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1/12 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.380/2017
BETWEEN:
THE PR. COMMISSIONER OF INCOME TAX CIT(A), 5TH FLOOR, BMTC BUILDING, 80 FEET ROAD, KORAMANGALA, BENGALURU – 560 095.
THE INCOME TAX OFFICER WARD-11(1), PRESENT ADDRESS, WARD-1(1)(1) 7TH FLOOR, BMTC BUILDING, 80 FEET ROAD, KORMANGALA, BENGALURU – 560 095.
... APPELLANTS
(BY SRI. ARAVIND K V, ADV.)
AND:
M/S ACUSIS SOFTWARE INDIA PVT. LTD., NO.17/2, DOLLARS CHAMBER, LALBAGH ROAD, BENGALURU – 560 029. PAN : AADCA 2415P.
... RESPONDENT
(BY SRI.MALLAHA RAO K AND SRI.SANDEEP KARHAIL, ADVS.)
Date of Judgment 28-06-2018, ITA No.380/2017 The Pr. Commissioner of Income Tax & another Vs. M/s Acusis Software India Pvt. Ltd.
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THIS INCOME TAX APPEAL IS FILED UNDER SEC.260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED:19/10/2016 PASSED IN IT(TP)A NO.1043/BANG/2014, FOR THE ASSESSMENT YEAR 2009-2010. PRAYING TO: 1. FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED ABOVE. 2. ALLOW THE APPEAL AND SET ASIDE THE ORDERS PASSED BY THE ITAT, BENGALURU IN IT(TP)A NO.1043/BANG/2014 DATED:19/10/2016 AND CONFIRM THE ORDER OF THE APPELLATE COMMISSIONER CONFIRMING THE ORDER PASSED BY THE INCOME TAX OFFICER, WARD-1(1)(1), BENGALURU.
THIS APPEAL COMING ON FOR ADMISSION, THIS DAY, Dr. VINEET KOTHARI, J., DELIVERED THE FOLLOWING:
J U D G M E N T
Mr.ARAVIND K.V. , Adv. for Appellants - Mr. MALLAHA RAO K AND SRI.SANDEEP KARHAIL, Adv. for Respondent-
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] No.1105/Bang/2014 dated 19.10.2016, relating to the Assessment Year 2009-10.
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The proposed substantial questions of law framed by the Revenue in the Memorandum of Appeal are as under: “1.
Whether in the facts and circumstances of the case, the Tribunal is right in directing to include forex gain/loss as operating in nature by following its earlier orders in the case of M/s SAP Labs India P.Ltd and M/s Triology E-Business Software India P.Ltd without ascertaining the nexus with the business activity of the taxpayer ?
Whether in the facts and circumstances of the case, the Tribunal is correct in upholding the decision of the Commissioner of Income Tax (Appeal regarding exclusion of telecommunication expenditure and other expenses incurred in foreign currency from export turnover as well as total turnover while computing deduction under section 10A, without appreciating the fact that there is no provision in Section 10A that such expenses should be reduced from the total turnover also, as clause
(iv) of the Explanation 2 to Section 10A provides
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that such expenses are to be reduced only from the export turnover? ”
Regarding substantial question of law No.2:-
Learned counsel for the Appellants-Revenue Mr.K.V.Aravind submits that he does not press the 2nd substantial question of law, as 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, Central – III vs. HCL Technologies Ltd., [2018] 93 Taxmann.com 33(SC).
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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 turnover’ is export turnover.
Any other interpretation would run counter to the legislative intent and would be impermissible.
Date of Judgment 28-06-2018, ITA No.380/2017 The Pr. Commissioner of Income Tax & another Vs. M/s Acusis Software India Pvt. Ltd.
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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”.
Re: Substantial question No.1: The learned Tribunal, after discussing the rival contentions of both the Appellant-Revenue and Respondent-Assessee, has returned a finding as under:
Date of Judgment 28-06-2018, ITA No.380/2017 The Pr. Commissioner of Income Tax & another Vs. M/s Acusis Software India Pvt. Ltd.
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“ 4. Having considered the rival submissions as well as relevant material on record we note that the issue of treatment of foreign exchange fluctuations (gain/loss), accrued on account of export sales has been consistently considered as part of the operating margin for the purpose of determining transfer pricing analysis in a series of decisions by this tribunal. In the case of SAP LABS India Pvt. Ltd., Vs. CIT (Supra), the tribunal held that if the foreign exchange (gain/loss) is accrued to nature.
Similarly, the foreign exchange fluctuations on sales turnover of the comparables should also be considered as part of operating margins. The tribunal in the case of M/s Trilogy E-Business Software Vs DCIT supra has again considered and decided this issue in para (B) as under: “B. As far as foreign exchange gain/loss being considered a 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 gain/loss of the enterprise and therefore they should be excluded while determining operating cost.
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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 56 (Bang) has taken the view that Foreign Exchange fluctuation gains are required to be 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
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Assessee. We hold accordingly and direct the AO to compute the operating cost of the Assessee”.
In view of the above discussion as well as by following the orders of this Tribunal, we direct the AO/TPO to recomputed the operating margin of the assessee by considering the foreign exchange fluctuations (gain/loss) arising from export as operating in nature. Similarly, the foreign exchange fluctuations (gain/loss) on sales shall be considered as part of operating margins of comparables for the purpose of determining arm’s length price.”
The controversy involved herein is no more res integra in view of the decision of this Court in I.T.A. Nos.536/2015 and 537/2015 dated 25.06.2018, 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
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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
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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 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
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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 Appellant-Revenue is liable to be dismissed and is accordingly dismissed. No costs.
Sd/- JUDGE
Sd/- JUDGE ln.