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1/13 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.122/2014
BETWEEN :
COMMISSIONER OF INCOME TAX-III C.R.BUILDINGS, QUEENS ROAD, BANGALORE-560 001
THE INCOME TAX OFFICER WARD-12(2), BANGALORE.
...APPELLANTS
(BY SRI JEEVAN J. NEERALGI, ADV.)
AND :
M/s TOPSPIN COMMUNICATION TECHNOLOGIES INDIA PVT. LTD., DIVYASHREE CHAMBERS, ‘B’ NO.11, O’SHAUGHNESSEY ROAD, OFF:LANGFORD ROAD, BANGALORE-560 025.
…RESPONDENT
(BY SMT.D.SUJATHA, ADV. FOR SRI MALLAHA RAO K., ADV.)
THIS ITA IS FILED UNDER SECTION 260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 30.09.2013 PASSED IN ITA NO. 1376/BANG/2011, FOR THE ASSESSMENT YEAR 2005-06 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
Date of Judgment 12-07-2018, ITA No.122/2014 Commissioner of Income Tax-III & another Vs. M/s Topspin Communication Technologies India Pvt. Ltd.
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APPELLATE ORDERS DATED 30.09.2013 THE INCOME TAX APPELLATE TRIBUNAL, 'B' BENCH, BANGALORE, IN ITA NO.1376/B/2011 FOR ASSESSMENT YEAR
2005-06 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. Jeevan J. Neeralgi, Adv. for Appellants – Revenue. Mrs. D.Sujatha, Adv. for Mr. Mallaha Rao K., Adv. 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, ‘B’ Bench, Bangalore, in ITA No.1376/B/2011 dated 30.09.2013 relating to the Assessment Year 2005-06.
This Appeal has been admitted on 15.07.2014. The substantial questions of law as framed by the Revenue in the Memorandum of Appeal are as under: “1. Whether the Tribunal was right in law in remitting back all the issues back to the file of Assessing Officer/Transfer Pricing Officer (for short TPO) when there are no fresh facts brought before the Tribunal apart from those
Date of Judgment 12-07-2018, ITA No.122/2014 Commissioner of Income Tax-III & another Vs. M/s Topspin Communication Technologies India Pvt. Ltd.
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which are already discussed in the order of the Assessing Officer/TPO?
Whether on the facts and in the circumstances of the case, the Tribunal was right in law in directing the exclusion of comparable companies having Related Party Transaction (RPT) more than 15% ignoring the TPO’s observation that the basis for determining the threshold limit for eliminating companies having RPT more than 25% was through determination of Indian Companies with foreign shareholding greater than 26%?
Whether on the facts and in the circumstances of the case the Tribunal is right in law in directing to include foreign gain as part of operating income/loss without ascertaining the nexus with the business activity of the assessee?
Whether on the facts and in the circumstances of the case the Tribunal is right in law in concluding that foreign gain or loss are to be treated as operating in nature despite the facts that the foreign gain/loss may be incidental but cannot be deemed as operating in nature since they are not critical to operational activities of the business conducted by the asseessee?
Whether on the facts and in the circumstances of the case, the Tribunal was
Date of Judgment 12-07-2018, ITA No.122/2014 Commissioner of Income Tax-III & another Vs. M/s Topspin Communication Technologies India Pvt. Ltd.
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justified in law in holding that the reimbursement of communication expenses are to be excluded both from total turnover as well as from export turnover for computation of deduction under sec. 10A whereas such exclusion is permitted to arrive at export turnover only as per the definitions given in Sec.10A of the IT Act and total turnover has not been defined in the section?
Whether the Tribunal is correct in law in holding that the deduction under Sec.10A should be computed in the above manner following the judgment of jurisdictional High Court in the case of CIT vs. Tata Elxsi Ltd., which has not become final since the same has not been accepted by the Department and SLPs filed by the revenue on this issue are pending before the Hon’ble Supreme Court?”
Regarding Substantial Question Nos. 5 & 6: 3. 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).
Date of Judgment 12-07-2018, ITA No.122/2014 Commissioner of Income Tax-III & another Vs. M/s Topspin Communication Technologies India Pvt. Ltd.
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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.
Date of Judgment 12-07-2018, ITA No.122/2014 Commissioner of Income Tax-III & another Vs. M/s Topspin Communication Technologies India 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. 20. 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 Appellant-Revenue and Respondent-Assessee, has returned the findings as under:
Date of Judgment 12-07-2018, ITA No.122/2014 Commissioner of Income Tax-III & another Vs. M/s Topspin Communication Technologies India Pvt. Ltd.
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Regarding Substantial Question of Law No.2
With this background we will consider each of the ground raised by the revenue. Ground No.3 raised by the revenue is with regard to the action of the CIT(A) in excluding comparables chosen by the TPO where the related party transactions were less than 15%. In this regard the CIT(A) found that as per the decision of the Hon’ble ITAT, Delhi in the case of M/s Mentor Graphic (Noida) Pvt. Ltd., Vs. DCIT in ITA No.1969/Del/2006 an entity in which related party transactions do not exceed 15% can be considered as comparable. if it exceeds 15% then the entity should not be taken for the purpose of comparability. The CIT(A) however, expressed the view that to determine the ALP of an international transaction under TNMM method there is no requirements in the law that certain number of comparable entities should exist. According to the CIT(A) even if there is one comparable entity, that should be sufficient. The CIT(A) found that there were many comparable company which would remain after suitable filters are applied and therefore, it would be proper to exclude companies which have related party transaction (RPT) irrespective of the percentage of such transaction to the total value of the transaction
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done by the comparable companies. On the basis of the above reasoning, the CIT(A) held that M/s Sasken Net Work System Ltd., Four Soft Ltd., Thirdware Solutions Ltd., R.S.Software (India) Ltd., Geomatric Software Solutions Ltd., Sasken Communication Tech. Ltd., iGate Global Solutions Ltd., Flextronics Software Ltdl., L & T Infotech Ltd., Satyam Computer Services Ltd., Infosys Tech. Ltd., be excluded from the list of comparables ultimately chosen by the TPO.
We have heard the rival submissions. We are of the view that the proposition laid down by the CIT(A) is too broad to be accepted. If on an application of FAR analysis companies are found to be comparable, merely for the reason that there were related party transactions carried out by such companies. such companies cannot be excluded from comparability. If the related party transactions exceeds the limit of 15% then there is every reason to believe that there will be significant influence on the profitability of the comparable. this is the principle laid down by the ITAT, Delhi Bench in the case of M/s Mentor Graphic (Noida) Pvt. Ltd. If the related parties transactions are less than 15% there is every reason to believe
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that RPT cannot have any significant influence on the profitability of the comparables. The mere fact that there were other comparable companies available for comparison cannot be the basis to reject an otherwise comparable company on the ground that there were related party transactions which may not have any significant influence on the profitability of that company. We therefore, set aside the order of the CIT(A) on this issue and accept the ground No.3 raised by the revenue. The issue is remanded to the TPO to exclude companies where the RPT is more than 15% of the total revenue.”
Regarding Substantial Question of Law Nos.3 & 4: “15. As far as ground No.5 projected by the revenue is concerned, the law is by now settled that foreign exchange loss or gain is part of the operative expenses, as the case may be. The Hon’ble ITAT, Bangalore Bench in the case of M/s SAP Labs Ind. Pvt. Ltd., in ITA No.398(B)/2008 has taken the following view. The CIT(A) following the aforesaid decision has rightly held as follows:
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Date of Judgment 12-07-2018, ITA No.122/2014 Commissioner of Income Tax-III & another Vs. M/s Topspin Communication Technologies India Pvt. Ltd.
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In our view, the CIT(A) has rightly followed the decision of the ITAT and directed the AO to exclude the foreign exchange loss as operating cost and foreign exchange gains as revenue in the hands of the assessee as well as the comparable company for determining the ALP.”
For the similar reasons, the Tribunal has excluded other comparables also.
In view of the aforesaid, substantial question No.1 does not arise for consideration.
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- 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 12-07-2018, ITA No.122/2014 Commissioner of Income Tax-III & another Vs. M/s Topspin Communication Technologies 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
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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
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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 Appeal filed by the Appellant-Revenue is liable to be dismissed and is accordingly dismissed. No costs.
Sd/- JUDGE
Sd/- JUDGE
ln.