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1/12 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.832/2017
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 SRI. ARAVIND K V, ADV.)
AND:
M/S G T NEXUS SOFTWARE PVT. LTD., THE SIRIUS 69/3, MILLERS ROAD, BENGALURU - 560 052 PAN:AACCG 2941
... RESPONDENT
(BY SRI.S.SHARATH, ADV.)
THIS INCOME TAX APPEAL IS FILED UNDER SEC.260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED: 18.04.2017 PASSED IN IT(TP)A NO.31/BANG/2016, FOR THE
Date of Judgment 05-07-2018, ITA No.832/2017 The Pr. Commissioner of Income Tax & another Vs. M/s G T Nexus Software Pvt. Ltd.,
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ASSESSMENT YEAR 2011-2012 ANNEXURE - D, PRAYING TO: I. FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED ABOVE. II. ALLOW THE APPEAL AND SET ASIDE THE ORDERS PASSED BY THE INCOME-TAX APPELLATE TRIBUNAL, BENGALURU IN IT(TP)A NO. 31/BANG/2016 DATED:18.04.2017, ANNEXURE-D CONFIRMING THE ORDER OF THE DRP AND CONFIRM THE ORDER PASSED BY THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-3(1)(2), BENGALURU.
THIS APPEAL COMING ON FOR HEARING, THIS DAY, Dr. VINEET KOTHARI, 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 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 IT [TP] A No.409/Bang/2016 dated 18.04.2017 relating to the Assessment Year 2011-12.
The substantial questions of law framed by the Revenue in the Memorandum of Appeal are as under: 1. “Whether on the facts and in the circumstances of the case and in law, the order of the Tribunal is not perverse in
Date of Judgment 05-07-2018, ITA No.832/2017 The Pr. Commissioner of Income Tax & another Vs. M/s G T Nexus Software Pvt. Ltd.,
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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 filers when culling out comparable companies?”
Date of Judgment 05-07-2018, ITA No.832/2017 The Pr. Commissioner of Income Tax & another Vs. M/s G T Nexus Software Pvt. Ltd.,
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Though the appeal has been admitted on 5.01.2018 to consider the substantial questions of law Nos.1 and 3, learned counsel for the appellant submits that substantial question No.2 may also be considered as the same is covered by the decision of the Hon’ble Supreme Court in Commissioner of Income-tax, Central – III vs. HCL Technologies Ltd., [2018] 93 Taxmann.com 33(SC).
Regarding Substantial Question No. 2: 4. The issue raised in the present appeal as to the deduction of expenditure incurred for ‘Export Turn Over’ is also required to be deducted from ‘Total Turn Over’ for the purpose of computing the deduction u/s.10A of the Act, 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
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(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 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
Date of Judgment 05-07-2018, ITA No.832/2017 The Pr. Commissioner of Income Tax & another Vs. M/s G T Nexus Software Pvt. Ltd.,
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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.
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. 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”.
Date of Judgment 05-07-2018, ITA No.832/2017 The Pr. Commissioner of Income Tax & another Vs. M/s G T Nexus Software Pvt. Ltd.,
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The learned Tribunal, after discussing the rival contentions of both the Appellant-Revenue and Respondent-Assessee, has returned a finding with regard to question Nos. 1 and 3 as under:
“ Therefore even if we apply the 10 times tolerance range of assessee’s turnover in respect 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&Tribunal 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
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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.
Further in view of the functional comparability has been considered by this Tribunal in the case of Applied Materials, the following companies namely (i) Acropetal Technologies Pvt. Ltd. (Seg.) and (ii) ICRA Techno Analytocs Ltd. are found to be functionally not comparable. 11. As regards the E-Zest Solution Ltd, the issue of comparability has been remitted to the record of the TPO. Accordingly the following the earlier order of this Tribunal, the functional comparability of E-Zest Solution Ltd. has been remitted to the record of the TPO/A.O.”
Date of Judgment 05-07-2018, ITA No.832/2017 The Pr. Commissioner of Income Tax & another Vs. M/s G T Nexus Software Pvt. Ltd.,
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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: “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
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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 found to be devoid of merit and the same are liable to be dismissed.
Date of Judgment 05-07-2018, ITA No.832/2017 The Pr. Commissioner of Income Tax & another Vs. M/s G T Nexus Software Pvt. Ltd.,
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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.”
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.
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Hence, the Appeal filed by the Appellant-Revenue is liable to be dismissed and is accordingly dismissed. No costs.
Sd/- JUDGE
Sd/- JUDGE
ln.