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1/15 IN THE HIGH COURT OF KARNATAKA, BENGALURU
DATED THIS THE 2ND DAY OF JULY 2018
PRESENT
THE HON’BLE DR.JUSTICE VINEET KOTHARI
AND
THE HON’BLE MRS.JUSTICE S.SUJATHA
I.T.A. No.457/2017
BETWEEN :
Pr. COMMISSIONER OF INCOME TAX-4, BMTC COMPLEX, KORAMANGALA, BANGALORE
DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE -12(3), BANGALORE
...APPELLANTS
(BY SRI E.I.SANMATHI, ADV.)
AND :
M/s SHARP SOFTWARE DEVELOPMENT INDIA (P) LTD., UNIT 5, LEVEL3, INNOVATE APPELLANT, INTERNATIONAL TECH PAR WHITEFIELD ROAD, BENGALURU-560066 PAN:AAECS0269E
…RESPONDENT
THIS ITA IS FILED UNDER SECTION 260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 09.12.2016 PASSED IN IT[TP]A NO.1102/BANG/2011, FOR THE ASSESSMENT YEAR 2007-2008, PRAYING TO: DECIDE THE FOREGOING QUESTION OF LAW AND/OR SUCH OTHER QUESTIONS OF LAW AS MAY BE FORMULATED BY THE
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HON'BLE COURT AS DEEMED FIT AND SET ASIDE THE APPELLATE ORDER DATED 09.12.2016 PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, 'B' BENCH, BANGALORE, IN APPEAL PROCEEDINGS IN NO. IT[TP]A NO. 1102/BANG/2011 FOR ASSESSMENT YEAR: 2007-08, AS SOUGHT FOR IN THIS APPEAL; AND TO GRANT SUCH OTHER RELIEF AS DEEMED FIT.
THIS APPEAL COMING ON FOR ADMISSION, THIS DAY, Dr. VINEET KOTHARI, J., DELIVERED THE FOLLOWING:
J U D G M E N T
Mr. E.I.Sanmathi, 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, ‘B’ Bench, Bangalore, in IT [TP]A No.1102/Bang/2011 dated 09.12.2016, relating to the Assessment Year 2007-08.
The proposed 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, the Tribunal is right in law in excluding comparable chosen by Transfer Pricing Officer on the basis of facts of a different case for different assessee
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without making any specific FAR analysis vis-à-vis he assessee-company in contrast to the facts of the comparable-companies satisfy all the qualitative and quantitative filters applied by the TPO?
Whether on the facts and in circumstances of the case, the Tribunal is right in law in directing the TPO to allow risk adjustment by following its earlier decision in case of M/s Intellinet Techonologies India P. Ltd. which has been challenged before this Hon’ble Court?
Whether on the facts and in the circumstances of the case, Tribunal is right in law in excluding Mega Soft Ltd. has to be included as comparable by placing reliance on its earlier order even when said order has not reached finality?
Whether on the facts and in the circumstances of the case, the Tribunal is right in law in setting aside the 10A deduction made by assessing authority by
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following the decision of this Hon’ble Court in case of CIT v/s Tata Elxsi which has not reached finality?”
Whether on the facts and in the circumstances of the case, the Tribunal was right in law in excluding certain comparables on the basis of Turnover Filter?”
Regarding Substantial Question No.4:
Learned counsel for the Appellants-Revenue Mr. E.I. Sanmathi 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,
Date of Judgment 02-07-2018, ITA No.457/2017 Pr. Commissioner of Income Tax-4 & another Vs. M/s Sharp Software Development India (P) Ltd.
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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 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”.
Date of Judgment 02-07-2018, ITA No.457/2017 Pr. Commissioner of Income Tax-4 & another Vs. M/s Sharp Software Development India (P) Ltd.
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Regarding Substantial Question Nos.1 to 3 and 5: 5. The learned Tribunal, after discussing the rival contentions of both the Appellants-Revenue and Respondent-Assessee, has returned a finding as under: “08. We have considered the above submissions and find merit in them and hence accepted the additional ground. We have perused the orders and heard the rival contentions. Assessee is seeking exclusion of 18 comparables out of 26 companies selected by the TPO. This 18 comparables included 5 comparables selected by the assessee and retained by the TPO Viz,, Helios & Matheson Information Technology Ltd.,Quintegra Solutions Ltd, Infosys Technologies Ltd, Mindtree Consulting Ltd & Sasken Communication Technologies Ltd. Out of which, the assessee filed additional grounds on Helios & Matheson Information Technology Ltd & Quintegra Solutions Ltd. For E – Zest Solutions Ltd also, the assessee filed an additional ground, which we have admitted, supra. In view of the decision of the special Bench in DCIT v Quark Systems India [2010] 42 DTR 414 which was followed by this Tribunal in M/s. Actiance India P. Ltd., vs. ITO in IT[TP]A.1056/Bang/2011, dt.
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12.06.2015, we are of the opinion that the assessee can raise a fresh ground for exclusion considering the evolving nature of the transfer pricing. The assessee mainly sought rejection of the following comparables based on functional difference and on the turnover filter relying on this Tribunal decisions reported in M/s. Meriter LVS India [P] Ltd in IT[TP]A No.1231/Bang/2011 dt. 16.10.2015 for ay 2007-08, M/s. Actiance India Private Ltd in IT[TP]A No.1056/Bang/2011 dt. 12.06.2015 for ay 2007-08, M/s. Maxim India Integrated Circuit Design Pvt Ltd in IT[TP]A No.28/Bang/2012 dt. 31.03.2016 for ay 2005-06 etc., which is schematically extracted as under: xxxxx.”
“15. The next issue is that the TPO erred in not making suitable adjustments on account of differences in the risk profile of the appellant vis- à-vis the comparables, while conducting comparability analysis:
The assessee pleaded that functions under a limited risk environment with most of the risk being assumed by its AE. It bears lesser/ limited business risks than independent comparable companies due to the nature of its revenue model
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as it is guaranteed profits by way of a mark-up on costs incurred, in provision of the software development services. However, the independent companies have to bear the vagaries of the economic and business factors that are prevailing in the industry and thus could either incur losses or earn profits based on market conditions. Rule 10B [1][e][iii] provides that an adjustment should be made to the profit margin of independent comparable companies to take into account the differences in functions and risks. The OECD Transfer Pricing guidelines also recognize adjustments to be made to account for differences between controlled and uncontrolled situations that would significantly affect the price charged or return required by independent enterprises. Accordingly, controlled and uncontrolled transactions are comparable only when adjustments with respect to significant differences between them in terms of risks assumed is made. In the submissions made to the TPO, it has computed the adjustment for the risk difference of the assessee vis-à-vis of the comparable companies by placing reliance on the methodology of risk adjustment as stated in the decision of the Hon’ble Bangalore Tribunal in case of Philips Software Centre Private
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Limited vs. Asst. Commissioner of Income Tax [119 TTJ 721] [2008 26 SOT 226] as below: Average prime lending rate during FY 2006-07 [A]
11.88 percent Average bank rate During FY 2006-07 [B]
6.00 percent Difference between the prime lending Rate and bank rate C [A – B]
5.88 percent Risk Adjustment [C]
5.88 percent
However, the TPO did not provide/ make any risk-adjustment to the margins on the ground that id does not have material impact on the profitability and accordingly denied any risk adjustment. The TPO has stated that the appellant bears the “single customer risk” which more than offsets the other risks borne by independent companies. It places reliance in M/s. Intellinet Technologies India Pvt. Ltd., vs. ITO [ITA No.1237[Bang]/2010] in support of its and highlighted the relevant part as under: xxxxxxxxxxxx
Following the above decision, we direct the TPO to consider all the contentions of the assessee and after taking into account all the
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relevant material decide the percentage of risk adjustment to be made in accordance with law. This ground is, accordingly, allowed for statistical purposes.”
Following the above order of the Tribunal i.e., M/s. Actiance India P. Ltd., v. ITO for the assessment year 2007-08, we direct exclusion of Quintegra Solutions Ltd on the basis of functional difference and exclusion of INfosys Technologies Ltd, Wipro Ltd [seg], Flextronics Software Systems Ltd [seg], Persistent Systems Ltd, Sasken Communication Technologies Ltd [seg], Tata Elsxi Ltd [seg], iGate Global Solutions Ltd [seg] and Mind tree Consulting Ltd on the basis of turnover filter.”
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
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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.
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
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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.
Hence, the Appeal filed by the Appellants- Revenue is liable to be dismissed and is accordingly dismissed. No costs.
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A copy of this order shall be sent to the Respondent-Assessee.
Sd/- JUDGE
Sd/- JUDGE
AN/-