THE PR. COMMISSIONER OF INCOME TAX-6 vs. M/S SOFTWARE AG

1/10 IN THE HIGH COURT OF KARNATAKA, BENGALURU

DATED THIS THE 4TH DAY OF JULY 2018

PRESENT

THE HON’BLE DR.JUSTICE VINEET KOTHARI

AND

THE HON’BLE MRS.JUSTICE S.SUJATHA

I.T.A.No.306/2016

BETWEEN : 1. THE Pr. COMMISSIONER OF INCOME TAX-6

BMTC COMPLEX

KORAMANGALA

BANGALORE.

WARD-12[2]

BANGALORE.

...APPELLANTS

(BY SRI SANMATHI.E.I., ADV.)

AND : M/s. SOFTWARE AG BANGALORE TECHNOLOGIES PVT LTD., [FORMERLY KNOWN AS WEBMETHODS DEVELOPMENT CENTER INDIA PRIVATE LTD] EXORA BUSINESS PARK WING B, 1ST FLOOR MARATHAHALLI – SARJAPUR OUTER RING ROAD BANGALORE-560103. PAN: AAACW5438M.

…RESPONDENT

(BY Mrs. SUJATHA.D., ADV FOR SRI MALLAHARAO.K., ADV.)

Date of Judgment 04-07-2018, ITA No.306/2016 The Pr. Commissioner of Income Tax-6 & another Vs. M/s. Software AG Bangalore Technologies Pvt. Ltd.,

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THIS INCOME TAX APPEAL IS FILED UNDER SECTION 260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 30.09.2015 PASSED IN IT[TP]A NO.1306/BANG/2011, FOR THE ASSESSMENT YEAR 2007-2008, ANNEXURE-A, PRAYING TO [a]. 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. [b] SET ASIDE THE APPELLATE ORDER DATED 30.09.2015 PASSED BY THE ITAT, ‘A’ BENCH, BENGALURU, IN APPEAL PROCEEDINGS No.IT[TP]A No.1306/BANG/2011 FOR A.Y. 2007- 08, ANNEXURE-A, AND GRANT SUCH OTHER RELIEF AS DEEMED FIT, IN THE INTEREST OF JUSTICE.

THIS APPEAL COMING ON FOR HEARING, THIS DAY, Dr. VINEET KOTHARI, J., DELIVERED THE FOLLOWING:

J U D G M E N T

Mr. Sanmathi.E.I., Adv. for Appellants – Revenue. Mrs. Sujatha.D., Adv. for Mr. Mallaharao.K., 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 ‘A’, Bangalore, in IT [TP]A. No.1306/Bang/2011 dated 30.09.2015, relating to the Assessment Year 2007-08.

Date of Judgment 04-07-2018, ITA No.306/2016 The Pr. Commissioner of Income Tax-6 & another Vs. M/s. Software AG Bangalore Technologies Pvt. Ltd.,

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formulated in the appeal memorandum except question No.3, which reads thus: “[1] Whether on the facts and in the circumstances of the case, the Tribunal was justified in 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 companies, out of companies selected by TPO as comparables in the case of the assessee? [2] Whether on the facts and in the circumstances of the case, the Tribunal was justified in holding that few companies are functionally different from the assessee when it satisfies all the qualitative and quantitative filters applied by the TPO. The Tribunal had used a narrower functionality filter than the TPO, but had not tested other comparables against the narrower functionality filter applied by it? [4] Whether on the facts and in the circumstances of the case, the Tribunal is right in holding that the assessing authority is not right in working out the operating revenue of the assessee by not including the foreign exchange gain by relying on its earlier decision in the case of Triology E-Busine which has not reached

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finality since the said order has been challenged before this Hon’ble Court in ITA No.171/13?”

“xxxxxx”

Date of Judgment 04-07-2018, ITA No.306/2016 The Pr. Commissioner of Income Tax-6 & another Vs. M/s. Software AG Bangalore Technologies Pvt. Ltd.,

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the final list of comparable companies for the purpose of determining ALP.”

Regarding second substantial question of law:- “17. As far as comparable companies listed at Sl.No.2, 3 and 12 of the final list of comparable companies chosen by the TPO viz., Avani Cincom Technologies Ltd., Celestial Labs Limited and KALS Infosystems Ltd., are concerned, this Tribunal in the case of First Advantage Offshore Services Pvt. Ltd., V/s. DCIT IT [TP] No.1086/Bang/2011 for AY 07-08 held that the aforesaid companies are not comparable companies in the case of software development services provider. The nature of services rendered by the Assessee in this appeal and the Assessee in the case of First Advantage Offshore Services Pvt. Ltd., [supra] are one and the same. This fact would be clear from the fact that the very same 26 companies were chosen as comparable in the case of the Assessee as well as in the case of First Advantage Offshore Services Pvt. Ltd., [supra]. In coming to the aforesaid conclusion, the

Date of Judgment 04-07-2018, ITA No.306/2016 The Pr. Commissioner of Income Tax-6 & another Vs. M/s. Software AG Bangalore Technologies Pvt. Ltd.,

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Tribunal in the case of First Advantage Offshore Services Pvt. Ltd., [supra] followed the decision rendered in the case of Trilogy E-Business Software India Pvt. Ltd., V/s. DCIT ITA No.1064/Bang/2011 for AY 07-08 order dated 23.11.2012. The following were the relevant observations in the case of First Advantage Offshore Services Pvt. Ltd., [supra]:

“xxxxx”

Regarding fourth substantial question of law:- 4. The learned Tribunal, after discussing the rival contentions of both the Appellants-Revenue and Respondent-Assessee, has returned a finding as under: “35. We have considered the rival submissions. It is not disputed by the Revenue that the foreign exchange fluctuation has arisen as a result of the realization of the consideration for rendering software development services. It is therefore incurred in the normal course of

Date of Judgment 04-07-2018, ITA No.306/2016 The Pr. Commissioner of Income Tax-6 & another Vs. M/s. Software AG Bangalore Technologies Pvt. Ltd.,

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business and therefore there is no reason why it should be excluded from determining the operating revenue for the purpose of calculation of operating margin. In our view, the analogy drawn by the DRP regarding exclusion of interest expenses while computing operating margins is not proper. In our view, foreign exchange gain on realization of consideration for rendering software development services should be regarding as part of the operating revenue. Following the decision of the ITAT, Bangalore Bench in the case of SAP Labs [supra], we hold that the operating revenue for the assessee be computed by including the foreign exchange gain.”

Date of Judgment 04-07-2018, ITA No.306/2016 The Pr. Commissioner of Income Tax-6 & another Vs. M/s. Software AG Bangalore Technologies 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

Date of Judgment 04-07-2018, ITA No.306/2016 The Pr. Commissioner of Income Tax-6 & another Vs. M/s. Software AG Bangalore Technologies Pvt. Ltd.,

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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. 57. 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

Date of Judgment 04-07-2018, ITA No.306/2016 The Pr. Commissioner of Income Tax-6 & another Vs. M/s. Software AG Bangalore Technologies Pvt. Ltd.,

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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.” 6. 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.

Sd/- JUDGE

Sd/- JUDGE

NC.