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1/13 IN THE HIGH COURT OF KARNATAKA, BENGALURU
DATED THIS THE 17TH DAY OF JULY 2018
PRESENT
THE HON’BLE DR.JUSTICE VINEET KOTHARI
AND
THE HON’BLE MRS.JUSTICE S.SUJATHA
I.T.A.No.332/2015
BETWEEN :
THE COMMISSIONER OF INCOME TAX C.R. BUILDINGS, QUEENS ROAD, BANGALORE-560001
THE INCOME TAX OFFICER WARD-12(1), BANGALORE.
...APPELLANTS
(BY SRI E.I.SANMATHI, ADV.)
AND :
M/s MINDTECK (INDIA) LIMITED, 16/3, CAMBRIDGE ROAD, ULSOOR, BANGALORE-560 009, PAN: AAACH 1072Q
…RESPONDENT
(BY SRI S.SANKARA NARAYANAN, ADV.)
THIS INCOME TAX APPEAL IS FILED UNDER SECTION 260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 09/01/2015 PASSED IN ITA NO.1548/BANG/2010, FOR THE ASSESSMENT YEAR 2006-2007 ANNEXURE-A. PRAYING TO: 1.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. 2. SET ASIDE THE APPELLATE ORDER DATED: 09/01/2015 PASSED BY THE ITAT,
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'A' BENCH, BANGALORE, AS SOUGHT FOR, IN THE RESPONDENT-ASSESSEE'S CASE, IN APPEAL PROCEEDINGS IN ITA NO.1548/BANG/2010 FOR A.Y. 2006-2007 ANNEXURE-A.
THIS APPEAL COMING ON FOR HEARING, THIS DAY, S. SUJATHA, J., DELIVERED THE FOLLOWING:
J U D G M E N T
Mr. E.I.Sanmathi, Adv. for Appellants – Revenue. Mr. S.Sankara Narayanan, 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 ‘A’, Bangalore, in IT[TP]A No.1548/Bang/2010 dated 09.01.2015, relating to the Assessment Year 2006-07.
The appeal has been admitted on 17.03.2016 to consider the substantial questions of law No.3 to 5 as indicated in the memorandum of appeal. However, learned counsel for the Revenue seeks to consider all the substantial questions of law framed in the memorandum of appeal, which reads as under:
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“1. Whether on the facts and in the circumstances of the case, the Tribunal is right in law in directing the AO to allow deduction under section 10A without setting off the losses of non- 10A units against the profit of STP units when as per the amended provisions of section 10A w.e.f. 1/4/2001, the deduction under section 10A has to be finally allowed from the total income of the assessee and total income is computed after aggregation of the profits/losses of various units and after setting off of brought forward losses/unabsorbed depreciation relation to the earlier assessment year?
Whether on the facts and in the circumstances of the case, the Tribunal is right in law in directing the AO to exclude the expenditure incurred in foreign currency towards communication charges and travel expenses both from the export turnover and the total turnover when there is no provision in section 10A which requires the concerned expenses which are required to be reduced from the export turnover as per clause (iv) of the Explanation to section 10A to be reduced from the total turnover also?
Whether on the facts and in the circumstances of the case, the Tribunal is right in
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law 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 the comparables, Flextronics, Infosys Ltd., iGate Solutions Ltd., Mindtree Consulting Ltd., Sasken Communication Technologies Ltd., Tata Elxsi, Persistant Systems in software development segment?
Whether on the facts and in the circumstances of the case, the Tribunal is right in law in excluding uncontrolled comparables having turnover more than Rs.200 crores in the absence of turnover criterion prescribed in Rule 10B of I.T.Rules and also there being no correlation between turnover and profit margin?
Whether on the facts and in the circumstances of the case, the Tribunal is right in law in holding that Tata Elxsi, M/s Accel Transmatics Ltd., and KALS Information Systems Ltd., being functionally different, cannot be taken as comparables when the said comparables satisfied all the qualitative and quantitative filters applied by the TPO and super imposing the decision in the case of different assessee to reject these comparables when the selection of comparables in a case depends in transfer pricing
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on assessee specific FAR analysis and without considering the comparability of these companies on the basis of specific facts brought on record by the TPO in the case of the assessee?”
Regarding Substantial Question of law No.1: 3. Learned counsel for the appellants-Revenue Mr.K.V.Aravind has submitted that the Hon'ble Supreme Court has settled the controversy in the case of Commissioner of Income-tax V/s. Yokogawa India Ltd., [(2017) 77 taxmann.com 41 (SC)] and therefore the said controversy is covered by the decision of the Hon'ble Supreme Court. The question is accordingly answered in the same terms.
Regarding Substantial Question of law No.2: 4. The issue is covered by the decision 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).
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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 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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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 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”.
The learned Tribunal, after discussing the rival contentions of both the Appellants-Revenue and
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Respondent-Assessee, has returned the findings as under: Regarding Substantial Question of law Nos.3 and 4: “12. We have considered the submissions of the learned counsel for the Assessee and the learned DR. We are of the that the additional grounds sought to be raised have to be admitted for adjudication as held by the Special Bench in the case of Quark Systems Ltd. (supra). We are also of the view that the entire exercise to be carried out u/s.92 of the Act is determination of ALP and in doing so, the revenue should not be allowed to plead admission by the Assessee, though erroneous or was made under particular circumstances and therefore are not final and binding, as conclusive. We therefore admit the additional grounds raised by the Assessee for adjudication.
On the application of turnover filter in the case of Trilogy E-Business Software India (P) Ltd. (supra), this Tribunal held that while selecting comparable companies for comparability analysis held as follows:
“xxxxx”
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Respectfully following the aforesaid decision of the Tribunal in the case of Trilogy E- Business Software India Pvt.Ltd. (supra), we hold that the following companies should be excluded from the list of comparable companies”-
“xxxxx”
The AO is directed to compute the Arithmetic mean by excluding the aforesaid companies from the list of comparable.”
Regarding Substantial Question of law No.5: “17. The facts and circumstances under which the aforesaid companies were considered as comparable is identical in the case of the Assessee as well as in the case of Trilogy E- Business Software India Pvt.Ltd. (supra). Respectfully following the decision of the Tribunal referred to above in the case of Trilogy E- Business Software India Pvt.Ltd.(supra), we direct that the following companies be excluded from the list of 26 comparable arrived at by the TPO.
a) KALS Information Systems Limited b) Accel Transmission Limited.
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As far as the comparable chosen by the TPO viz., TATA Elxsi is concerned, this Tribunal in the case of Yodlee Infotech Pvt. Ltd. Vs. ITO in ITA No.1538/Bang/2010 by its order dated 30.8.2013, held that this company is not functionally comparable with a software development service provider. The following were the relevant observations of the Tribunal in this regard.”
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: “Conclusion:
55.
A substantial quantum of international trade and transactions depends
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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.
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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. 57. 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.
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The appeals filed by the Revenue are therefore dismissed with no order as to costs.”
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 Appellants- Revenue is liable to be dismissed and is accordingly dismissed. No costs.
Sd/- JUDGE
Sd/- JUDGE
NC.