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1/21 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.20/2014
BETWEEN : 1. THE COMMISSIONER OF
INCOME-TAX, CIT[A]
C.R. BUILDING, QUEENS ROAD
BANGALORE.
THE INCOME-TAX OFFICER
WARD-11[1]
RASHTROTHANA BHAVAN
NRUPATHUNGA ROAD
BANGALORE-560001.
...APPELLANTS
(BY SRI K.V.ARAVIND, ADV.)
AND : M/s. CURAM SOFTWARE INTERNATIONAL PVT. LTD., No.150/1, AL HABEEB INFANTRY ROAD BANGALORE-560001.
…RESPONDENT
(BY Mrs. D.SUJATHA, ADV. FOR SRI NAGESWAR RAO, ADV.)
THIS INCOME TAX APPEAL IS FILED UNDER SECTION 260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 31.07.2013 PASSED IN ITA. No.1280/BANG/2012, FOR THE ASSESSMENT YEAR 2008-09, ANNEXURE-D, PRAYING TO: 1]. FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW
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STATED ABOVE: 2]. ALLOW THE APPEAL AND SET ASIDE THE ORDERS PASSED BY THE INCOME-TAX APPELLATE TRIBUNAL, BANGALORE IN ITA No.1280/BANG/2012 DATED 31.07.2013, ANNEXURE-D AND CONFIRM THE ORDER OF THE APPELLATE COMMISSIONER CONFIRMING THE ORDER PASSED BY THE INCOME TAX OFFICER, WARD-11[1], BANGALORE.
THIS APPEAL COMING ON FOR FINAL 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. Mrs. D.Sujatha, Adv. for Mr. Nageswar Rao, 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 ‘B’, Bangalore, in ITA No.1280/Bang/2012 dated 31.07.2013, relating to the Assessment Year 2008-09.
The appeal has been admitted on 09.06.2015 to consider the following substantial questions of law: “1. Whether on the facts and in the circumstances and in law the Tribunal was right
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in super imposing the decisions of the other benches and the decision of the ITAT while rejecting the comparables [(i) M/s. Celestial Bio Labs (ii) KALS Information Systems Limited (iii) M/s. Infosys Technologies Ltd, (iv) M/s. Wipro Ltd and (v) Tata Elxsi Ltd.,] without appreciating the fact that selection of comparables in a case depends on assessee specific FAR analysis and recorded a perverse finding?
Whether on the facts and in the circumstances of the case the Tribunal was correct in directing the transfer pricing officer to provide the information obtained under section 133[6] of the Act in respect of the comparability of M/s. Avani Cimcon Technologies Ltd., without taking into consideration that the material relied on by the transfer pricing officer was made available to the assessee and opportunity of hearing was also provided before the same was utilized in computing the arms length price and recorded perverse finding?
Whether on the facts and in the circumstances of the case the Tribunal was correct in holding that Infosys technology Ltd., is functional dissimilar to the assessee, without appreciating that the comparable is a product
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developer and therefore is not functionally different from the assessee and recorded perverse finding?
Whether on the facts and in the circumstances of the case and in law the Tribunal was correct in rejecting Tata Elxsi Ltd., as a comparable by placing reliance on the order in the case of the other assessee passed by the Mumbai ITAT without taking into consideration the finding recorded by the Transfer Pricing Officer for selecting as a comparable as the comparable company is in the business of software development and satisfies all the filters and recorded a perverse finding?
Whether on the facts and in the circumstances of the case and in law the Tribunal was correct in directing transfer pricing officer to make the computation of the related party transaction in respect of KPIT Cummins INfosystems Ltd., on the stand-alone basis to decide the comparability, without appreciating the fact that the segmental financials of the comparable were adopted for the purposes of comparability under TNMM and recorded perverse finding?
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Whether on the facts and in the circumstances of the case the Tribunal was correct in holding that the foreign exchange loss/gain attributable as operative activities without appreciating that the foreign exchange loss/gain a derived from foreign exchange loss/gain and not from the operating expenditure and the same cannot be considered as operating income to compute the arms length price and recorded perverse finding?
Whether on the facts and in the circumstances of the case, the Tribunal was correct in remanding the issue of market risk adjustment to the file of the transfer pricing officer to identify the risks to bring it at par with the comparables and make required adjustments to the profit margin without pointing out the risk in comparables and without appreciating that transfer pricing regulations in India does not provide for assumptions in respect of adjustments and recorded perverse finding?
Whether on the facts and in the circumstances of the case and in law the Tribunal was correct in directing exclusion of telecommunication expenses and expenditure incurred in foreign currency from export turnover
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and total turnover, when the provision does not refer to exclusion of the expenditure reduced from export turnover to reduce the same from total turnover?”
Regarding Substantial Question No.8:
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).
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
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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.
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
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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 Respondent-Assessee, has returned the findings as under: Regarding Substantial Question Nos.1, 3 and 4: “10. [2] Celestial Biolabs Ltd. 10.5.1 We have heard both parties and carefully perused and considered the material on record including the judicial decisions cited. As discussed earlier, there is merit in the contention of the learned Departmental Representative that the ruling of the co-ordinate bench of this Tribunal in the case of Triology E- Business Software India Pvt. Ltd., [supra], was with respect to the facts relevant to an earlier financial year and there cannot be an assumption that it would continue to be applicable to all other
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assesses for this year as well. At the same time, we find that the TPO also seems to have selected this company as a comparable, based on the reasoning given in the TPO’s order for the earlier year i.e., F.Y. 2006-07. Evidently, in this view of the matter, the TPO has not conducted any independent FAR analysis for this company for the year under consideration and therefore the selection process adopted by the TPO is defective.
10.5.2 Further, besides relying on the decision of the co-ordinate bench in the case of Triology E-Business Software India Pvt. Ltd., [supra], the assessee has demonstrated that the finding given therein for Assessment Year 2007- 08 is applicable for this year also. Further, the assessee has also brought on record substantial evidence by quoting from various portions of the Annual Report that this company is functionally different from the assessee and hence is not comparable to the assessee in the case on hand. We agree with the submissions made by the assessee, that as per the details from the Annual Report of this company, it is functionally different from the assessee. In view of the fact that the financial profile and other parameters of this company have not changed during the year under
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consideration, which fact has been demonstrated by the assessee, following the decision of the co- ordinate bench of this Tribunal in the case of Triology E-Business Software India Pvt. Ltd., [supra], we hold that the company ought to be excluded from the list of comparables. It is ordered accordingly.
11.0 [3] KALS Information Systems Ltd., 11.4 We have heard both parties and perused and carefully considered the material on record including the judicial decisions cited. As discussed earlier in this order, there is merit in the contention of the learned Departmental Representative that the ruling rendered in the case of Triology E-Business India Pvt. Ltd., [supra] was with respect to an earlier period i.e., F.Y. 2006-07 and there cannot be an assumption or presumption that it is applicable for the year under consideration as well. At the same time, we find that the TPO has drawn conclusions on the basis of information obtained under Sectio 133[6] of the Act, which was not in the public domain and could not have been used by the TPO, when the same is contrary to the Annual Report of the company as has been highlighted by the
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assessee in its submissions. We also find that the co-ordinate bench of this Tribunal in the case of Trilogy E-Business Software India Pvt. Ltd., [supra] has held that this company was developing software products and was not purely or mainly a software development service provider. Further, apart from relying on the decision of Trilogy E-Business Software India Pvt. Ltd., [supra], the assessee has brought on record substantial evidence quoting from various portions of the Annual Report of that this company is functionally dis-similar and different from the assessee and hence is not comparable and therefore the finding rendered in respect of this company in the case of Trilogy E-Business Software India Pvt. Ltd., for Assessment Year 2007-08 is applicable for this year i.e., Assessment Year 2008-09 also. In view of the facts and circumstances of the case as discussed above, we hold that this company i.e., KALS Information Systems Ltd., is to be omitted from the set of comparable companies.
[4] Infosys Technologies Ltd., 12.4 We have heard the rival submissions and perused and carefully considered the material on record. We find that the assessee has
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brought on record sufficient evidence to establish that this company is functionally dis-similar and different from the assessee and hence is not comparable and the finding rendered in the case of Trilogy E-Business Software India Pvt. Ltd., [supra] for Assessment Year 2007-08 is applicable to this year also. The argument put forth by assessee’s is that Infosys Technologies Ltd., is not functionally comparable since it owns significant intangible and has huge revenues from software products. It is also seen that the break up of revenue from software services and software products is not available. In this view of the matter, we h old that this company ought to be omitted from the set of comparable companies. It is ordered accordingly.
13.0 [5] Wipro Limited 13.4.1 We have heard both parties and carefully perused the material on record. We find merit in the contentions of the assessee for exclusion of this company from the set of comparables. It is seen that this company is engaged both in software development and product development services. There is no information on the segmental bifurcation of revenue from sale of product and software
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services. The TPO appears to have adopted this company as a comparable without demonstrating how the company satisfies the software development sales 75% of the total revenue filter adopted by him. Another major flaw in the comparability analysis carried out by the TPO is that he adopted comparison of the consolidated financial statements of Wipro with the stand alone financials of the assessee; which is not an appropriate comparison.
13.4.2 We also find that this company owns intellectual property in the formo of registered patents and several pending applications for grant of patents. In this regard, the co-ordinate bench of this Tribunal in the case of 24/7 Customer.Com Pvt. Ltd., [ITA No.227/Bang/2010] has held that a company owning intangibles cannot be compared to a low risk captive service provider who does not own any such intangible and hence does not have an additional advantage in the market. As the assessee in the case on hand does not own any intangibles, following the aforesaid decision of the co-ordinate bench of the Tribunal i.e., 24/7 Customer.Com Pvt. Ltd., [supra], we hold that this company cannot be considered as a comparable
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to the assessee. We, therefore, direct the Assessing Officer/TPO to omit this company from the set of comparable companies in the case on hand for the year under consideration.
14.0 [6] Tata Elxsi Ltd. 14.4.1 We have heard both parties and carefully perused and considered the material on record. From the details on record, we find that this company is predominantly engaged in product designing services and not purely software development services. The details in the Annual Report show that the segment “software development services” relates to design services and are not similar to software development services performed by the assessee.”
Regarding Substantial Question No.2: “9.5.1 We have heard both parties and perused and carefully considered the material on record. It is seen from the record that the TPO has included this company in the final set of comparables only on the basis of information obtained under section 133[6] of the Act. In these circumstances, it was the duty of the TPO to have necessarily furnished the information so gathered to the assessee and taken its
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submissions thereon into consideration before deciding to include this company in its final list of comparables. Non-furnishing the information obtained under section 133[6] of the Act to the assessee has vitiated the selection of this company as a comparable.”
Regarding Substantial Question No.5:
“17.0 [9] KPIT Cummins Infosystems Ltd.
17.3 We have heard the submissions of both the learned Departmental Representative for revenue and the learned Authorised Representative for the assessee. We find from the record that the TPO has neither explained the computation in the order nor has the TPO explained how the RPT filter fails in this case. However, we do not find the contention of the assessee, that the computation has to be done on a consolidated basis, to be acceptable. This is for the reason that when he comparability is between the specific segments, there is no requirement to take the consolidated financials for the computation. We agree with the view of the TPO that the computation of the RPT filter has to be on a standalone basis. With this finding, we restore the issue back to the file of the Assessing
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Officer/TPO to make the computation on stand along basis, taking into consideration the decisions rendered by the co-ordinate bench of this Tribunal in this regard.”
Regarding Substantial Question No.6:
“21. Foreign Exchange Gain / Loss [Ground of appeal : 14]
21.2.1 We have heard both parties and given careful consideration to the material on record. We find that the TPO in his order has not given any reasoning for treating foreign exchange gain / loss as a non-operating item of income / expense. In the remand report submitted to the DRP, the TPO has merely stated that the exchange loss / gain could be on account of hedging / speculative activity owing to which it has been treated as non-operating in nature. In a rejoinder to the remand report, the assessee had submitted that the assessee receives remuneration from its AEs for rendering of services in foreign currency. The foreign exchange gain / loss relates entirely to the rendering of services and there is no speculative hedging activity.
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21.2.2 Before us, it was reiterated that the foreign exchange gain should be considered as on operating income while computing the operating margins of the assessee and comparable companies. We have carefully considered the submissions made. From the reasons given by the TPO in the remand report, it is clear that the TPO has considered the foreign exchange income as non-operating income based on assumptions and surmises. As pointed out by the assessee, there are several decisions of this and other Tribunals which hold that foreign exchange gain related to business activities are to be treated as operating income. In this view of the matter, we hold that foreign exchange gain is to be treated as operating income in the view of the facts in the case on hand and the margins are to be computed accordingly.”
Regarding Substantial Question No.7:
“22.2 As regards risk adjustment, the TPO has not allowed any adjustment by observing that this has been considered and discussed in detail in the order for earlier years. We find that on similar facts, different co-ordinate benches of this Tribunal in the case of Intellinet Technologies India Pvt. Ltd., [ITA No.237/Bang/2010] and
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Bearing Point Business Consulting Pvt. Ltd., [ITA No.1124/Bang/2011] have held that the TPO ought to have given risk adjustment to the margins of the comparables for bringing them on par with the assessee and remanded the issue back to the file of the TPO. Following the decisions in the aforementioned cases of the co- ordinate benches of this Tribunal [supra], we remand the issue of market risk adjustment to the file of the Assessing Officer/TPO for examining the issue in the light of the decisions cited.”
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:
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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.
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.
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.