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1/15 IN THE HIGH COURT OF KARNATAKA, BENGALURU
DATED THIS THE 5th DAY OF JULY 2018
PRESENT
THE HON'BLE Dr.JUSTICE VINEET KOTHARI
AND
THE HON’BLE Mrs.JUSTICE S.SUJATHA
I.T.A.No.481/2017
Between:
The Pr. Commissioner of Income-tax, CIT(A) 5th floor, BMTC Building 80 Feet Road, Kormangala Bengaluru-560 095.
The Income-Tax Officer, Ward-11(1), Present Address Ward-2(1)(2), 2nd Floor BMTC Building, 80 Feet Road Kormangala, Bengaluru-560 095.
…Appellants (By Mr. Aravind K.V. Advocate)
And:
M/s. Capco IT Services Pvt. Ltd., Salarpuria Annexe, 351/5-19, Luskar Hosur Road, Koramangala, Bengaluru-560034 PAN: AACCC 1734G.
…Respondent (By Ms. Rashmi R. Advocate)
Date of Judgment 05-07-2018 I.T.A.No.481/2017 The Pr. Commissioner of Income-Tax, CIT (A) & Anr. Vs. M/s. Capco IT Services Pvt. Ltd.,
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This I.T.A. is filed under Section 260-A of Income Tax Act 1961, praying to: 1. Formulate the substantial questions of law stated above. 2. Allow the appeal and set aside the orders passed by the Income-Tax Appellate Tribunal, Bengaluru in ITA No.1340/Bang/2011 dated 9-12-2016 Annexure –D and confirm the order of the DRP confirming the order passed by the Income Tax Officer, Ward-2(1)(2), Bengaluru & etc.
This I.T.A. coming on for Admission, this day Dr. Vineet Kothari J. delivered the following:-
J U D G M E N T
Mr. Aravind K.V. Adv. for Appellants – Revenue Ms. Rashmi R. Adv. for Respondent - Assessee
The Appellants - Revenue have filed this appeal raising purported substantial questions of law arising from the Order of the learned Income Tax Appellate Tribunal Bangalore Bench “B”, Annexure D dated 09/12/2016 in ITA.No.1340/Bang/2011 for AY 2007-08. 2. The Revenue has suggested five substantial questions of law, which are quoted below for ready reference:
Date of Judgment 05-07-2018 I.T.A.No.481/2017 The Pr. Commissioner of Income-Tax, CIT (A) & Anr. Vs. M/s. Capco IT Services Pvt. Ltd.,
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“1. Whether on the facts and circumstances of the case, the Tribunal is correct in directing the assessing officer to exclude expenses incurred in foreign currency and other expenses that has been excluded from ETO, from the total turnover also and accordingly recomputed the deduction under section 10A without appreciating the fact that there is no provision in sec.10A that such expenses should be reduced from the total turnover also as clause (iv) of the Explanation 2 to Sec.10A provides that such expenses are to be reduced only from the export turnover?
Whether on the facts and circumstances of the case, the Tribunal is right in law in excluding certain comparable on the ground of functional dissimilarity even when Transfer Pricing Officer has rightly chosen the same considering its functions which are similar to assessee’s and has satisfied all the required tests and without doing an FAR analysis of the taxpayer with those other cases?
Date of Judgment 05-07-2018 I.T.A.No.481/2017 The Pr. Commissioner of Income-Tax, CIT (A) & Anr. Vs. M/s. Capco IT Services Pvt. Ltd.,
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Whether on the facts and circumstances of the case, the Tribunal is right in law in directing TPO to give working capital adjustment considering the comparables after exclusion of the three companies for the reason that the assessing authority cannot force an artificial limitation to the actual working capital adjustment ratio derived from the comparable companies?
Whether on the facts and in the circumstances of the case, the Tribunal is right in law in directing the TPO to make appropriate adjustments to be carried out in situations where there are differences between the tested parties and comparable and in such case differences perceptible in the comparable cannot be eliminated on account of adjustment to other wise, then to delete such comparable even when without appreciating that risk adjustment involves two vital preconditions which are difference in risk exists between the tested party and uncontrolled comparable and these factors are missing in the case of assessee ?
Date of Judgment 05-07-2018 I.T.A.No.481/2017 The Pr. Commissioner of Income-Tax, CIT (A) & Anr. Vs. M/s. Capco IT Services Pvt. Ltd.,
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Whether on the facts and in the circumstances of the case, the Tribunal is right in law in directing the TPO to include comparable’s namely, Mars Software International Ltd, Akshay Software Technologies and VJIL Consulting Ltd even when the TPO has rightly rejected same as they do not satisfy the required tests?”
The learned counsel appearing for the Appellants – Revenue, Mr.K.V. Aravind submitted that in so far as the first substantial question of law is concerned, the same is covered by the decision of the Hon’ble Apex 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:-
Date of Judgment 05-07-2018 I.T.A.No.481/2017 The Pr. Commissioner of Income-Tax, CIT (A) & Anr. Vs. M/s. Capco IT Services 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.
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Date of Judgment 05-07-2018 I.T.A.No.481/2017 The Pr. Commissioner of Income-Tax, CIT (A) & Anr. Vs. M/s. Capco IT Services Pvt. Ltd.,
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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.
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”.
In so far as the second and fifth substantial questions of law raised by the Revenue are concerned, the learned counsel for the Revenue submitted that the
Date of Judgment 05-07-2018 I.T.A.No.481/2017 The Pr. Commissioner of Income-Tax, CIT (A) & Anr. Vs. M/s. Capco IT Services Pvt. Ltd.,
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learned ITAT in its Order dated 09/12/2016 has given the findings, the relevant portion of which is quoted below for ready reference:-
“8. We are in agreement to the request of ld. Counsel for the Assessee. The Assessee has relied on the decision of M/s Infineon Technologies India Pvt Ltd., in IT(TP)A 1068/Bang/2011 for rejection of 15 comparables and has accepted 11 comparable selected by TPO. 9. The learned AO/DRP has erroneously rejected the following comparable companies.
Sl.No Companies excluded By TPO Ld.DRP’s grounds For exclusion Appellant’s arguments 1 Akshay Software Technologies Ltd Predominantly Onsite Onsite filter is not a valid Offer. 2 Maars Software International Ltd Functionally not Comparable The company is functionally comparable 3 VJIL Consulting Ltd Predominantly onsite Onsite filter is not a valid filter
Date of Judgment 05-07-2018 I.T.A.No.481/2017 The Pr. Commissioner of Income-Tax, CIT (A) & Anr. Vs. M/s. Capco IT Services Pvt. Ltd.,
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We direct the TPO to include Akshay Software Technologies Ltd., (2) Maars Software International Ltd and (3) VJIL Consulting Ltd., for the reasons by the Assessee.”
In so far as the third substantial question of law raised by the Revenue is concerned, the learned counsel for the Revenue submitted that the ITAT in its Order dated 09/12/2016 has recorded the findings the relevant portion of which is extracted below for ready reference:- “18. We heard both parties. Reliance on the ruling of the Hyderabad Bench of Hon’ble Tribunal in the case of Adaptec (India) P. Ltd Vs. ACIT [ITA Bi, 206/Hyd 2014], wherein it was held that there is no need for making any negative working capital adjustment when assessee does not carry any working capital risk. The relevant extract of the aforementioned judgment is provided below: “ 11. In view of the above, we are of the opinion that assessee’s being similar,
Date of Judgment 05-07-2018 I.T.A.No.481/2017 The Pr. Commissioner of Income-Tax, CIT (A) & Anr. Vs. M/s. Capco IT Services Pvt. Ltd.,
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there is no need for making any negative working capital adjustment when assessee does not carry any capital risk. In fact, TPO should have done necessary working capital adjustment to the profits of the selected comparables so as to make them comparable to the ITA.No.206/Hyd/ 2014 Adaptec (India)P.Ltd., Hyderabad.”
In so far as the fourth substantial question of law raised by the Revenue is concerned, the learned counsel for the Revenue submitted that the ITAT in its Order dated 09/12/2016 has recorded the findings the relevant portion of which is extracted below for ready reference:-
“14. We heard both parties relying on the following Tribunal judgments, wherein comparability economic adjustments are also mandated by the Tribunal.
Date of Judgment 05-07-2018 I.T.A.No.481/2017 The Pr. Commissioner of Income-Tax, CIT (A) & Anr. Vs. M/s. Capco IT Services Pvt. Ltd.,
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Sony India (P) Limited [114 ITD 448] E-Gain Communication Pvt. Ltd [118 ITD 243] Mentor Ruling Motorola Solutions India Private Limited Vs. ACIT [ITA No.5637/Del/2011]
Further, in addition to the above rulings the principle has also been upheld by the recent High Court ruling the case of Chryscapital Investment Advisors (India) Pvt. Ltd. Vs DCIT [ITA 417/2014], wherein the Hon’ble Court has held that appropriate adjustments should be carried out in situations where there are differences between the tested parties and comparables and in case such differences perceptible in the comparables cannot be eliminated on account of adjustments or otherwise, then such comparables have to be rejected.
We direct the TPO to work out appropriate risk adjustment.”
Date of Judgment 05-07-2018 I.T.A.No.481/2017 The Pr. Commissioner of Income-Tax, CIT (A) & Anr. Vs. M/s. Capco IT Services Pvt. Ltd.,
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However, this Court in a recent judgment in I.T.A.No.536/2015 c/w. I.T.A.No.537/2015 (Pr. 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
Date of Judgment 05-07-2018 I.T.A.No.481/2017 The Pr. Commissioner of Income-Tax, CIT (A) & Anr. Vs. M/s. Capco IT Services Pvt. Ltd.,
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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 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
Date of Judgment 05-07-2018 I.T.A.No.481/2017 The Pr. Commissioner of Income-Tax, CIT (A) & Anr. Vs. M/s. Capco IT Services Pvt. Ltd.,
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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.”
Having heard the learned counsel for the appellant – Revenue, this Court is satisfied that no
Date of Judgment 05-07-2018 I.T.A.No.481/2017 The Pr. Commissioner of Income-Tax, CIT (A) & Anr. Vs. M/s. Capco IT Services Pvt. Ltd.,
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substantial question of law would arise in the present 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*