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1/16 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.343/2013
BETWEEN :
THE COMMISSIONER OF INCOME TAX C.R. BUILDING, QUEENS ROAD BANGALORE
THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-11(4) RASHTROTHANA BHAVAN NRUPATHUNGA ROAD BANGALORE
...APPELLANTS
(BY SRI K.V.ARAVIND, ADV.)
AND :
M/s HCL EAI SERVICES LTD., NO.6, CHAMBERS 80 Ft. ROAD, 6TH BLOCK KORAMANAGALA BANGALORE-560095
…RESPONDENT
(RESPONDENT SERVED & UNREPRESENTED.)
THIS ITA IS FILED UNDER SECTION 260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 28.02.2013 PASSED IN ITA NO.1348/BANG/2011, FOR THE ASSESSMENT YEAR 2007-08, ANNEXURE-D PRAYING TO: I. FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN, II.
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ALLOW THE APPEAL AND SET ASIDE THE ORDER PASSED BY THE ITAT, BANGALORE IN ITA NO.1348/BANG/2011 DATED 28.02.2013 ANNEXURE-D AND CONFIRM THE ORDER OF THE APPELLATE COMMISSIONER CONFIRMING THE ORDER PASSED BY THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-11(4), BANGALORE.
THIS APPEAL COMING ON FOR ADMISSION, THIS DAY, S. SUJATHA, J., DELIVERED THE FOLLOWING:
J U D G M E N T
Mr. K.V.Aravind, Adv. for Appellants – Revenue.
This Appeal is filed by the Revenue purportedly raising substantial questions of law arising from the Order of the Income Tax Appellate Tribunal, ‘A’ Bench Bangalore, in IT [TP]A No.1348/Bang/2011 dated 28.02.2013, relating to the Assessment Year 2007-08.
This Appeal has been admitted on 19.11.2013. The substantial questions of law as framed by the Revenue in the Memorandum of Appeal reads thus. “1. Whether on the facts and in the circumstances and in law the Tribunal was right in super imposing the decisions of the other
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benches and the decision of the ITAT while rejecting the comparables (i) Megasoft Limited, (ii) Avani Cimcon Technologies Limited, (iii) KALS Information Systems Limited, (iv) Accel Transmatics Limited 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 and in law the Tribunal was right in directing that the segmental financials have to be considered as against the enterprise financials without appreciating the fact that at the enterprise level the comparable satisfied all the filters applied by the Transfer Pricing Officer and recorded a perverse finding?
Whether on the facts and in the circumstances of the case and in law the Tribunal was right in directing that segmental financials have to be considered as against the enterprise level financials without appreciating the fact the Transfer Pricing Officer attracted the enterprise level financials as against the segmental financials with which he started, on the basis of the information gathered under Section 133(6) of
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the act and detailed analysis thereof and recorded a perverse finding?
Whether on the facts and in the circumstances of the case and in law Tribunal was correct in rejecting M/s Lucid Software Limited 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 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 inclusion of VMF Softech as a comparable on the ground that comparable functionally similar and is not carrying on outsourcing activity without taking into consideration that the comparable has failed the functionally filter and the major activity is done on job work basis and recorded a perverse finding?
Whether on the facts and in the circumstances of the case and in law the Tribunal was justified in fixing the related party transaction filtered at 15% of the total revenue
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without going into the specific facts in the case of the Tax Payer and without adducing the basis for arriving at such cut-off at 15% 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 exclusion of telecommunication expenses and expenditure incurred in foreign currency from export turnover 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.7:
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
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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
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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 No.1: 5. The learned Tribunal, after discussing the rival contentions of both the Appellants-Revenue and Respondent-Assessee, has returned a finding as under:
“13. As far as comparables at Sl.Nos.1, 2, 3 & 12 of the list of comparables chosen by the TPO are concerned, this Tribunal in the case of Trilogy E-Business Software India Pvt. Ltd.(supra) has taken a view that these companies are not comparable to the software service provider companies. The following are the relevant observations of the Tribunal in this regard:-
xxxxxx
In view of the aforesaid decision of the Tribunal, comparables at Sl.Nos.1, 2, 3 & 12 of the list of comparables chosen by the TPO have to be excluded for the purpose of comparison while determining the ALP of the impugned transaction in this appeal.”
Regarding Substantial Question No.2:
“19. As far as Sl.No.16 viz., Megasoft Ltd. of the list of comparables chosen by the TPO is
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concerned, this Tribunal in the case of Trilogy E- Business Software India Pvt. Ltd. (supra) had held that only segmental data should be taken for the purpose of comparison. Following are the relevant observation of the Tribunal.
xxxxxxx
In view of the aforesaid decision of the Tribunal, segmental margins in so far as it relates to providing software services by Megasoft alone be taken for the purpose of comparison.”
Regarding Substantial Question No.3: “21. As far as the comparable chosen by the TPO at Sl.No.25 viz., Thirdware Solutions Ltd. is concerned, the same was opposed by the assessee as not functionally comparable with that of the assessee. The relevant portion of the order of the TPO in this regard is at page 149 of the TPO’s order. The objection of the assessee is that the aforesaid company was not a software service provider and that the TPO had used segmental data (relating to software development) which was unaudited and provided by the company in response to a notice u/s. 133(6) of the Act. We find that the TPO’s order on this issue is quite vague and it reads as follows:
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xxxxxxxxx
It can be seen from the aforesaid order of the TPO that none of the facts have come out clearly and the objections of the assessee in adopting this company as a comparable is not appropriately dealt with. We therefore set aside the order of the TPO and remand the same to the TPO for fresh consideration with liberty to the assessee to substantiate its case. The TPO will afford opportunity of being heard to the assessee for deciding this issue.”
Regarding Substantial Question No.4: “17. As far as Sl.No.14 of the list of comparable chosen by the TPO is concerned viz., Lucid Software Ltd., is concerned, this Tribunal in the case of CSR India Ltd. in ITA No.1119/Bang/2011, order dated 29.01.2013 for AY 07-08, had considered the comparable of this company with a software service provider like the assessee and has come to the conclusion that the same is not comparable, on the ground that this company was software developer. The following were the relevant observations of the Tribunal:-
xxxxxxxxx
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Respectfully the aforesaid decision of the Tribunal, comparable at Sl.No.14 of the list of comparable chosen by the TPO has to be excluded for the purpose of comparison while determining the ALP of the impugned transaction in this appeal.”
Regarding Substantial Question No.5: “25. The assessee also claims that one of the comparable chosen by it was VMF Softech Ltd., but the same was rejected by the TPO for the reason that this company does not satisfy the 25% employee cost filter and also for the reason that this company was predominantly outsourcing its business. Finally, after considering the taxpayer’s submissions, the TPO has observed as follows:- xxxxxxxx” Regarding Substantial Question No.6: “15. With regard to Sl.No.11 of the list of comparable chosen by the TPO viz., Ishir Infotech Ltd., the ld. counsel for the assessee brought to our notice that this company does not satisfy the employee cost filter adopted by the TPO. In this regard, it is seen that at page 120 of the TPO’s order, the TPO has discussed the comparability of
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this company. One of the filters applied by the TPO was that if the employee cost of a comparable company is less than 25% of its revenue, then the same cannot be treated as a comparable. According to the TPO, the employee cost was more than 25% of the total revenue and therefore the same should be taken as a comparable with the assessee. The assessee’s objection is that in applying the 25% employee cost filter, the TPO has taken the professional fees paid to external third parties as part of the employees cost. The assessee’s submission is that payment of professional fees to external third parties for the performance of services is not a payment on its own behalf and who are not employees of the organization, ought not to have been taken into consideration while arriving at the 25% employee cost filter. The order of the TPO on this aspect is not very clear as to how he has got over the aforesaid objection of the assessee. The TPO seems to have relied on the reply given by the company to the notice issued u/s.133(6) of the Act. It was further brought to our notice that the Bangalore Bench of the Tribunal in the case of CSR India Ltd. in ITA No.1119/Bang/2011, order dated 29.01.2013 for AY 07-08, had considered the comparable of this company with a software
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service provider like the assessee and has come to the conclusion that the same is not comparable, on the ground that it does not satisfy the related party transaction filter. The following are the observations of the Tribunal:- xxxxxxxx
Respectfully the aforesaid decision of the Tribunal, comparable at Sl.No.11 of the list of comparable chosen by the TPO has to be excluded for the purpose of comparison while determining the ALP of the impugned transaction in this appeal.”
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. 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 Appellants- Revenue is liable to be dismissed and is accordingly dismissed. No costs. Copy of this Order be sent to the Respondent- Assessee forthwith.
Sd/- JUDGE
Sd/- JUDGE AN/-