Loading judgment…
No AI summary yet for this case.
1/14 IN THE HIGH COURT OF KARNATAKA, BENGALURU
DATED THIS THE 10TH DAY OF JULY 2018
PRESENT
THE HON’BLE DR.JUSTICE VINEET KOTHARI
AND
THE HON’BLE MRS.JUSTICE S.SUJATHA
I.T.A.No.171/2013
BETWEEN : 1. COMMISSIONER OF INCOME TAX-III
REVENUE BUILDINGS
QUEENS ROAD
BANGALORE-560001.
THE DEPUTY COMMISSIONER
OF INCOME TAX
CIRCLE 12[4]
BANGALORE.
...APPELLANTS
(BY SRI E.I.SANMATHI, ADV.)
AND : M/s. TRILOGY E-BUSINESS SOFTWARE INDIA PRIVATE LTD., No.1/2, LALITHA NILAYA 4TH CROSS, RMV IIND STAGE BHOOPASANDRA BANGALORE-560094.
…RESPONDENT
(BY SRI S.SHARATH, ADV. FOR SRI CHYTHANYA.K.K., ADV.)
THIS INCOME TAX APPEAL IS FILED UNDER SECTION 260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 23.11.2012, PASSED IN ITA No.1054/BANG/2011, FOR THE ASSESSMENT YEAR 2007-08, ANNEXURE-A, PRAYING TO:
Date of Judgment 10-07-2018, ITA No.171/2013 Commissioner of Income Tax-III & Another Vs. M/s. Trilogy E-Business Software India Private Ltd.,
2/14
i.] FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN; ii.] SET ASIDE THE APPELLATE ORDER DATED 23.11.2012 PASSED BY THE ITAT, ‘A’ BENCH, BANGALORE, IN APPEAL PROCEEDINGS ITA No.1054/BANG/2011, ANNEXURE-A, AS SOUGHT FOR IN THIS APPEAL.
THIS APPEAL COMING ON FOR HEARING, THIS DAY, S. SUJATHA, J., DELIVERED THE FOLLOWING:
J U D G M E N T
Mr. E.I.Sanmathi, Adv. for Appellants – Revenue. Mr. S.Sharath, Adv. for Mr. Chythanya.K.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 ITA No.1054/Bang/2011 dated 23.11.2012, relating to the Assessment Year 2007-08.
The appeal has been admitted on 08.07.2013 to examine the substantial questions of law as indicated in the memorandum of appeal.
Date of Judgment 10-07-2018, ITA No.171/2013 Commissioner of Income Tax-III & Another Vs. M/s. Trilogy E-Business Software India Private Ltd.,
3/14
The 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 was justified in law in holding that the size and turnover of the company are deciding factors for treating a company as a comparable and accordingly directing the Assessing Officer/TPO not to includes cases of M/s. Flextronics Software Systems Ltd., M/s. IGate Global Solutions Ltd., M/s. Mindtree Ltd., M/s. Persistent Systems Ltd., M/s. Sesken Communication Technologies Ltd., M/s. Tata Elxsi Ltd., M/s. Wipro Ltd., and M/s. Infosys Ltd., as comparables for determining ALP in the case of the assessee?
Whether on the facts and in the circumstances of the case, the Tribunal was right in law in super imposing the decision of other benches of the Tribunal in the case of the assessee to reject the four cases of comparables namely, M/s. Megasoft Ltd., M/s. Avani Cimcon Technology Ltd., M/s. Kals Information Systems Ltd., and M/s. Accel Transmatics Ltd., when
Date of Judgment 10-07-2018, ITA No.171/2013 Commissioner of Income Tax-III & Another Vs. M/s. Trilogy E-Business Software India Private Ltd.,
4/14
selection of comparables in a case for determining ALP depends on assessee specific FAR analysis?
Whether on the facts and in the circumstances of the case, the Tribunal was right in law in relying on the decision of other benches of the Tribunal to reject the four cases of comparables namely, M/s. Megasoft Ltd., M/s. Avani Cimcon Technology Ltd., M/s. Kals Information Systems Ltd., and M/s. Accel Transmatics Ltd., without considering the specific facts brought on record by the TPO in the case of assessee for deciding the comparability of the companies?
Whether on the facts and in the circumstances of the case the Tribunal was right in law in holding that the foreign exchange loss/gain is operating in nature when, such loss/gain though attributable to the operating activity, is not derived form the operating activity?”
The learned Tribunal, after discussing the rival contentions of both the Appellants-Revenue and Respondent-Assessee, has returned a finding as under:
Date of Judgment 10-07-2018, ITA No.171/2013 Commissioner of Income Tax-III & Another Vs. M/s. Trilogy E-Business Software India Private Ltd.,
5/14
Regarding first substantial question of law:-
[1] Turnover Filter
The learned counsel for the assessee submitted that the TPO has applied a lower turnover filter of Rs.1 crore, but has not chosen to apply any upper turnover limit. In this regard, it was submitted by him that under rule 10B[3] to the Income-tax Rules, it was necessary for comparing an uncontrolled transaction with an international transaction that there should not be any difference between the transactions compared or the enterprises entering into such transaction, which are likely to materially affect the price or cost charged or paid or profit arising from such transaction in the open market. Further, it is also necessary to see that wherever there are some differences such differences should be capable of reasonable accurate adjustment in monetary terms to eliminate the effect of such differences. It was his submission that size was an important facet of the comparability exercise. It was submitted that significant differences in size of the companies would impact comparability. In this regard our attention was drawn to the decision of the Special Bench of the ITAT Chandigarh Bench in the case of DCIT v. Quark Systems Pvt. Ltd., 38 SOT 207,
Date of Judgment 10-07-2018, ITA No.171/2013 Commissioner of Income Tax-III & Another Vs. M/s. Trilogy E-Business Software India Private Ltd.,
6/14
wherein the Special Bench had laid down that it is improper to proceed on the basis of lower limit of 1 crore turnover with no higher limit on turnover, as the same was not reasonable classification. Several other decisions were referred to in this regard laying down identical proposition. We are not referring to those decisions as the decision of the Special Bench on this aspect would hold the field. Reference was also made to the OECD TP Guidelines, 2010 wherein it has been observed as follows:-
“xxxxx”
The ICAI TP Guidelines note on this aspect lay down in para 15.4 that a transaction entered into by a Rs.1,000 crore company cannot be compared with the transaction entered into by a Rs.10 crore company. The two most obvious reasons are the size of the two companies and the relative economies of scale under which they operate. The fact that they operate in the same market may not make them comparable enterprises. The relevant extract is as follows [on Rule 10B [3]]:
“xxxxx”
Date of Judgment 10-07-2018, ITA No.171/2013 Commissioner of Income Tax-III & Another Vs. M/s. Trilogy E-Business Software India Private Ltd.,
7/14
It was further submitted that the TPO’s range [Rs.1 crore to infinity] has resulted in selection of companies like Infosys which is 277 times bigger than the Assessee [turnover of Rs.13,149 crores as compared to Rs.47.47 crores of Assessee]. It was submitted that an appropriate turnover range should be applied in selecting comparable uncontrolled companies.
Reference was made to the decision of the ITAT Bangalore Bench in the case of Genesis Integrating Systems [India] Pvt. Ltd., v. DCIT, ITA No.1231/Bang/2010, wherein relying on Dun and Bradstreet’s analysis, the turnover of Rs.1 crore to Rs.200 crores was held to be proper. The following relevant observations were brought to our notice:-
“xxxxx”
It was brought to our notice that the above proposition has also been followed by the Honourable Bangalore ITAT in the following cases:
“xxxxx”
It was finally submitted that companies having turnover more than Rs.200 crores ought to
Date of Judgment 10-07-2018, ITA No.171/2013 Commissioner of Income Tax-III & Another Vs. M/s. Trilogy E-Business Software India Private Ltd.,
8/14
be rejected as not comparable with the Assessee.”
Regarding substantial question of law Nos.2 and 3:- “38. Neither the TPO nor the DRP have noticed that there is bound to be a difference between the Assessee and Megasoft and the profit arising to the Megasoft as a result of the existence of the software product segment and no finding has been given that reasonably accurate adjustments can be made to eliminate the material effects of such differences. For this reason, we are inclined to hold that the profit margin of 23.11% which is the margin of the software service segment be taken for comparability. In view of the above conclusion, we do not wish to go into the question as to whether less than 25% of the revenues of the comparable are from software products and therefore the comparable satisfied TPO’s filter of more than 75% of revenues from software development services.
We have given a careful consideration to the submissions made on behalf of the Assessee and are of the view that the same deserves to be accepted. The reasons given by the Assessee for excluding this company as comparable are found
Date of Judgment 10-07-2018, ITA No.171/2013 Commissioner of Income Tax-III & Another Vs. M/s. Trilogy E-Business Software India Private Ltd.,
9/14
to be acceptable. The decision of ITAT [Mumbai] in the case of Telcordia Technologies Pvt. Ltd., v. ACIT [supra] also supports the plea of the assessee. We therefore accept the plea of the Assessee to reject this company as a comparable.”
On similar grounds, the Tribunal has distinguished the other comparables also.
Regarding fourth substantial question of law:-
“[B] Treating foreign exchange gain or loss and provision for bad debts as non-operating in nature and fringe benefit tax as part of operating cost:
As far as foreign exchange gain/loss being considered as not forming part of the operating cost, the reasoning of the revenue is that such loss or gain cannot be said to be one realized from international transaction though they may form part of the gain/loss of the enterprise and therefore they should be excluded while determining operating cost. On the above issue we find that the Bangalore Bench of ITAT in the case of Sap Labs India [P] Ltd., Vs. ACIT [2011] 44 SOT 156 [Bang.] has taken the view that
Date of Judgment 10-07-2018, ITA No.171/2013 Commissioner of Income Tax-III & Another Vs. M/s. Trilogy E-Business Software India Private Ltd.,
10/14
Foreign Exchange Fluctuation gains are required to be added to operating revenue. Following the same, the AO is directed to accept the claim of the Assessee in this regard. As far as provision for bad debts are concerned, the TPO has accepted that the same would be part of operating expenses provided the same is incurred every year for at least three years and the manner in which provision is made is consistent. The Assessee in reply to the query of the TPO on the above aspect has not furnished any details. We are of the view that the Assessee should be afforded opportunity to explain its position on the above and the AO is directed to consider the same in accordance with law. As far as Fringe Benefit Tax [FBT] is concerned, the same was not considered by the TPO as part of operating cost in the case of comparables and therefore the same should also not be considered as part of operating cost of the Assessee. We hold accordingly and direct the AO to compute the operating cost of the Assessee.
[C] Not making proper adjustment for enterprise level and transactional level differences between the Assessee and comparable companies.
Date of Judgment 10-07-2018, ITA No.171/2013 Commissioner of Income Tax-III & Another Vs. M/s. Trilogy E-Business Software India Private Ltd.,
11/14
[D] Adjustment for differential in risk to be given.”
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: “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
Date of Judgment 10-07-2018, ITA No.171/2013 Commissioner of Income Tax-III & Another Vs. M/s. Trilogy E-Business Software India Private Ltd.,
12/14
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 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
Date of Judgment 10-07-2018, ITA No.171/2013 Commissioner of Income Tax-III & Another Vs. M/s. Trilogy E-Business Software India Private Ltd.,
13/14
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 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
Date of Judgment 10-07-2018, ITA No.171/2013 Commissioner of Income Tax-III & Another Vs. M/s. Trilogy E-Business Software India Private Ltd.,
14/14
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.