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1/15 IN THE HIGH COURT OF KARNATAKA, BENGALURU
DATED THIS THE 29TH DAY OF JUNE 2018
PRESENT
THE HON'BLE Dr.JUSTICE VINEET KOTHARI
AND
THE HON’BLE Mrs.JUSTICE S.SUJATHA
I.T.A.No.53/2016
BETWEEN:
Principal Commissioner of Income-Tax
Bangalore-3, C.R.Building, 1st Floor
Queen’s Road, Bangalore-560 001
Income-Tax Officer, Ward-11(2)
B.M.T.C. Building, Koramangala
Bangalore.
…APPELLANTS (By Mr.Jeevan J. Neeralgi, Adv.)
AND:
M/s.GXS India Technology Centre Pvt. Ltd. Prestige Emerald, 2nd, 3rd & 4th Floor Municipal No.2 Madras Bank Road Levelle Road Junction, Bangalore-560 001
…RESPONDENT (By Mr.Ankur Pai, Adv.)
THIS I.T.A IS FILED UNDER SECTION 260-A OF INCOME TAX ACT 1961 PRAYING TO I) DECIDE FOREGOING QUESTIONS OF LAW OR SUCH OTHER QUESTIONS OF LAW AS MAY BE FORMULATED BY THE HON’BLE Court AS DEEMED FIT IN FAVOUR OF THE APPELLANT II) SET ASIDE THE ORDER DATED 31.07.2015 PASSED BY THE ITAT IN IT(TP)A
Date of Judgment 29-06-2018 I.T.A.No.53/2016 Principal Commissioner of Income-Tax & Anr. Vs. M/s. GXS India Technology Centre Pvt. Ltd.
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NO.1444/BANG/2012 FOR THE ASSESSMENT YEAR 2008-2009 AND ETC.
THIS I.T.A. COMING ON FOR ADMISSION, THIS DAY Dr. VINEET KOTHARI J. DELIVERED THE FOLLOWING:-
JUDGMENT
Mr. Jeevan J. Neeralgi, Adv. for Appellants-Revenue Mr.Ankur Pai, Adv. for Respondent-assessee
The Appellants-Revenue have filed this appeal u/s.260A of the Income Tax Act, 1961, raising purportedly certain substantial questions of law arising from the order of the ITAT, ‘C’ Bench, Bangalore, dated 31.07.2015 passed in IT(TP)A No.1444(Bang) 2012 (GXS India Technology Centre Pvt. Ltd. vs. The Income-tax Officer) for A.Y.2008-2009.
The proposed substantial questions of law framed in the Memorandum of appeal by the Appellants-Revenue are quoted below for ready reference:-
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“1) Whether the ITAT is right in fact and in law in seeking exact comparability while searching for comparable companies of the respondent under TNMM method whereas requirement of law and international jurisprudence require seeking similar comparable companies?
2) Whether while seeking the exact comparability as mentioned in the above the ITAT is right in imposing the condition beyond law where the requirement of law is to acknowledge only those differences that are likely to materially affect the margin?
3) Whether, the ITAT is right in not acknowledging that determination of ALP by carrying out comparability analysis of the companies is an art and not exact science as no two companies are exactly same?
4) Whether the ITAT is right in demanding comparability standards that may itself defeat the purpose of law relating to determination of ALP under the Income-Tax Act?
5) Whether under the circumstances of the case, the ITAT is right in not taking
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cognizance of the fact that the respondent had been accorded approval by STPI for setting up a new undertaking and the undertaking was not conferred the status of a STP consequent upon the sale?
6) Whether under the circumstances of the case the ITAT is right in allowing the claim of deduction under Section 10A of the Act by not considering the fact that prior to the sale of the undertaking the assets had been put to use in India and therefore not eligible for deduction under Section 10A of the Act?”
Regarding substantial question of law Nos.1 to 5:
The learned Tribunal, after discussing the rival contentions of both the Appellants-Revenue and the Respondent-assessee, has given the following findings against Revenue with regard to various issues raised before it with regard to ‘Transfer Pricing’ and ‘Transfer Pricing Adjustments’ made by the concerned authorities below. We consider it appropriate to quote
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from the order of Tribunal rejecting the Application seeking a review before Tribunal as hereunder:- i) Avani Cimcon:
“7.1 Thus, it was brought to the notice of the Tribunal that the said company is primarily engaged in the development of software products and particularly in customized software solution like DXchange, Carma etc. products. The Tribunal after considering the functions and the information available on the website of the company has concluded at para-7.6.1 and 7.6.2 as under; xxxxx Following the order of the co-ordinate bench of this Tribunal in case of 3DPLM Software Solutions Ltd (Supra) we direct the AO/TPO to exclude this company from the list of comparables.
Bodhtree Ltd: The learned AR of the assessee submitted that this company is in the business of software products and engaged in providing open and end to end as well as software consultancy and design, development and software. He has referred and relied upon
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the decisions of the co-ordinate bench of this Tribunal in case of M/s CISCO Systems India Pvt. Ltd., dated 14-08-2014 in ITA No.271(B)/2014 and submitted that this company was found to be not comparable to a software development company.
8.1 On the other hand, learned DR relied upon the orders of the authorities below.
8.2 Having considered the rival submission as well as the relevant material on record, we note that the functional comparability of this company has been examined by the co-ordinate bench of this Tribunal in case of M/s CISCO Systems India Pvt. Ltd(Supra) in para-26.1 as under; xxxxxx
Following the finding of this Tribunal in case of Cisco System (Ind.)Pvt. Ltd.(Supra)we direct the AO/TPO to exclude this company from the list of comparables.
Celestial Labs Ltd., The learned AR of the assessee submitted that this company is engaged in the product development in the field of biotech and pharmaceuticals etc. This company has also incurred R&D expenditure which is
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morethan 3% of the sales. Therefore, this company cannot be treated as functionally similar to the assessee for the purpose of determining the ALP. In support of his contention, he has relied upon the decision of the co-ordinate bench of this Tribunal in case of 3DPLM Software Solutions Ltd. (Supra).
9.1 On the other hand, learned DR relied upon the orders of the authorities below and submitted that the objections of the assessee were duly considered by the TPO/DRP and this company was found to be a good comparable of the assessee.
9.2 We have considered the rival submissions and the material on record. At the outset, we note that the functionally comparability of this company has been examined by the co-ordinate bench of this Tribunal in case of 3DPLM Software Solutions Ltd (Supra), in para-9.4.1 & 9.4.2 as under;
xxxxx
Following the decision of the co-rdinate bench of this Tribunal(Supra), we direct the TPO/AO to exclude this company from the list of comparables.”
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Softsol India Ltd:
18.3 Since the functional comparability has not been examined by the Tribunal in the case of 3DPLM Software Solutions Ltd., (Supra) and this company was directed to be excluded only on the ground of related party transaction. It is pertinent to note that the Tribunal in series of decisions has determined the tolerance range of related party transactions from 5% to 25% depending upon case to case and facts and circumstances of the each case. It is not clear from the orders of the authorities below whether any related party filter was applied by the TPO. Further, the tolerance range of related party transactions has to be determined depending upon the availability of number of comparables. If the no of comparables are abundance then, this tolerance range of related party transactions can be fixed at a lower level to say 10% to 15% as against the case where number of comparables are very few, the tolerance range can be relaxed upto 25%. This view of varying the range of RPT percentage has been considered by this Tribunal in number of cases depending upon the peculiar facts of each case. Thus, if the filter of RPT at 15% is
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applied in a particular comparable then, this filter should also applied to all other comparables companies. The assessee has also disputed functional comparability of this company and contended that this company is engaged in the software product development. However, the relevant record has not been produced before us to show the functional profile and the revenue generated activity of this company. In view of the facts and circumstances of the case, we are of the considered opinion that the functional comparability as well as the applicability of RPT filter is required to be properly examined at the level of TPO. Accordingly, we set aside the functional comparability and application of the RPT filter to the record of the TPO. Needless to say the assessee be given an appropriate
18.4 We make it clear that the RPT filter if any is applied in this case, then, the same would be applicable in all the comparable companies to be considered for the purpose of determining the ALP.”
Lucid Software and Mindtree:
20.1 Thus, it is clear from the examination of the fact that this company was found to be
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functionally not comparable with the software development service provider company. Accordingly, following the order of the co-ordinate bench of this Tribunal (Supra), we direct the AO/TPO to exclude this company from the list of comparables. [ 20.2 Since most of the comparables selected by the TPO has been rejected by us in the foregoing findings therefore, the assessee as well as the TPO are at liberty to consider as many as possible companies as comparable for the purpose of determining the ALP, subject to the parameters on the basis of which the earlier companies selected by the TPO are rejected. Thus, the AO/TPO are directed to re-compute the ALP by doing a fresh exercise of selecting the suitable comparables apart from the comparables which are accepted by both the parties in the present of comparables.”
Regarding substantial question of law No.6:-
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
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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, 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
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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. 20. 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
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from the total turnover in same proportion as well”.
This Court in ITA No.536/2015 C/w ITA No.537/2015 delivered on 25.06.2018 (Prl. Commissioner of Income Tax & Anr. Vs. M/s. Softbrands India Pvt. Ltd.,) has held that in these type of cases, unless an ex-facie perversity in the findings of the learned Income Tax Appellate Tribunal is established by the appellant, the appeal at the instance of an assessee or the Revenue under Section 260-A of the Act is not maintainable and the relevant portion of the said 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
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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 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
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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.”
Having heard the learned counsels for the parties, we are therefore of the opinion that no substantial question of law arises in the present case also. The appeal filed by the Appellants-Revenue is liable to be dismissed and it is dismissed accordingly. No costs.
Sd/- JUDGE
Sd/- TL
JUDGE