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1/17 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.550/2016
BETWEEN :
Pr. COMMISSIONER OF INCOME TAX-7 BMTC COMPLEX, KORMANGALA BANGALORE
THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-12(4) BANGALORE
...APPELLANTS
(BY SRI E.I.SANMATHI, ADV.)
AND :
M/s TELELOGIC INDIA PVT. LTD., C/O IBM INDIA PVT. LTD., 3RD FLOOR, SUBRAMANYA ARCADE NO.12, BANNERGHATTA MAIN ROAD BANGALORE, PAN:AABCT3272D
…RESPONDENT
(BY SRI MALLAHARAO K. & SRI SANDEEP S. KARHAIL, ADVS.)
THIS ITA IS FILED UNDER SECTION 260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 09.03.2016 PASSED IN IT(TP)A NO.1599/BANG/2012, FOR THE ASSESSMENT YEAR 2008-2009. 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 AND SET ASIDE THE
Date of Judgment 28-06-2018, ITA No.550/2016 Pr. Commissioner of Income Tax-7 & another Vs. M/s Telelogic India Pvt. Ltd.
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APPELLATE TRIBUNAL, 'B' BENCH, BENGALURU, AS SOUGHT FOR, IN THE RESPONDENT-ASSESSEE'S CASE, IN APPEAL PROCEEDINGS IN IT(TP)A NO. 1599/BANG/2012 FOR A.Y. 2008- 2009 & 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. Mr. Mallaharao K. & Mr. Sandeep S. Karhail, Advs. 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, ‘B’ Bench, Bangalore, in IT [TP]A No.1599/Bang/2012 dated 09.03.2016, relating to the Assessment Year 2008-09.
The proposed substantial questions of law framed by the Revenue in the Memorandum of Appeal is as under:
“[1] Whether on the facts and in the circumstances of the case, the Tribunal is right in holding that the assessee is entitled for set off of
Date of Judgment 28-06-2018, ITA No.550/2016 Pr. Commissioner of Income Tax-7 & another Vs. M/s Telelogic India Pvt. Ltd.
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brought forward losses of earlier years for computation of deduction under section 10A by following the decision of this Hon’ble High Court in the case of CIT V/s. Yokogowa even when the said decision has not reached finality and no such provision of set off of brought forward losses of earlier years of other units is prescribed under the Act?
[2] Whether on the facts and in the circumstances of the case, that the Tribunal is right in law in including the expenditure incurred in foreign currency attributed to providing technical services outside India by relying upon the decision of this Hon’ble High Court in the case of CIT V/s. Tata Elaxy even when the said decision has not reached finality and no such way of recomputation as directed by the Tribunal is provided under the provisions of IT Act?
[3] Whether on the facts and in the circumstances of the case, that the Tribunal is right in law in setting aside the disallowance of rent equalization provision for an amount of Rs.5,47,46,191/- even when the assessing authority has applied Accounting Standard -19 of principle of accountancy, which stipulated that if no liability were to exist against a provision, the
Date of Judgment 28-06-2018, ITA No.550/2016 Pr. Commissioner of Income Tax-7 & another Vs. M/s Telelogic India Pvt. Ltd.
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same is to be added back to the total income of the assessee, as the IT Act, 1961, does not recognize any liability on provisional basis?
[4] Whether on the facts and in the circumstances of the case, that the Tribunal is right in law in excluding the comparables on the ground of functional dissimilarity even when the Transfer Pricing Officer has rightly chosen the same by applying qualitative and quantitative filters?”
Regarding 1st substantial question of law:- Learned counsel for the appellants-Revenue has submitted that the Hon'ble Supreme Court has settled the controversy in the case of Commissioner of Income-tax V/s. Yokogawa India Ltd., [(2017) 77 taxmann.com 41 (SC)] and therefore the said controversy is covered by the decision of the Hon'ble Supreme Court. The question is accordingly answered in the same terms.
Date of Judgment 28-06-2018, ITA No.550/2016 Pr. Commissioner of Income Tax-7 & another Vs. M/s Telelogic India Pvt. Ltd.
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Regarding 2nd substantial question of Law:- Learned Counsel for the Revenue submits that the issue involved in this Appeal is covered by the decisions of this Court in M/s.Tata Elxsi Ltd., vs. Asst.Commissioner of Income Tax, decided on 20.10.2015 since reported in (2015) 127 DTR 0327 (Kar) and Commissioner of Income-tax, Central – III vs. HCL Technologies Ltd., [2018] 93 Taxmann.com 33(SC).
The relevant portion of the judgment of the Division Bench 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. Secondly, the said export may be done directly by him or through other exporter after fulfilling the conditions mentioned therein. Thirdly, such
Date of Judgment 28-06-2018, ITA No.550/2016 Pr. Commissioner of Income Tax-7 & another Vs. M/s Telelogic India Pvt. Ltd.
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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 purpose of Exim Policy, it is treated as ‘deemed export’. Therefore, when Section 10A of the Act was introduced to
Date of Judgment 28-06-2018, ITA No.550/2016 Pr. Commissioner of Income Tax-7 & another Vs. M/s Telelogic India Pvt. Ltd.
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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
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or by another STP Unit 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”.
Date of Judgment 28-06-2018, ITA No.550/2016 Pr. Commissioner of Income Tax-7 & another Vs. M/s Telelogic India Pvt. Ltd.
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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.550/2016 Pr. Commissioner of Income Tax-7 & another Vs. M/s Telelogic India Pvt. Ltd.
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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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Regarding 3rd substantial question of Law:- The learned Tribunal, after discussing the rival contentions of both the Appellants-Revenue and Respondent-Assessee, has given the following findings, we consider it appropriate to quote the relevant portions of which read as under:
“It is clear that the DRP has not disputed that this is covered by the judgment of Hon’ble Jurisdictional High Court as well as Hon’ble Delhi High Court wherein this issue has been decided in favour of the assessee. The only ground for not accepting the claim of the assessee is that the has not accepted the judgment of Hon’ble jurisdictional High Court and filed an appeal before the Hon'ble Supreme Court. Since nothing has brought before us to show that these judgments of Hon’ble jurisdictional High Court and Hon’ble Delhi High Court have either been reversed or the same has been stayed by the Hon'ble Supreme Court therefore, in the absence of any contrary judgment of the Hon'ble Supreme Court, the judgment of Hon’ble jurisdictional High
Date of Judgment 28-06-2018, ITA No.550/2016 Pr. Commissioner of Income Tax-7 & another Vs. M/s Telelogic India Pvt. Ltd.
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Court is binding on this Tribunal as well as on the DRP. Accordingly, we allow the claim of the assessee on this issue regarding rent equilisation amount.”
Regarding 4th substantial question of Law:- The learned Tribunal, after discussing the rival contentions of both the Appellants-Revenue and Respondent-Assessee, has given the following findings, we consider it appropriate to quote the relevant portions of which read as under: “As regards the additional grounds raised by the assessee, the co-ordinate bench of the Tribunal also dealt with an identical issue in para 24 [supra] and therefore when the functional comparability of these two companies have been examined by the Tribunal and it was found that these companies are not comparable with the software development services provider because of different activities as well as engaged in the software products, R & D activities and resulting in creation of Intellectual Property Rights [IPRs] then, even if these companies are selected by the
Date of Judgment 28-06-2018, ITA No.550/2016 Pr. Commissioner of Income Tax-7 & another Vs. M/s Telelogic India Pvt. Ltd.
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assessee in its T.P. Analysis the same shall be excluded from the comparables. The comparability of these companies was already tested by this Tribunal, then the same cannot be included in the list of comparables. Accordingly, by following the earlier order of the Tribunal as well as Special Bench decision in the case of Quark Systems Pvt. Ltd., [supra]. We admit the additional grounds raised by the assessee. In view of the findings of the co-ordinate bench of the Tribunal in the case of Kodiak Network India Pvt. Ltd., [supra], we hold that 12 companies out of 13 sought by the assessee are required to be excluded from the list of comparables where as the company Bodhtree Consulting Ltd., is accepted as a good comparable of software development services provided by the assessee. Accordingly, we direct the TPO/A.O to exclude 12 companies as mentioned in para 25 of the order of the co-ordinate bench [supra] from the set of comparables and recomputed the ALP after considering the claim of risk adjustment as well as the benefit of tolerance range of +/- 5% as per the proviso to section 92C(2).”
The controversy involved herein is no more res integra in view of the decision of this Court in I.T.A.
Date of Judgment 28-06-2018, ITA No.550/2016 Pr. Commissioner of Income Tax-7 & another Vs. M/s Telelogic India Pvt. Ltd.
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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 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
Date of Judgment 28-06-2018, ITA No.550/2016 Pr. Commissioner of Income Tax-7 & another Vs. M/s Telelogic India Pvt. Ltd.
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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. 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
Date of Judgment 28-06-2018, ITA No.550/2016 Pr. Commissioner of Income Tax-7 & another Vs. M/s Telelogic India Pvt. Ltd.
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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 the considered opinion that no substantial question of law arises for consideration in the present case.
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Hence, the Appeal filed by the Appellants- Revenue is liable to be dismissed and is accordingly dismissed. No costs.
Sd/- JUDGE
Sd/- JUDGE
NC.