal are concerned, the learned ITAT in its Order dated 16/05/2014 has given the findings, the relevant portion of which is quoted below for ready reference:-
“33. We are now left with ground no.15, which reads as follows: “15. treating foreign exchange gain or loss as non-operating in nature, in the process of determining the ALP.”
With regard to the aforesaid ground the plea of the assessee before us was that the TPO has excluded foreign exchange gain/loss while computing the operating margins of comparable companies and the assessee. It
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was his submission that the exchange gain or loss arises on account of factors like realization of sales, payment to suppliers and restatement of the values of assets and liabilities. These causes/factors are operating in nature. It was submitted that the same should be treated as operating in nature as the same emanates from the business operations. In this regard the assessee invites your honour’s attention to para 134, page 46 of OECD Draft Guidelines on Transactional Profit Methods, which is extracted below: ... … … … … … The learned counsel further invited out attention to Bangalore ITAT decision in the case of Sap Labs Pvt Ltd V ACIT 6 ITR (Trib) 81, wherein it has been held that foreign exchange gain needs to be considered as operating in nature while determining arm’s length price. The relevant observation of Bangalore ITAT are as follows: … … … … … …
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It was submitted that the above decision is in context of determining arm’s length price and therefore the assessee submits that foreign exchange loss or gain should be considered as operating in nature. During the year under consideration, assessee earned foreign exchange gain of Rs, 31, 06,034. Based on above, the assessee submits that foreign exchange gain should be considered as operating in nature. 34. On the above issue, the DRP has given its finding as follows: … … … … … … 35. We are of the view that in the light of the subsequent decisions rendered by the Tribunal, it would be just and appropriate to direct the TPO/assessing Officer to consider the question of including foreign exchange gain as part of the operating profits for fresh consideration. We hold and direct accordingly.”
However, this Court in a recent judgment in I.T.A.No.536/2015 c/w. I.T.A.No.537/2015 (Pr.
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Commissioner of Income Tax, Bangalore and Another Vs. M/s. Softbrands India P.Ltd.,) rendered on 25-06-2018, 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 and 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
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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 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.
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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.” 7. Having heard the learned counsel for the appellant – Revenue, this Court is satisfied that no substantial question of law would arise in the present
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case and the appeal filed by the Revenue is therefore, liable to be dismissed. Accordingly, it is dismissed. No costs.
Sd/- JUDGE
Sd/- JUDGE
BMV*