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1/13 THE HIGH COURT OF KARNATAKA, BENGALURU
DATED THIS THE 18TH DAY OF JULY 2018
PRESENT
THE HON’BLE DR.JUSTICE VINEET KOTHARI
AND
THE HON’BLE MRS.JUSTICE S.SUJATHA
I.T.A. Nos.226 & 646/2015
BETWEEN:
THE COMMISSIONER OF INCOME-TAX C R BUILDING, QUEENS ROAD, BANGALORE.
THE DEPUTY COMMISSIONER OF INCOME TAX CIRCLE -11(3), RASHTROTHANA BHAVAN, NRUPATHUNGA ROAD, BANGALORE - 560 001.
... APPELLANTS
(BY SRI.K V ARAVIND, ADV.)
AND:
M/S GENESIS INTEGRATING SYSTEMS (INDIA) PVT. LTD. 43-46 AND 33-36, EXPORT PROMOTION INDUSTRIAL PARK, WHITEFIELD ROAD, BANGALORE - 560 066, PAN: AAACG 6635N
... RESPONDENT
(BY SRI.S.SHARATH, ADV. FOR SRI.CHYTHANYA K K, ADV.)
Date of Judgment 18-07-2018, ITA Nos.226 & 646/2015 The Commissioner of Income Tax & another Vs. M/s.Genesis Integrating Systems (India) Pvt. Ltd.
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THESE ITAs ARE FILED UNDER SECTION 260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 23/01/2015 PASSED IN ITA NO.25/BANG/2014 & S.P. NO. 41/BANG/2014, FOR THE ASSESSMENT YEAR-2006-2007 ANNEXURE-D, PRAYING TO: 1. FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED ABOVE. 2. ALLOW THE APPEALS AND SET ASIDE THE ORDERS PASSED BY THE INCOME-TAX APPELLATE TRIBUNAL, BANGALORE IN ITA NO.25/BANG/2014 & S.P. NO.41/BANG/2014 DATED 23/01/2015 ANNEXURE – D AND CONFIRM THE ORDER OF THE DRP CONFIRMING THE ORDER PASSED BY THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE - 11(3), BANGALORE.
THESE APPEALS 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. Mr.S.Sharath, Adv. for Mr.Chythanya. K.K., Adv. for Respondent – Assessee.
These Appeals are filed by the Revenue purportedly raising substantial questions of law arising from the Order of the Income Tax Appellate Tribunal, ‘C’ Bench, Bangalore in IT[TP]A No.25/Bang/2014 & S.P. No.41/Bang/2014 dated 23.01.2015, relating to the Assessment Year 2006-07.
These Appeals have been admitted on 27.11.2015 to consider the following substantial
Date of Judgment 18-07-2018, ITA Nos.226 & 646/2015 The Commissioner of Income Tax & another Vs. M/s.Genesis Integrating Systems (India) Pvt. Ltd.
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questions of law as framed by the Revenue in the Memorandum of Appeals. “1. Whether on the facts and circumstances of the case, the Tribunal was right in law in holding that the functions of the assessee are not comparable to the functions of M/s KALS Information Systems Ltd., by super imposing decisions of other benches of tribunal, without doing any FAR analysis in the instant case even though this comparable satisfies all the qualitative and quantitative filters applied by the TPO and the Tribunal ought to have decided comparability of this company on the basis of specific facts brought on record by the TPO in the case of the assessee?
Whether on the facts and circumstances of the case, a comparable may be considered as engaged in software product business merely because it has developed software product by following software development process without having legal ownership on such software products?
Date of Judgment 18-07-2018, ITA Nos.226 & 646/2015 The Commissioner of Income Tax & another Vs. M/s.Genesis Integrating Systems (India) Pvt. Ltd.
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Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the functions of the assessee are not comparable to the functions of the assessee are not comparable to the functions of M/s. Accel Transmatics Ltd., by super imposing decisions of other benches of Tribunal, without doing any FAR analysis in the instant case even though this comparable satisfies all the qualitative and quantitative filters applied by the TPO and the Tribunal ought to have decided comparability of this company on the basis of specific facts brought on record by the TPO in the case of the assessee?
Whether on the facts and circumstances of the case, the Tribunal was right in law in holding that the functions of the assessee are not comparable to the functions of M/s.Lucid software Ltd., by super imposing decisions of other benches of Tribunal, without doing any FAR analysis in the instant case even though this comparable satisfies all the qualitative and quantitative filters applied by the TPO
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and the Tribunal ought to have decided comparability of this company on the basis of specific facts brought on record by the TPO in the case of the assessee?
Whether on the facts and circumstances of the case, the Tribunal was right in law in holding that the functions of the assessee are not comparable to the functions of M/s.Tata Elxsi Ltd., by super imposing decisions of other benches of Tribunal, without doing any FAR analysis in the instant case even though this comparable satisfies all the qualitative and quantitative filters applied by the TPO and the Tribunal ought to have decided comparability of this company on the basis of specific facts brought on record by the TPO in the case of the assessee?”
The learned Tribunal, after discussing the rival contentions of both the Appellants-Revenue and Respondent-Assessee, has returned findings as under:
Date of Judgment 18-07-2018, ITA Nos.226 & 646/2015 The Commissioner of Income Tax & another Vs. M/s.Genesis Integrating Systems (India) Pvt. Ltd.
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“(d) KALS Information Systems Ltd.
As far as this company is concerned, the contention of the assessee is that the aforesaid company has revenues from both software development and software products. Besides the above, it was also pointed out that this company is engaged in providing training. It was also submitted that as per the annual report, the salary cost debited under the software development expenditure was Rs.45,93,351. The same was less than 25% of the software services revenue and therefore the salary cost filter test fails in this case. Reference was made to the Pune Bench Tribunal’s decision of the ITAT in the case of Bindview India Private Limited Vs. DCI, ITA No. 1386/PAIN AND AGONY/IO wherein KALS as comparable was rejected for AY 2006-07 on account of it being functionally different from software companies. The relevant extract are as follows: xxxxxxxxx
Date of Judgment 18-07-2018, ITA Nos.226 & 646/2015 The Commissioner of Income Tax & another Vs. M/s.Genesis Integrating Systems (India) Pvt. Ltd.
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Based on all the above, it was submitted on behalf of the assessee that KALS Information Systems Limited should be rejected as a comparable.
We have given a careful consideration to the submission made on behalf of the Assessee. We find that the TPO has drawn conclusions on the basis of information obtained by issue of notice u/s.133(6) of the Act. This information which was not available in public domain could not have been used by the TPO, when the same is contrary to the annual report of this company as highlighted by the Assessee in its letter dated 21.6.2010 to the TPO. We also find that in the decision referred to by the learned counsel for the Assessee, the Mumbai Bench of ITAT has held that this company was developing software products and not purely or mainly software development service provider. We therefore accept the plea of the Assessee that this company is not comparable.
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(e) Accel Transmatic Ltd.
With regard to this company, the complaint of the assessee is that this company is not a pure software development service company. It is further submitted that in a Mumbai Tribunal Decision of Capgemini India (F) Ltd v Ad. CIT 12 Taxman.com 51, the DRP accepted the contention of the assessee that Accel Transmatic should be rejected as comparable. The relevant observations of DRP as extracted by the ITAT in its order are as follows: xxxxxxxxxxx
In view of the aforesaid decision of the Tribunal, comparables at Sl.Nos.4 & 13 of the list of comparables chosen by the TPO have to be excluded for the purpose of comparison while determining the ALP of the impugned transaction in this appeal.
As far as comparable at SL. No.9 viz., Lucid software Ltd. from the list of comparables chosen by the TPO is concerned, we find that the Mumbai Bench of the
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Tribunal in the case of Telcordia Technologies India Pvt. Ltd. (supra) while dealing with the case of software services provider like the assessee, considered the comparability of Lucid Software Ltd. with similar software services provider and the Tribunal held as follows:- xxxxxxxxx
In view of the aforesaid decision of the Mumbai Bench of the Tribunal, which is in relation to A.Y. 2007-08, we are of the view that the said company Sl.No.9 of the list of comparable listed by the TPO is to be excluded as a comparable while determining the ALP of the international transaction impugned in this appeal.
We are now left with only one comparable company chosen by the TPO viz., TATA Elxsi which is at Sl.No.8 of the list of comparable companies chosen by the TPO. 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
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not functionally comparable with a software development service provider. The following were the relevant observations of the Tribunal in this regard. xxxxxxxxxxxx
In view of the above, the aforesaid comparable at Sl.No.8 of the list of comparable chosen by the TPO should also be excluded for the purpose of comparison while determining the ALP of the international transaction in question.”
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:
Date of Judgment 18-07-2018, ITA Nos.226 & 646/2015 The Commissioner of Income Tax & another Vs. M/s.Genesis Integrating Systems (India) Pvt. Ltd.
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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.
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
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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.”
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 Appeals filed by the Appellants- Revenue are liable to be dismissed and are accordingly dismissed. No costs.
Sd/- JUDGE
Sd/- JUDGE AN/-