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1/20 IN THE HIGH COURT OF KARNATAKA, BENGALURU
DATED THIS THE 3RD DAY OF JULY 2018
PRESENT
THE HON’BLE DR.JUSTICE VINEET KOTHARI
AND
THE HON’BLE MRS.JUSTICE S.SUJATHA
I.T.A. No.310/2017
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-11(2), PRESENT ADDRESS CIRCLE-1(1)(1), 2ND FLOOR, BMTC BUILDING, 80 FEET ROAD, KORMANGALA, BENGALURU-560 095.
...APPELLANTS
(BY SRI K.V.ARAVIND, ADV.)
AND :
M/s AKAMAI TECHNOLOGIES INDIA PVT. LTD. SALARPURIA SOFTZONE, 2ND & 3RD FLOOR, ‘A’ WING, SURVEY NO.80/1, BELLANDUR VILLAGE, OUTER RING ROAD, BENGALURU.
…RESPONDENT
(BY SRI K.MALLAHA RAO & SRI SANDEEP S. KARHAIL, ADVS.)
THIS ITA IS FILED UNDER SECTION 260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 11.08.2016 PASSED IN IT(TP)A NO.1227/BANG/2010, FOR THE
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ASSESSMENT YEAR 2006-2007 ANNEXURE-E. PRAYING TO: I. FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN, II. ALLOW THE APPEAL AND SET ASIDE THE ORDER PASSED BY THE ITAT, BENGALURU IN IT(TP)A NO.1227/BANG/2010 DATED 11.08.2016 ANNEXURE-E AND CONFIRM THE ORDER OF THE DRP CONFIRMING THE ORDER PASSED BY THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-1(1)(1), BENGALURU.
THIS APPEAL COMING ON FOR ADMISSION, 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. Mallaha Rao K., and Mr. Sandeep S. Karhail, Advs. 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 ‘B’, Bangalore, in IT [TP]A No.1227/Bang/2010 dated 09.11.2016, relating to the Assessment Year 2006-07.
The proposed substantial questions of law framed by the Revenue in the Memorandum of Appeal are as under:
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“1. Whether in the facts and circumstances of the case, the Tribunal is right in law in directing the assessing officer to re-calculate the deduction to the assessee under section 10A of the Act by reducing the total turnover also by the same amount by which export turnover was reduced by the assessing officer in respect of foreign currency expenses incurred towards technical services rendered outside India, without appreciating the fact that there is no provision in Section 10A that such expenses should be reduced from the total turnover also, as clause (iv) of the Explanation 2 to Section 10A provides that such expenses are to be reduced only from the export turnover?
Whether in the facts and circumstances of the case, the Tribunal is right in law in excluding the comparables, namely DATA MATIC Financial Services Ltd., Vishal Information Technologies, Asit-C Mehta Financial Services Ltd., and Apex Knowledge Solutions by following its earlier order in the case of Goldman Sachs Services Private
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Limited as functionally different without doing any FAR analysis of the assessee with those other cases and without appreciating that comparability of these companies on the basis of specific facts brought on record by the TPO in the case of the assessee? 3. Whether in the facts and circumstances of the case, the Tribunal is right in law in directing the TPO to include the foreign exchange fluctuations as part of the profit for the purpose of computation of operating margin of the company by relying on its decision in the case of Sap Labs India Pvt. Ltd., dt.30.8.2010 in ITA No.398 and 418/Bang/2008 even-though the said decision has not reached finality?
Whether in the facts and circumstances of the case, the Tribunal is right in law in directing the assessing authority/TPO to consider the benefit of proviso to section 92-C after examination of issue even-though the assessing authority had given proper finding on the basis of
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materials available on record and in accordance with the provisions of the Act?”
Learned Counsel for the Appellants-Revenue does not press substantial question No.4.
Submission is taken on record.
Regarding Substantial Question No.1:
Learned Counsel for the Appellants-Revenue submits that the issue regarding 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 (Kar), which has been affirmed by the Hon’ble Supreme Court in the case of Commissioner of Income-tax, Central – III vs.
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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 used. Hence, what is excluded from ‘export turnover’ must also be excluded from ‘total turnover’, since one of the components of ‘total
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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.
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”.
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Regarding Substantial Question Nos.2 & 3:
The learned Tribunal, after discussing the rival contentions of both the Appellants-Revenue and Respondent-Assessee, has returned a finding as under:
“32. Thus, it is apparent that the comparability of this company was examined in assessee’s own case and it was found that this company cannot be rejected as comparable on the alleged objections of involvement of directors of this company in alleged fraud. By following the order of this tribunal in assessee’s own case, we decide this issue against the assessee and in favour of the Revenue.
I. Vishal Information Technologies Ltd., 33. The learned AR of the assessee submitted that this company fails the employee filter as the cost of the employee is less than 2% of the total cost, therefore, this company is out sourcing its business activity for which the out sourcing cost is 88.64% of
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the total cost. In support of his contention he has relied upon the decision of the co-ordinate bench in the case of M/s Goldman Sachs Services Pvt. Ltd., (Supra).
On the other hand learned DR has submitted that when the TPO has not applied any filer as employee cost than this objection cannot be considered as relevant factor for exclusion of this company in the list of comparable.
II. Asit C Mehta Financial Services Ltd., 35. The learned AR of the assessee submitted that this company functionally is not comparable with the assessee as it has outsourcing a significant portion of its business as the employee cost of this company is 31.37% of the total cost and outsourcing cost 24.75% of the total costs. Therefore as further contended that there was extra ordinary event of amalgamation with Nucleus Securities Ltd.,. reported in annual report of this company w.e.f. 1/4/2005 which is relevant to the asst. year under
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consideration. He has relied upon the decision of the co-ordinate bench of this tribunal in the case of M/s Goldman Sachs Services Pvt. Ltd., (Supra).
On the other hand, the learned DR has relied upon the orders of the authorities below and submitted that when the prominent business activity of this company is comparable with the business activity of the assessee then other factor which are in segment and not affecting main business activity are not relevant for the purpose of selecting this company. He has submitted that this company satisfied all the filters applied by the TPO.
II. Goldstone Infratech Ltd.(Seg)
The learned AR of the assessee has submitted that this company is functionally not comparable with the assessee as this company is engaged mainly into leasing activity. This company also fails the TPO’s own diminishing revenue over the last three
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years and foreign exchange earning filter which is less than 1% of the total turnover. He has further submitted that the TPO has used the information obtained u/s 133(6) without sharing with the assessee. In support of its contention, he has relied upon the decision of the co-ordinate bench in the case M/s Goldman Sachs Services Pvt. Ltd., (Supra).
On the other hand, the learned DR has submitted that the lease income is not part of the IT segment and the TPO has used only segmental information.
Therefore, this company is comparable as ITP segment data has been considered by the TPO.
IV. Apex Knowledge Salutations:
Learned AR of the assessee has submitted that this company is functionally different from the assessee as this company’s main activity is electronic publishing and export of software. He has further contended that the TPO has used the information
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obtained u/s 133(6) of the Income-tax Act. In support of his contention, he has relied upon the decision of the co-ordinate bench of this tribunal in the case of M/s Goldman Sachs Services Pvt. Ltd., (Supra).
On the other hand, the learned DR has submitted that when the TPO has used the information obtained u/s 133(6) and found that this company is functionally comparable with the assessee then in the absence of any vertical considered in the same segment either by the assessee or TPO these objections raised by the assessee cannot be accepted.
We have considered the rival submissions as well as relevant material on record. At the outset we note that the comparability of these 4 companies has been examined by the co-ordinate bench of this tribunal in case of M/s Goldman Sachs Services Pvt. Ltd., (Supra) in para 13.4.1 to 14.3.2 as under:
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xxxxxxxxx
As regards, the employee cost as well as outsourcing cost in case of Asit C Mehta Financial Services there is not dispute that this company is outsourcing part of its business and the cost of outsourcing is 24.75% of the total cost. This company was earlier know as Nucleus Netsoft and GIS India Ltd. As per schedule 9 of the balance sheet this company has reported operations which included IT enabled services and software development apart from portfolio management fee. Thus, this company derives its main income from the operations of the IT enabled and software development activities and there is no separate data of sub segment IT enabled services and software development. Therefore, the composite data of income from IT enabled services and software development cannot be considered as comparable prices of the assessee’s IT enabled services. Further, we find that this company paying data process charges to the extent of 24.75% which shows that this
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company outsourcing its IT enabled services activity instead of carrying out its own. As per the notes to accounts, this company has also reported that the scheme of amalgamation of this company w.e.f. 1/4/05 has been sanctioned by the Hon’ble Bombay High Court vide order dated 10/2/2006. Therefore, this company amalgamated with Nucleus Netsoft and GIS India Ltd. w.e.f 1/4/05.
As regards Goldstone Infratech Ltd. seg we find that the information u/s 133(6), the auditor of its company has furnished the details of export sale of BPO segment which contradicts the claim of the assessee that this company fails the export revenue filter. Since the TPO has applied this information without inviting objections to the assessee, therefore, in the facts and circumstances of the case and in the interest of natural justice, we set aside this issue to the record of the AO/TPO to reconsider the same after affording opportunity to the assessee for raising the objections against this company.
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So far as Apex Knowledge Solutions is concerned it is apparent from the finding of the tribunal that the activity of electronic publishing knowledge based services etc. cannot be considered as comparable with the ITP services/BPO services provider company. Accordingly, following the earlier order of this tribunal, we direct the AO/TPO to exclude this company from the list of comparables. xxxxxxx
Having considered the rival submissions, we are of the considered view that the foreign exchange gain or loss arising from the export turnover realization would be part of the operating profit of the assessee as well as the comparable company. Therefore, foreign exchange fluctuation income arising from the sales realization cannot be excluded from the operating profit for the purpose of determining arms length price. However rule of parity has to be maintained by considering the gain or loss on account of foreign exchange fluctuation in the cases of comparable also. This view has been
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supported by the decision of the co-ordinate bench of the tribunal in the case of SAP Labs India Pvt. Ltd., (Supra). In para 42, it is held as under:- “We considered the issue carefully. The foreign exchange fluctuation gains is nothing but an integral part of the sales proceeds of an assessee carrying on export business. This proposition has been time and again considered in case arising in eh context of sec. 80HHC. The courts and Tribunals have held that foreign exchange fluctuation gains form part of the sale proceeds of exporter-assessee. Useful reference may be made to the decisions of Bombay High Court in the case of CIT Vs. Ambha Inflex, 284 ITR 144 and that of Mumbai ITAT Spl. Bench jin the case of ACIT Vs. Prakash L Shah, 306 ITR (AT) 01= (2008-TIOL-429-ITAT-Mum-SB). In all the above cases, the dominant question considered was
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the year of deduction on the accepted proposition that the foreign exchange fluctuation gains computed by an assessee in a relevant previous year should be treated as part of the operating income and thereby it would contribute to the operating margin of the assessee company. The foreign exchange fluctuations income cannot be excluded from the computation of the operating margin of the assessee company. This contention of the assessee is accepted.”
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
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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 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
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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.
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
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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.
Hence, the Appeal filed by the Appellants- Revenue is liable to be dismissed and is accordingly dismissed. No costs.
Sd/- JUDGE
Sd/- JUDGE AN/-