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1/16 IN THE HIGH COURT OF KARNATAKA, BENGALURU
DATED THIS THE 28th DAY OF JUNE 2018
PRESENT
THE HON'BLE Dr.JUSTICE VINEET KOTHARI
AND
THE HON’BLE Mrs.JUSTICE S.SUJATHA
I.T.A.No.507/2016
Between:
Principal Commissioner Of Income Tax-4 C.R. Building, Queens Road Bangalore-560 001.
The Income Tax Officer Circle-11(2) Bangalore. …Appellants (By Mr. Sanmathi.E.I, Advocate)
And:
M/s LSI Research & Development Private Limited Global Technology Park- Block C, Marathahalli Outer Ring Road Devarabeesanahalli Bangalore-560 103. …Respondent (By Mr. T. Suryanarayana, Advocate)
Date of Judgment 28-06-2018 I.T.A.No.507/2016
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This I.T.A. is filed under Section 260-A of Income Tax Act 1961, praying to 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. (a) Set aside the appellate order dated:13/05/2016 passed by the ITAT, ‘B’ Bench, Bengaluru, in appeal proceedings No.IT(TP)A No.1381/ Bang/2010 for the Assessment Year 2006-07 as sought for in this appeal; and to grant such other relief as deemed fit, in the interest of justice and etc.
This I.T.A. coming on for Admission, this day Dr. Vineet Kothari J. delivered the following:-
JUDGMENT
Mr. Sanmathi.E.I. Adv. for Appellants - Revenue Mr. T.Suryanarayana Adv. for Respondent-Assessee
The Appellants - Revenue have filed this appeal raising purported substantial questions of law arising from the Order of the learned Income Tax Appellate Tribunal “B” Bench: Bangalore, Annexure A dated 13/05/2016 in IT(TP)A.No.1381/Bang/2010 for AY 2006-07. 2. The appellants - Revenue have suggested five substantial questions of law which are quoted below for ready reference: -
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“(1) Whether, on the facts and in the circumstances of the case, the Tribunal is justified in directing the assessing officer to exclude the expenditure in foreign currency from the export turnover and the total turnover when there is no provision in section 10A which requires the said expenses to be reduced from the total turnover also?
(2) Whether the Tribunal was right in fact and in law in seeking exact comparability, while searching for comparable companies of the assessee under TNMM whereas the requirement of law and international jurisprudence require seeking similar comparables companies?
(3) Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in directing the TPO to exclude M/s. Kals Information Systems India Ltd., Tata Elxi Ltd., Lucid Software Ltd., Accel Software Ltd., and M/s.Infosys Technologies Ltd, as comparables in the case of the
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taxpayer even with the assessing authority has chosen the same considering the functions, FAR analysis and applying the required test?
(4) Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in directing the TPO to re- adjudicate and re-examine the comparability of Flextronics Software Ltd, even when the TPO had considered the same as comparable after verification and due application of mind?
(5) Whether, on the facts and in the circumstances of the case, the Tribunal is right in directing the TPO to exclude certain comparables on the ground of having RPT in excess of 15% of the total sales/Revenue ignoring the TPO’s observation that the basis for determining the threshold limit for eliminating companies having RPT transactions more than 25% was through the determination of Indian companies with foreign shareholding greater than 26% and, therefore, had its basis in the provisions of
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the IT Act, 1961, and the Accounting Standards AS-18?”
In so far as the first purported substantial question of law raised by the Revenue is concerned, the same is covered by the Division Bench decision of this Court in the case of M/s.Tata Elxsi Ltd., Vs. Asst.Commissioner of Income Tax, decided on 20/10/2015 (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 this Court in the case of M/s.Tata Elxsi (supra), is quoted below for ready reference:-
“20. From the aforesaid provisions, it is clear that if a assessee wants to claim the benefit of Section 10A, firstly he must export articles or things or computer software.
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Secondly, the said export may be done directly by him or through other exporter after fulfilling the conditions mentioned therein. Thirdly, such an export should yield foreign exchange which should be brought into the country. If all these three conditions are fulfilled, then the object of enacting Section 10A is fulfilled and the assessee would be entitled to the benefit of exemption from payment of Income Tax Act on the profits and gains derived by the Undertaking from the export.
Clause 6.11 of Exim Policy dealing with entitlement for supplies from the DTA states that supplies from the DTA to EOU/EHTP/STP/BTP units will be regarded as ‘deemed export’, besides being eligible for relevant entitlements under paragraph 6.12 of the Policy. They will also be eligible for the additional entitlements mentioned therein. What is of importance is when a supply is made from DTA to STP, it does not satisfy the requirements of export as defined under the Customs Act. However, for the
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purpose of Exim Policy, it is treated as ‘deemed export’. Therefore, when Section 10A of the Act was introduced to give effect to the Exim Policy, the supplies made from one STP to another STP has to be treated as ‘deemed export’ because Clause 6.19 specifically provides for export through Status Holder. It provides that an EOU/EHTP/STP/BTP unit may export goods manufactured/software developed by it through other exporter or Status holder recognized under this policy or any other EOU/EHTP/STP/BTP unit. What follows from this provision is that to be eligible for exemption from payment of income tax, export should earn foreign exchange. It does not mean that the undertaking should personally export goods manufactured / software developed by it outside the country. It may export out of India by itself or export out of India through any other STP Unit. Once the goods manufactured by the assessee is shown to have been exported out of India either by the assessee or by another STP Unit
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and foreign exchange is directly attributable to such export, then Section 10A of the Act is attracted and such exporter is entitled to benefit of deduction of such profits and gains derived from such export from payment of income tax. Therefore, the finding of the authorities that the assessee has not directly exported the computer software outside country and because it supplied the software to another STP unit, which though exported and foreign exchange received was not treated as an export and was held to be not entitled to the benefit is unsustainable in law. The substantial question of law is answered in favour of the assessee and against the revenue. The appeal is allowed. The impugned orders are set aside. The assessee is held to be entitled to deduction of such profits and gains derived from the export of the computer software. No costs”.
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
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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”.
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In so far as the substantial question of law Nos.2 to 5 is concerned, the learned ITAT in its Order dated 13/05/2016 has given the following findings, the relevant portion of which is quoted below for ready reference:-
“20. In view of the consistent opinion of this Tribunal of this issue, we concur with the view of the coordinate Bench that when a sufficient number of comparable companies are available for determination of arm’s length price (ALP), then the tolerance limit of RPT at 15% is proper in the case of assessee. Accordingly, we direct the AO/TPO to exclude the following three companies from the list of comparables having more than 15% RPT.
Aztec Software Ltd. 2. Geometric Software Ltd. (Seg.) 3. Megasoft Ltd.
21 to 23 … …. …
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Since the functional comparability of 5 companies which are in dispute before us have been discussed by the coordinate Bench of this Tribunal in case cited supra for the assessment year under consideration, therefore in view of the finding of the coordinate Bench of this Tribunal, we direct the AO/TPO to exclude 4 companies from the list of comparables for determination of ALP and re-examine the comparability of Flextronics Software Ltd. in light of the directions given by the coordinate Bench.
25 to 29 … … …
We find from the profit & loss account of this company that there is work-in-progress during the year under consideration as well as in the earlier year, therefore it supports the finding given by the Tribunal that this company is in the software product and in the absence of segmental data, the financial results of software development services as well product cannot be compared with the assessee’s transaction of software
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development services. Accordingly, in view of the decision of coordinate Bench of the Tribunal cited supra, we direct the AO/TPO to exclude this company, Lucid Software Ltd. from the list of comparables.”
However, this Court in a recent judgment in I.T.A.No.536/2015 c/w. I.T.A.No.537/2015 (Pr.Comissioner of Income Tax, Bangalore and Another Vs. M/s. Softbrands India P.Ltd.,) rendered on 25-06-2018, 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
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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 opinion, give rise to any substantial question of law.
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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 a sufficient reason to invoke Section 260-A of the Act before this Court.
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The appeals filed by the Revenue are therefore dismissed with no order as to costs.”
Having heard the learned counsel for the parties, this Court is satisfied that no substantial question of law would arise in the present case and the appeal filed by the Revenue is therefore, liable to be dismissed. Accordingly, it is dismissed. No costs.
Sd/- JUDGE
Sd/-
JUDGE
BMV*