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1/13 IN THE HIGH COURT OF KARNATAKA, BENGALURU
DATED THIS THE 6TH DAY OF JULY 2018
PRESENT
THE HON'BLE Dr.JUSTICE VINEET KOTHARI
AND
THE HON’BLE Mrs.JUSTICE S.SUJATHA
I.T.A.No.831/2017
BETWEEN:
THE Pr. COMMISSIONER OF INCOME-TAX, CIT(A) 5TH FLOOR, BMTC BUILDING, 80 FEET ROAD, KORMANGALA, BENGALURU-560 095.
THE DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-3(1)(2), 2ND FLOOR, BMTC BUILDING, 80 FEET ROAD, KORMANGALA, BENGALURU-560 095.
…APPELLANTS (BY Mr. ARAVIND K.V. ADV.)
AND:
M/s. GT NEXUS SOFTWARE PVT. LTD., THE SIRIUS, 69/3, MILLERS ROAD, BENGALURU – 560 052. PAN: AACCG 2941D
…RESPONDENT (BY Mr. CHYTHANYA K.K ADV.)
THIS I.T.A IS FILED U/S.260-A OF INCOME TAX ACT, 1961 PRAYING TO 1. FORMULATE THE SUBSTANTIAL
Date of Judgment 06-07-2018 I.T.A.No.831/2017 The Pr. Commissioner of Income-tax, CIT(A) & Anr. Vs. M/s. GT Nexus Software Pvt. Ltd.,
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QUESTIONS OF LAW STATED ABOVE. 2. ALLOW THE APPEAL AND SET ASIDE THE ORDERS PASSED BY THE INCOME-TAX APPELLATE TRIBUNAL, BENGALURU IN IT(TP)A No. 409/BANG/2016 DATED 18.04.2017 AND CONFIRM THE ORDER OF THE DRP CONFIRMING THE ORDER PASSED BY THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-3(1)(2), BENGALURU AND ETC.
THIS I.T.A. COMING ON FOR ADMISSION, THIS DAY S.SUJATHA J. DELIVERED THE FOLLOWING:-
JUDGMENT
Mr. Aravind K.V. Adv. for Appellants-Revenue 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 ‘B’, dated 18.04.2017 passed in IT(TP)A No.409/Bang/2016 for the A.Y.2011-12.
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 06-07-2018 I.T.A.No.831/2017 The Pr. Commissioner of Income-tax, CIT(A) & Anr. Vs. M/s. GT Nexus Software Pvt. Ltd.,
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“1. “Whether, on the facts and in the circumstances of the case and in law, the order of the Tribunal is not perverse in holding that the size and turnover of the company are deciding factors for treating a company as a comparable and consequently erred in excluding certain comparable’s in the case of the taxpayer?
“Whether, on the facts and circumstances of the case, the Tribunal is right in law in setting aside the re-computation of deduction under section 10A of the Act by following the decision of this Hon’ble High Court in the case of CIT v/s. Tata Elxsi which has not reached finality?
“Whether, on the facts and circumstances of the case, the Tribunal is right in law in directing assessing authority/Transfer Pricing Officer to exclude certain comparable based on functional dissimilarity even when the TPO has chosen the said comparable by applying qualitative and quantitative filters when culling out comparable companies”?
Regarding substantial question of law No.2 :-
Date of Judgment 06-07-2018 I.T.A.No.831/2017 The Pr. Commissioner of Income-tax, CIT(A) & Anr. Vs. M/s. GT Nexus Software Pvt. Ltd.,
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The controversy is no longer res integra and is covered by the decision of the Division Bench of this Court in the case of M/s.Tata Elxsi Ltd., vs. Asst.Commissioner of Income Tax, decided on 20.10.2015 since reported in (2015) 127 DTR 0327 (Kar), which has been affirmed by 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).
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:- “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
Date of Judgment 06-07-2018 I.T.A.No.831/2017 The Pr. Commissioner of Income-tax, CIT(A) & Anr. Vs. M/s. GT Nexus Software Pvt. Ltd.,
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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.
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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 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
Date of Judgment 06-07-2018 I.T.A.No.831/2017 The Pr. Commissioner of Income-tax, CIT(A) & Anr. Vs. M/s. GT Nexus Software Pvt. Ltd.,
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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”.
Regarding substantial question of law Nos.1 and 3:-
The learned Tribunal, after discussing the rival contentions of both the Appellants-Revenue and the Respondent-assessee, has given the following findings against Revenue with regard to various issues raised before it with regard to ‘Transfer Pricing’ and ‘Tran sfer Pricing Adjustments’ made by the concerned authorities below. We consider it appropriate to quote relevant portion of the order of Tribunal which runs as hereunder:-
“Therefore even if we apply the 10 times tolerance range of assessee's turnover in respect
Date of Judgment 06-07-2018 I.T.A.No.831/2017 The Pr. Commissioner of Income-tax, CIT(A) & Anr. Vs. M/s. GT Nexus Software Pvt. Ltd.,
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of the comparable companies then by considering the turnover of assessee of Rs.18.18 Crores, the companies which are having the turnover less than Rs.1.8 Crores and more than Rs.181 Crores will be excluded. Accordingly, apart from the functional dissimilarity, the following companies will be excluded by applying this parameter of turnover tolerance range of 10 times of assessee's turnover on both sides : 1. Infosys Technology Ltd. Rs.25,385 Crores. 2. L&T Infotech Ltd. Rs.2,331.81 Crores. 3. Mindtree Limited (Seg.) Rs.871.30 Crores. 4. Persistent Systems Rs.610 Crores. 5. R S Software Ltd. Rs.188.26 Crores. 6. Sasken Communications Ltd. Rs.394.20 Crores 7. Tata Elxsi Ltd. (Seg.) Rs.358.20 Crores. It is pertinent to note that the DRP has applied the turnover filter and the revenue has challenged the same therefore, the issue of turnover filter has been a subject matter in these appeals. Accordingly, these 7 companies are directed to be excluded.”
Date of Judgment 06-07-2018 I.T.A.No.831/2017 The Pr. Commissioner of Income-tax, CIT(A) & Anr. Vs. M/s. GT Nexus Software Pvt. Ltd.,
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“E-Infochips Limited. 12. The functional comparability of this company has been considered by the Delhi Bench of the Tribunal in the case of Saxo India Pvt. Ltd. Vs. ACIT (supra) in para 10.1 to 10.2 as under :
“ (i) E-Infochips Limited:
10.1. The Transfer Pricing Officer included this company in the list of comparables. On being called upon to explain as to why it should not be considered as a comparable, the assessee contended that there was functional dissimilarity inasmuch as this company was engaged in software development and IT enabled services and also Products. The Transfer Pricing Officer observed that the revenues of this company from Products was only 15% of total revenue and hence the same qualified to be eligible for comparison. The DRP did not allow any relief.
Date of Judgment 06-07-2018 I.T.A.No.831/2017 The Pr. Commissioner of Income-tax, CIT(A) & Anr. Vs. M/s. GT Nexus Software Pvt. Ltd.,
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10.2. After considering the rival submissions and perusing the relevant material on record, we find that the Annual report of this company is available in the paper book with its Profit and loss account at page 1025. Schedule of Income indicates its operating revenue from software development, hardware maintenance, information technology, consultancy etc. Revenue from hardware maintenance stands at Rs. 3.92 crore, which has been considered by the Transfer Pricing Officer himself as sale of products. Such sale of products constitutes 15% of total revenue. There is no segmental information available as regards the revenue from sale of products and revenue from software development segment. As the assessee is simply engaged in rendering software development services and there is no sale of any software products, this company, in our considered opinion, ceases to be comparable. It is obvious that from
Date of Judgment 06-07-2018 I.T.A.No.831/2017 The Pr. Commissioner of Income-tax, CIT(A) & Anr. Vs. M/s. GT Nexus Software Pvt. Ltd.,
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the common pool of income from both the streams of software products and software services, one cannot deduce the revenue from software services and no one knows the impact of revenue from Products on the overall kitty of profit, which may be significant. Since no segmental data of this company is available indicating operating profit from software development services, we order to exclude this company from the list of comparables.”
Accordingly following the order of the Delhi Bench of ITAT, we direct the TPO/A.O. to exclude this company from the set of 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 established by the appellant, the appeal at the instance
Date of Judgment 06-07-2018 I.T.A.No.831/2017 The Pr. Commissioner of Income-tax, CIT(A) & Anr. Vs. M/s. GT Nexus Software Pvt. Ltd.,
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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 list of comparables have been rightly applied or
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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 06-07-2018 I.T.A.No.831/2017 The Pr. Commissioner of Income-tax, CIT(A) & Anr. Vs. M/s. GT Nexus Software 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. The appeal filed by the Appellants-Revenue is liable to be dismissed and it is dismissed accordingly. No costs.
Sd/- JUDGE
Sd/-
JUDGE