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1/14 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.334/2015
BETWEEN
PRINICIPAL COMMISSIONER OF INCOME TAX CR BUILDING, QUEENS ROAD, BANGALORE-560001.
DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-12(2), BANGALORE.
... APPELLANTS
(BY MR.E.I.SANMATHI, ADV.)
AND
M/S. NOVELL SOFTWARE DEVELOPMENT (INDIA) PVT. LTD., “LAUREL”, BLOCK-D, 65/2, BAGMANE TECH PARK, C V RAMAN NAGAR, BYRASANDRA POST, BANGALORE-560093. PAN: AAACN 6992K.
... RESPONDENT
(BY MR.SANDEEP HUILGOL, ADV. FOR MR. T.SURYANARAYANA, ADV.)
Date of Judgment 18-07-2018 I.T.A.No.334/2015
Principal Commissioner of Income Tax & Anr Vs.
M/s. Novell Software Development (India) Pvt. Ltd., 2/14
THIS I.T.A IS FILED UNDER SECTION 260-A OF THE INCOME-TAX ACT, 1961 PRAYING TO (A) 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. (B) SET ASIDE THE APPELLATE ORDER DATED: 13/02/2015 PASSED BY THE ITAT, 'B' BENCH, BENGALURU, IN APPEAL PROCEEDINGS NO. IT(TP)A NO. 1047/BANG/2011 ANNEXURE-A AS SOUGHT FOR IN THIS APPEAL ETC.
THIS I.T.A. COMING ON FOR HEARING, THIS DAY S.SUJATHA J. DELIVERED THE FOLLOWING:-
JUDGMENT
Mr. E.I.Sanmathi, Adv. for Appellants-Revenue Mr. Sandeep Huilgol for Mr.T.Suryanarayana, Advs. for Respondent-Assessee
This Appeal is filed by the Appellants-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.1047/Bang/2011 dated 13.02.2015 relating to the Assessment Year 2005-06.
This appeal has been ADMITTED on 17.03.2016 to consider the following substantial questions of law framed by the learned counsel for the Appellants-Revenue:
Date of Judgment 18-07-2018 I.T.A.No.334/2015
Principal Commissioner of Income Tax & Anr Vs.
M/s. Novell Software Development (India) Pvt. Ltd., 3/14
(1) “Whether, on the facts and in the circumstances of the case, the Hon’ble Tribunal erred 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 taxpayer and without adducing the basis for arriving at the 15% cut off for RPT filter, in the case of the tax payer?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal erred in holding that the size and turnover of the company are deciding factors for treating a company as a comparable and accordingly erred in excluding M/s.Igate Global Solutions Ltd., Flextronics Software Systems Ltd., and L&T Infotech Ltd.,?
(3) Whether, on the facts and in the circumstances of the case, the Tribunal in excluding Tata Elxsi Ltd., and Sankhya Infotech Ltd., on the basis of decision in a different case for a different financial year while the comparable is qualifying all the qualitative and quantitative filters applied by the TPO and also erred in not appreciating the functional similarity of the taxpayer with that of Tata Elxsi Ltd., and Sankhya Infotech Ltd.?
Date of Judgment 18-07-2018 I.T.A.No.334/2015
Principal Commissioner of Income Tax & Anr Vs.
M/s. Novell Software Development (India) Pvt. Ltd., 4/14
(4) Whether, on the facts and in the circumstances of the case, the Tribunal erred in including Melstar Information Technologies Ltd., on the basis of mere submission of the tax payer and not appreciating that the restructure of the business has an effect on the margins of the Melstar?”
The learned Tribunal, after discussing the rival contentions of both the Appellants-Revenue and Respondent-Assessee, has returned findings as under: Regarding substantial question of law No.1
“13. We have heard the rival submissions. As regards the improper application of the RPT filter by the CIT(A), it is not in dispute before us that this Tribunal, in the cases of 24/7 Customer Pvt. Ltd. (ITA No.227/Bang/2010), and Sony India Private Ltd. reported in (2009) 315 ITR (80) 150 (Del.) and various other cases has taken a view that comparables having RPT of upto 15% of total revenues can be considered. In view thereof, the Revenue’s on this ground has to be allowed. It is held that the CIT(A) ought to have adopted a threshold limit of 15% of the total revenue attributable to related party transaction as ground for rejecting comparable companies. Consequently it is held that comparable
Date of Judgment 18-07-2018 I.T.A.No.334/2015
Principal Commissioner of Income Tax & Anr Vs.
M/s. Novell Software Development (India) Pvt. Ltd., 5/14
companies having RPT upto 15% of the total revenues alone can be included. The Revenue’s contention that comparables with RPT upto 25% can be considered is without any basis.”
Regarding substantial question of law No.2:
“16. The submission of the Assessee in this regard and correct and in the light of the decisions referred in the earlier para, we hold that igate Global solutions Ltd., Flextronics Software Systems Ltd. And L & T Infotech Ltd would have to be excluded as comparable companies as these companies have turnover above Rs.200 Crores. So also Tata Elxsi Ltd., would have to be excluded as not comparable in the light of the decision in the case of Logica Pvt. Ltd.(supra).”
Regarding substantial question of law No.3
Sankhya Infotech Limited (‘Sankhya’)
It was submitted by the learned counsel for the Assessee that Sankhya is engaged in the business of development of software products & services and training. The company focuses on the development of niche products for the
Date of Judgment 18-07-2018 I.T.A.No.334/2015
Principal Commissioner of Income Tax & Anr Vs.
M/s. Novell Software Development (India) Pvt. Ltd., 6/14
transport and aviation industry. However, segmental information in relation to the above mentioned activities is not available in public domain. Therefore, as Sankhya engages itself in products and services as well as software training, it cannot be considered as a comparable of the Appellant. The products developed and owned by Sankhya are listed below: xxxx
xxxx
The Delhi Tribunal in ITO v. Colt Technology Services India Pvt. Ltd. (judgment dated 23.10.2012 in ITA No. 609I/Del/2011 for the assessment year 2005-06) has held that the said company is not a comparable to the assessee therein which was also in the business of software development.
The submissions made by the learned counsel for the Assessee are considered. The activities set out above and the decision of the Delhi ITAT rendered in the context of a software development company such as the Assessee makes it amply clear that this company Sankhya cannot be regarded as a comparable. The same is
Date of Judgment 18-07-2018 I.T.A.No.334/2015
Principal Commissioner of Income Tax & Anr Vs.
M/s. Novell Software Development (India) Pvt. Ltd., 7/14
directed to be excluded from the list of comparable companies.”
Regarding substantial question of law No.4:
Melstar Information Technologies Ltd. (Melstar): As far as this company is considered, the same was chosen as comparable company by the Assessee in its TP study. The TPO rejected Melstar stating the following:- xxxx
It is the submission of the learned counsel for the Assessee before us that that Melstar passes all filters applied by the TPO in his order and is functionally comparable. The filters applied by TPO and their satisfaction was tabulated as under: xxxx
It was further pointed out by him that the TPO has concluded that Melstar is not comparable on the ground that there was an extraordinary debit of Rs. 2.85 Cr and on the ground that the company’s sales are diminishing. A perusal of the revenues of the previous financial years (page 81 of the TP order) demonstrates that the revenues are more or less consistent for the
Date of Judgment 18-07-2018 I.T.A.No.334/2015
Principal Commissioner of Income Tax & Anr Vs.
M/s. Novell Software Development (India) Pvt. Ltd., 8/14
previous financial years and has only substantially decreased in the financial year 2004-05. The relevant extract of the Annual Report (Page 4) is reproduced below: xxxx
xxxx 24. In view of the above, it was submitted that since Melstar is functionally comparable to the assessee and clears all the filters applied by the TPO, the same should be considered as comparable with Net Cost Plus margin of 3.26%.
The submissions are considered and found to be acceptable. As rightly pointed out by the learned counsel for the Assessee, Melstar passes all the tests of comparability adopted by the TPO. The extraordinary item of expenditure, if removed, would render this company as a company revenues of which are not diminishing. Melstar therefore deserves to be included as a comparable company. We hold accordingly.
The learned counsel for the assessee submitted that the Assessee has a policy of charging a higher rate of depreciation as compared to the companies selected by the TPO and the CIT(A). It was therefore submitted by him that there is a need for making an adjustment to
Date of Judgment 18-07-2018 I.T.A.No.334/2015
Principal Commissioner of Income Tax & Anr Vs.
M/s. Novell Software Development (India) Pvt. Ltd., 9/14
eliminate differences in the accounting policies of the assessee and the comparable companies. The learned counsel for the Assessee submitted that the assessee’s depreciation policy for the year was as below (available in the annual report of the assessee at page 8 of the paper book filed):- xxxx
Most other companies provide for depreciation at the rates specified in the Companies Act. The depreciation policies of a few comparables selected by CIT(A), as available in their annual reports, is as below:-
Bodhtree Consulting Ltd. xxxx
Lanco Global Systems Ltd.
xxxx
Sankhya Infotech Ltd.
xxxx
Visual Soft Technologies Ltd.
xxxx
The learned counsel for the Assessee further submitted the rationale for making depreciation adjustment. He pointed out that Rule10B of the Income-tax Rules, 1962 [‘the Rules’] provides the
Date of Judgment 18-07-2018 I.T.A.No.334/2015
Principal Commissioner of Income Tax & Anr Vs.
M/s. Novell Software Development (India) Pvt. Ltd., 10/14
method in which the comparability analysis is to be conducted under the Transactional Net Margin Method. Under sub-clause (i) of Rule 10B(1)(e), the net profit margin realised by the taxpayer from an international transaction is computed having regard to a relevant base e.g. costs incurred, sales effected, etc. Under sub-clause (ii) of Rule 10B(1)(e), the net profit margin realised by an unrelated enterprise/comparable company is computed having regard to the same relevant base as was selected in sub-clause (i).
Sub-clause (iii) of the said Rule specifies that before a comparison of the net margins realised under sub- clauses (i) and (ii) is done, the net margin realised under sub-clause (ii) must be adjusted to take into account the differences which could materially affect the net profit margin in the open market. Relevant extracts of Rule 10B(1)(e)(iii) are reproduced as under:- xxxx
According to ld. counsel for the assessee, based on the above, there was a need for making an adjustment on account of difference between the net margin of the assessee and that of the comparable companies. It was further pointed out by him that Rule 10B(3) of the Rules provides that
Date of Judgment 18-07-2018 I.T.A.No.334/2015
Principal Commissioner of Income Tax & Anr Vs.
M/s. Novell Software Development (India) Pvt. Ltd., 11/14
an uncontrolled transaction shall be considered as a comparable if:
a) none of the differences between the comparable company and the controlled transaction are likely to materially affect the profit arising from such transactions in the open market; or
b) reasonably accurate adjustments can be made to eliminate the material effect of such differences.”
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 18-07-2018 I.T.A.No.334/2015
Principal Commissioner of Income Tax & Anr Vs.
M/s. Novell Software Development (India) Pvt. Ltd., 12/14
“ 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 18-07-2018 I.T.A.No.334/2015
Principal Commissioner of Income Tax & Anr Vs.
M/s. Novell Software Development (India) Pvt. Ltd., 13/14
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.” 5. In the circumstances, having heard the learned Counsel appearing for both the sides, We are of
Date of Judgment 18-07-2018 I.T.A.No.334/2015
Principal Commissioner of Income Tax & Anr Vs.
M/s. Novell Software Development (India) Pvt. Ltd., 14/14
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