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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.504/2014
BETWEEN:
THE COMMISSIONER OF INCOME-TAX C.R. BUILDING, QUEENS ROAD BANGALORE.
THE INCOME-TAX OFFICER WARD-11(2) RASHTROTHANA BHAVAN NRUPATHUNGA ROAD BANGALORE.
…APPELLANTS (By Mr. K.V. ARAVIND, ADV.)
AND:
M/S. JULY SYSTEMS & TECHNOLOGIES PVT. LTD., No.17/9C, 17/4C, 4TH FLOOR MARUTHI CHAMBERS, RUPENA AGRAHARA NEAR CENTRAL SILK BOARD HOSUR ROAD, BANGALORE-560068.
…RESPONDENT (By Mr. S. SHARATH, ADV., FOR Mr. CHYTHANYA K.K. ADV.,)
THIS I.T.A. IS FILED UNDER SECTION 260-A OF INCOME TAX ACT 1961, PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED ABOVE. ALLOW THE APPEAL AND
Date of Judgment 13-07-2018 I.T.A.No.504/2014 The Commissioner of Income-tax & Anr. Vs. M/s. July Systems & Technologies Pvt. Ltd.,
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SET ASIDE THE ORDERS PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, BANGALORE IN IT(TP)A No.1203/Bang/2011 DATED 11-07-2014 ANNEXURE-D AND CONFIRM THE ORDER PASSED BY THE INCOME TAX OFFICER, WARD-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 (for short ‘Act’) raising purportedly certain substantial questions of law arising from the order of the Income Tax Appellate Tribunal, ‘A’ Bench, Bangalore (for short ‘Tribunal’) dated 11.07.2017 passed in I.T (TP)A No.1203/Bang/2011 for the A.Y.2007-08.
This Appeal is filed to consider the following substantial questions of law as framed by the Revenue in the Memorandum of Appeal: “1. Whether, on the facts and in the circumstances of the case, the Tribunal was right
Date of Judgment 13-07-2018 I.T.A.No.504/2014 The Commissioner of Income-tax & Anr. Vs. M/s. July Systems & Technologies Pvt. Ltd.,
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in directing the assessing officer to exclude the telecommunication expenses of Rs.32,29,985/- and expenses incurred in foreign currency of Rs.71,35,610 both from the export turnover as well as the total turnover without appreciating the fact that there is no provision in section 10A that such expenses should be reduced from the total turnover, as clause (iv) of the Explanation 2 to section 10A provides that such expenses are to be reduced only from the export turnover?.
Whether the Tribunal was justified, on the facts and in the circumstances of the case, in allowing relief to the assessee by relying on the decision of the High Court in the case of Tata Elxsi Ltd., 349 ITR 98 without appreciating that the decision of the High Court has not reached its finality and SLPs have been filed against such orders on this issue in a number of cases including the case of Tata Elxsi Ltd.,?.
Whether, the Hon’ble Tribunal was correct in holding that the functions of the assessee is not comparable to the functions of Accel Transmatics Limited, KALS Information Systems Ltd (seg.), Avani Cimcon Technologies Limited and Celestial Labs Ltd by relying on the decisions of the co-ordinate benches rendered in other cases
Date of Judgment 13-07-2018 I.T.A.No.504/2014 The Commissioner of Income-tax & Anr. Vs. M/s. July Systems & Technologies Pvt. Ltd.,
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and applying the decisions to the facts of the assessee without making a FAR analysis of the assessee and the companies which it directed to be omitted from the list of comparables and without appreciating that the comparables satisfy all the qualitative and quantitative filters applied by the TPO?.
Whether, on the facts and circumstances of the case, the Tribunal was correct in following the decisions of the other benches of the Tribunal while rejecting the comparables included by the TPO in the final list without appreciating that the selection of comparables in a case depends upon assessee specific FAR analysis and without appreciating the specific facts brought on record by the TPO?.
Whether, on the facts and circumstances of the case, the Tribunal was correct in not appreciating the fact that if any filter or criteria applied by the taxpayer for search of comparables is accepted or any filter or criteria applied by the TPO is relaxed, the entire accept/reject matrix changes resulting in a new comparable set including those companies which are neither taken by the assessee nor by the TPO in his final comparable set and which may not be
Date of Judgment 13-07-2018 I.T.A.No.504/2014 The Commissioner of Income-tax & Anr. Vs. M/s. July Systems & Technologies Pvt. Ltd.,
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finding place in the TP order under section 92CA?”.
Though this Appeal has been ADMITTED on 17.04.2015 to consider the substantial questions of law Nos.3,4 and 5, learned Counsel for the Appellants- Revenue submits that Substantial Question Nos.1 and 2 is covered by the Judgment 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).
Regarding Substantial Question of Law Nos.1 and 2: The issue is covered by the decision of the Hon’ble Supreme Court in the case of HCL Technologies Ltd. (supra). 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:-
Date of Judgment 13-07-2018 I.T.A.No.504/2014 The Commissioner of Income-tax & Anr. Vs. M/s. July Systems & Technologies Pvt. Ltd.,
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“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 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
Date of Judgment 13-07-2018 I.T.A.No.504/2014 The Commissioner of Income-tax & Anr. Vs. M/s. July Systems & Technologies Pvt. Ltd.,
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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. 20. 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”.
The learned Tribunal, after discussing the rival contentions of both the appellants-Revenue and the Respondent-assessee, has returned the findings as under:
Regarding substantial question of law Nos. 3, 4 and 5: “11. Improper selection of comparables: It was submitted by the learned counsel for the assessee that the following 4 companies are not
Date of Judgment 13-07-2018 I.T.A.No.504/2014 The Commissioner of Income-tax & Anr. Vs. M/s. July Systems & Technologies Pvt. Ltd.,
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functionally comparable with that of the Assessee.
a) Avani Cincom Technologies Ltd.
b) KALS Information Systems Limted
c) Celestial Labs Limited
d) Accel Transmission Limited In this regard our attention was drawn to the decision of the Hon’ble ITAT Bangalore Bench in the case of Trilogy 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 comparable companies in the case of Trilogy E-Business Software India Pvt. Ltd. (supra):
(b) Avani Cimcon Technologies Ltd. xxxx xxxx xxxx
(d) KALS Information Systems Ltd. xxxx
(c) Celestial Labs Ltd. xxxx xxxx xxxx
Date of Judgment 13-07-2018 I.T.A.No.504/2014 The Commissioner of Income-tax & Anr. Vs. M/s. July Systems & Technologies Pvt. Ltd.,
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(e) Accel Transmatic Ltd. xxxx xxxx xxxx
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 assessees 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.”
This Court 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
Date of Judgment 13-07-2018 I.T.A.No.504/2014 The Commissioner of Income-tax & Anr. Vs. M/s. July Systems & Technologies Pvt. Ltd.,
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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 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
Date of Judgment 13-07-2018 I.T.A.No.504/2014 The Commissioner of Income-tax & Anr. Vs. M/s. July Systems & Technologies Pvt. Ltd.,
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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.504/2014 The Commissioner of Income-tax & Anr. Vs. M/s. July Systems & Technologies Pvt. Ltd.,
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The appeals filed by the Revenue are therefore dismissed with no order as to costs.” 7. In the circumstances, having heard the learned Counsel appearing for both the sides, 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 Appellant-Revenue is liable to be dismissed and is accordingly dismissed. No costs.
Sd/- JUDGE
Sd/-
JUDGE