THE COMMISSIONER OF INCOME TAX vs. M/S DELMIA SOLUTIONS PVT LTD.,

1/15 IN THE HIGH COURT OF KARNATAKA, BENGALURU

DATED THIS THE 12TH DAY OF JULY 2018

PRESENT

THE HON’BLE DR.JUSTICE VINEET KOTHARI

AND

THE HON’BLE MRS.JUSTICE S.SUJATHA

I.T.A. No.342/2013

BETWEEN:

... APPELLANTS

(BY SRI. K V ARAVIND, ADV.)

AND:

M/S DELMIA SOLUTIONS PVT. LTD., NO 680, 8TH MAIN JP NAGAR, 2ND PHASE, BANGALORE – 560 078

... RESPONDENT

(BY MS.MANASA ANANTHAN, ADV. FOR SRI.T.SURYANARAYANA, ADV.)

THIS ITA IS FILED UNDER SEC.260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 22/02/2013 PASSED IN ITA NO.845/BANG/2011, FOR THE ASSESSMENT

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YEAR 2007-08, PRAYING TO: I. FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN, II. ALLOW THE APPEAL AND SET ASIDE THE ORDER PASSED BY THE ITAT, BANGALORE IN ITA NO.845/BANG/2011 DATED 22/02/2013 ANNEXURE-D AND CONFIRM THE ORDER OF THE APPELLATE COMMISSIONER CONFIRMING THE ORDER PASSED BY THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-11(1), BANGALORE.

THIS APPEAL COMING ON FOR HEARING, THIS DAY, S. SUJATHA, J., DELIVERED THE FOLLOWING:

J U D G M E N T

Mr. K.V. Aravind, Adv. for Appellants – Revenue. Ms. Manasa Ananthan, Adv., for Mr. T. Suryanarayana, Adv., for Respondent-Assessee

This Appeal is filed by the Revenue purportedly raising substantial questions of law arising from the Order of the Income Tax Appellate Tribunal, Bangalore Bench ‘B’, in IT [TP]A No.845/Bang/2011 dated 22.02.2013, relating to the Assessment Year 2007-08.

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“1. Whether on the facts and in the circumstances of the case and in law the Tribunal was right in super imposing the decisions of the other benches and the decision of the ITAT while rejecting the comparables (i) Accel Transmatic Limited (ii) Avani Cimcon Technologies Limited, (iii) Celestial Labs Limited, (iv) KALS Information Systems Limited, (v) Lucid Software Limited and (vi) Megasoft Limited

without appreciating the fact that selection of comparables in a case depends on assessee specific FAR analysis and recorded a perverse findings?

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assessee company are similar and recorded a perverse finding?

Regarding Substantial Question Nos.1 and 2: 3. The learned Tribunal, after discussing the rival contentions of both the Appellants-Revenue and Respondent-Assessee, has returned findings as under: “ Functional Dissimilarity

3.4 We shall now deal with the improper selection of comparables by the TPO for the reasons that they were functionally different. A. Accel Transmatic Ltd. (Seg): The selection of this company as comparable by the TPO was duly considered by the

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tribunal in the case of trilogy E-Business and the reason recorded in its finding is extracted as under: xxxxxxxxxx

B. Avani Cimcon Technologies Ltd:

The selection of this company as comparable by the TPO was rejected by the earlier Bench of the Tribunal in trilogy E-Business for the reasons that- xxxxxxxxx

C. Celestial Labs. Ltd:

This Company was also selected by the TPO as comparable. However, on due consideration of the issue, the earlier Bench of this Tribunal in Trilogy E-Business had opined that this company cannot be as comparable on the ground that- xxxxxxxxxx

D. KALS Information System Ltd (Seg): Incidentally, the selection on this company as comparable by the TPO was rejected by the Tribunal in the case of Trilogy E-Business on

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the premise that the information obtained by the TPO by issuance of notice u/s 133(6) of the Act was not, however, available in public domain.

The reasons recorded, for appreciation of facts, are extracted hereunder: xxxxxxxxxxxx

3.4.1 In conformity with the findings of the coordinate Bench of the Tribunal in the case of Trilogy E-Business, we are of the considered view that (i) Accel Transmatic Ltd (Seg); (ii) Avani Cimcon Technologes Ltd; (iii) Celestial Labs. Ltd., & (iv) KALS Information Systems Ltd (seg) cannot qualify as comparables in the case of the assessee under consideration. It is ordered accordingly.

E) Lucid Software Limited

3.4.2. The above company has been rejected as comparable in the case of Telcordia Technologies Pvt. Ltd. v. ACIT (supra). The submission and the finding of the Hon’ble Mumbai Tribunal is reproduced below:- xxxxxxxxxxx

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3.4.3 The objections raised by the assessee for inclusion of Lucid Software Ltd. as a comparable is placed at pages 244 to 248 of the paper book filed by the assessee. We find identical objection has been raised against the inclusion of Lucid Software in the cae of Telcordia Technologies. Since the facts and the assessment year are identical, following the order of the Tribunal in the case of Telcordia Technologies Pvt. Ltd. V. ACIT (supra), we direct the Assessing Officer/TPO not to include Lucid Software Limited as a comparable.

3.4.4 After excluding from the TPO’s list of comparables, the companies having turnover exceeding Rs.200 crores and five companies which are functional dissimilar to that of the assessee, the following thirteen companies in TPO list are retained as comparables:-

Sl.No. Name of the Company 1 Datamatics Limited 2 E Zest Solutions Limited 3 Geometric Ltd. [seg]

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4 Helios & Matheson Information Technology Ltd., 5 Ishir Infotech Ltd., 6 LGS Global Ltd., [Lanco Global Solutions Ltd.,] 7 Mediasoft Solutions Pvt. Ltd 8 Megasoft Ltd. [Seg] 9 Quintegra Solutions Ltd 10 R S Software [India] Ltd 11 R Systems International Ltd [Seg] 12 SIP Technologies & Exports Ltd 13 Thirdware Solutions Ltd [Seg]

3.4.5. The above companies have been retained as comparables in conformity with the findings of the earlier Bench in the cases of Trilogy E-Business and Telcordia Technologies Pvt. Ltd.(supra).

(F) Megasoft : It is to be noted that in the case of Trilogy E-Business, the Tribunal turned down the plea of the assessee that M/s. Megasoft Ltd should be rejected as comparable. However, the Tribunal accepted the alternative submission of the assessee that the segmental profit margin is to be

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reckoned with instead of entity level margin and held that the profit margin of 23.11% which is the margin of the software service segment be taken for comparability. The discussion and the findings of the Bench with regard to the acceptance of the alternative submission of the assessee to adopt the segmental margin of 23.11% are reproduced below:

xxxx xxx xxx

3.4.6 In conformity with the findings of the earlier Bench (supra), we are of the considered view that the TPO was justified in selecting M/s. Megasoft Ltd as comparable. However, the AO/TPO is directed to take segmental margins of 23.11% for comparability. It is ordered accordingly.”

Regarding Substantial Question No.3: “3.5.3 Following the Coordinate Bench order of the Tribunal in the case cited supra, we direct the Assessing

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Officer/TPO to exclude, after due verification, those comparables from the list with the related party transactions or controlled transactions in excess of 15% of the total revenue for the financial year 2006-07. It is to be mentioned here, Geometric Ltd. is also to be removed from the comparable list, since that company was having RPT at 19.98% (going by assessee’s own calculation), however, no argument was raised for its exclusion by the assessee, probably, on account of low margin of Geometric Ltd.

Geometric Ltd. is also to be removed from the comparable list, since that company was having RPT at 19.98% (going by assessee’s own calculation), however, no argument was raised for its exclusion by the assessee, probably, on account of low margin of Geometric Ltd.

IV) Calculation of operating income and net margin

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3.6 The TPO had made a reduction of Rs.6,19,336/- to the operating income of Rs.27,68,28,114/- (as considered by the assessee) on the ground that the said income pertains to profit and sale of asset, which would not form part of the operating income. According to the assessee, in the TP study, while arriving at the operating income of Rs.27,68,28,114/-, the assessee had specifically excluded further income amounting to Rs.7,54,385/-, which includes a sum of Rs.6,19,336/- (Schedule 10 to the P&L account).

Therefore, it was contended, reduction made by the TPO is unwarranted.

If Rs.6,19,336/- is not excluded, the operating/net margin of the assessee would be at 12.2% instead of 11.87% fixed by the TPO.

3.6.1 The learned DR present was duly heard.

3.6.2 We have heard the rival submissions and perused the materials on record. The TPO is directed to verify the claim made by the assessee whether a sum of Rs.6,19,336/-

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is already excluded and thereafter, arrived at the operating income of Rs.27,68,28,114/-. If the operating income is arrived at after excluding Rs.6,19,336/- by the assessee in TP study, then no further reduction of the said amount is warranted. Hence, this issue is restored to the file of Assessing Officer/TPO for verification and necessary action, if required. It is ordered accordingly.”

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“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

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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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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.”

Sd/- JUDGE

Sd/- JUDGE AN/-